Interpretive Letter to Name Not Public
April 11, 1997
I am responding to your letter of November 14, 1996 wherein you request that NASD Regulation, Inc. ("NASD Regulation") provide a letter ruling to you stating: (i) that the sales activities of registered representatives ("RR") of [Broker/dealer], a registered broker/dealer, relating to certain group variable contracts issued by [Entity 1] and the [Entity 2] are exempt from supervision by [Broker/dealer] under all NASD rules, and (ii) that [Broker/dealer] will not be held responsible by NASD Regulation under any circumstances for failure to supervise the activities of 's registered representatives regarding the solicitation and sales of such contracts.
Your letter and attachments thereto in part state the following: [Entity 1] and [Entity 2] issue certain group variable contracts sold by securities representatives registered with [Broker/dealer], a registered broker/dealer of which you are the president. Commissions for sales activities relating to these contracts are paid directly to your registered representatives by [Entity 1] and [Entity 2] without obtaining approval of [Broker/dealer] and without permitting [Broker/dealer] to supervise the registered representatives' sales activities of such contracts.
You believe sales activities of your registered representatives who sell [Entity 1] and [Entity 2] group variable contracts are subject to approval and supervision by [Broker/dealer] under NASD Rules. Both [Entity 1] and [Entity 2] believe that the sales activities of registered representatives who sell [Entity 1] and [Entity 2] group variable contracts are not subject to approval and supervision by the registered representatives' affiliated broker/dealers under NASD Rules.
NASD Regulation cannot provide the letter ruling that you have requested. Prior to enactment by Congress of the Government Securities Act Amendments of 1993 ("GSAA"), NASD Regulation was statutorily precluded under the Securities Exchange Act of 1934 ("Exchange Act") from applying NASD Conduct Rules to transactions in exempted securities as defined in Section 3(a)(12) of the Exchange Act. The GSAA eliminated this statutory limitation, thus permitting NASD Regulation to apply its Conduct Rules to transactions in all exempted securities, except municipal securities. Subsequent to the enactment of the GSAA amendments, NASD Regulation filed proposed amendments with the SEC to implement this expanded sales-practice authority. The amendments were approved by the SEC on August 20, 1996 and announced in Notice to Members 96-66 (October 1996) ("NTM 96-66"). As a result of the amendments, the NASD Conduct Rules now apply to all sales by members and their registered representatives of exempted securities (except municipal securities) as defined in Section 3(a)(12) of the Exchange Act, including group variable contracts.
Please note that the NASD Conduct Rules apply to sales of group variable contracts by NASD members and their registered representatives, but not to sales of such contracts by persons who are not registered with an NASD member firm. [Broker/dealer] should review, and amend if necessary, its existing supervisory and compliance systems, policies and procedures to ensure that [Broker/dealer]'s sales practices relating to group variable contracts are properly addressed. NASD Regulation soon will issue a Notice to Members discussing in greater detail the application of NASD Rules to group variable contracts.
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. This letter responds only 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 involved.
Robert J. Smith
Office of General Counsel
NASD Regulation, Inc.