Interpretive Letter to Karen A. Steighner, Brokerage Administrator Corporation
April 22, 1998
Karen A. Steighner
Brokerage Administrators Corporation
370 17th Street
Denver, Colorado 80202
Dear Ms. Steighner:
I am responding to issues raised in your letter of November 10, 1997, and your fax submissions of December 4, 1997 and February 19, 1998 ("submissions"), and our conversations of December 3, 1997, January 27, 1998 and February 19, 1998. You request clarification of how NASD Rules 1031, 3030 and 3040 apply to a person associated with an NASD member that acts as an introducing broker to and engages in teleservicing activities on behalf of another member firm or member firm affiliate.
You state that a member firm ("teleservices member") is a wholly-owned subsidiary of a teleservices firm that, among other things, will contract with mutual fund companies, asset managers and insurance companies ("client member") to provide teleservicing activities. You state that the teleservices member and its registered representatives will: (i) introduce customer accounts and transactions to client members, (ii) receive and conduct telephone calls representing the client members in response to business reply cards returned by recipients who have received them through the client members’ advertising campaign, (iii) not make specific recommendations but will respond to prospectus requests from customers relating to the customers’ needs and objectives, (iv) assist customers on the phone in establishing an account, and (v) accept orders for mutual fund and annuity transactions and introduce the orders to the client members for execution.
In our last conversation and your last submission (February 19, 1998), you clarified that the teleservices member: (i) follows procedures designed to ensure that the representatives clarify for customers in a clear and concise manner the names of the teleservices member and the client member and the relationship of the entities to each other, (ii) will have no relationship with the client member firms’ customers beyond the scope of the original teleservicing campaign, and (iii) relinquishes all ownership and control of accounts opened on behalf of client member firms.
You also state that the teleservices member’s representatives are compensated by salary only, receive no form of incentive or compensation based on sales, will have limited access to existing account information for any caller and will transfer calls requesting assistance to customer service representatives of the client member. The staff understands that the teleservices member’s representatives are compensated only by the teleservices member, not the client members, and that the teleservices member will have sole authority over all aspects of their employment.
You specifically request guidance as to whether the registered representatives presently licensed with the teleservices member performing the above-stated functions are also required to be licensed with the client member, and how provisions of NASD Rules 3030 and 3040 may apply.
The staff does not believe that registered representatives presently licensed with the teleservices member are also required to be licensed with the client member. NASD Rule 1031(a) states in part that "...persons...engaged in the investment banking business of a member who are to function as representatives shall be registered...in the category of registration appropriate to the function to be performed...." Rule 1031(b) defines "representative" in part as "[p]ersons associated with a member...who are engaged in the investment banking or securities business of the member...." Paragraph (q) to Article I of the NASD By-Laws defines "person associated with a member" in part as "...any natural person engaged in the investment banking or securities who is directly or indirectly controlling or controlled by such member...." Based on your representations, it is not contemplated that the registered representatives licensed with the teleservices member will be directly or indirectly controlling or under the control of, or working pursuant to the direction of, the client member. The registered representatives perform their functions solely as salaried employees of the teleservices member pursuant to a contractual arrangement between the teleservices member and the client member. In addition, the registered representatives will not solicit securities transactions or make recommendations, will not receive transaction-based compensation, and will not retain ownership or control of accounts opened and forwarded to the client member.
Since the activities of the teleservices member’s registered representatives on behalf of the client member occur pursuant to a contract between the two members, the teleservices member’s registered representatives are not employed, directly or indirectly, outside the scope of their relationship with their employing member. In addition, since the teleservices member’s registered representatives are compensated only by a salary from the teleservices member, they will not receive compensation from any person outside the scope of their relationship with their employing member. Therefore, Rule 3030 is inapplicable.
Since the teleservices member’s registered representatives are not employed, directly or indirectly, outside the scope of their relationship with their employing member, NASD Rule 3040 is also inapplicable.
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 described, and does not address any other rule or interpretation of the Association, or all the possible regulatory and legal issues involved. In particular, this letter does not address the question of whether the teleservices member’s registered representatives would be required to be registered with the client member under rules and regulations of the SEC or state law.
Robert J. Smith
Office of General Counsel
NASD Regulation, Inc.
cc: Sibears, Daniel M., NASD Regulation
Whelan, Jacqueline D., NASD Regulation, District 3