Interpretive Letter to Name Not Public
December 16, 1996
I am responding to your November 19 letter to Daniel M. Sibears and your December 10 letter to me regarding the application of NASD Rules 3030 and 3040 (formerly Sections 40 and 43 of the Rules of Fair Practice) to certain employees in the trust departments of five [Bank's] subsidiary banks. These employees are also registered representatives with [Broker/dealer], an NASD member and a subsidiary of one of the five banks, and are considered "Dual Employees."
You have represented that these Dual Employees spend 75 percent of their time performing administrative functions and 25 percent of their time providing investment advice. Such investment advice is provided only to trust customers. When a Dual Employee determines that a trust customer would be more appropriately serviced by [Broker/dealer], the Dual Employee, who then is acting as a registered representative for [Broker/dealer], refers the trust customer to another registered representative of [Broker/dealer], who opens the account and executes any trades. The Dual Employee refers trust customers only to [Broker/dealer] and is not involved in opening any securities accounts or executing any trades.
You further represented that [Broker/dealer] supervises the Dual Employees when they act as registered representatives and that Dual Employees are required to participate in training and continuing education programs for [Broker/dealer] registered representatives.
You also have represented that Dual Employees are compensated by one of [Bank's] subsidiary banks and do not receive any direct compensation from [Broker/dealer]. However, a Dual Employee's income may be indirectly affected by the number of referrals from his bank to [Broker/dealer]. [Broker/dealer] has entered into a contract with each of the subsidiary banks whereby it makes a payment to each bank based on the business generated by the bank's customers that are referred to it. Dual Employees receive incentive compensation based on their bank's net income, which you have represented is insignificantly affected by these contractual payments.
Based on the foregoing representations, which were provided in your letters or in our telephone conversations, this office of the opinion that Rule 3040 does not apply to the foregoing activities of Dual Employees. Rule 3040 provides that "[n]o person associated with a member shall participate in any manner in a private securities transaction except in accordance with the requirements of this Rule." This position is based particularly on your representation that the securities activities of the Dual Employees are related solely to referrals to [Broker/dealer].
This office also is of the opinion that [Broker/dealer] should have a record of which of its registered representatives is employed by and receiving compensation from one of the five subsidiary banks. Therefore, [Broker/dealer] should comply with Rule 3030. Note that Rule 3030 permits you to determine the form of the notice. A one-time notice for each Dual Employee would be sufficient for purposes of the Rule.
This opinion is based on the representations set forth above. If any of these representations are incorrect or change in any material respect, this office would have to reevaluate its opinion. If you have any questions, please call me at 202-728-8252.
Mary M. Dunbar