Interpretive Letter to Sheryl Anne Zuckerman, Esq., Singer Frumento LLP
December 6, 2001
Singer Frumento LLP
Sheryl Anne Zuckerman, Esq.
40 Exchange Place
New York, NY 10025
Re: NASD Rule 3030
Dear Ms. Zuckerman:
I am responding to your letter dated September 24, 2001 in which you seek advice on whether a registered person who is associated with a member firm would violate NASD Rule 3030 - Outside Business Activities of an Associated Person by filing a membership application with the NASD to form a new broker/dealer without providing prompt written notice to his or her firm about such activity.
According to your letter, your firm has been approached on numerous occasions by both member firms and associated persons seeking advice regarding the scope of NASD Rule 3030 in the circumstance where an associated person currently employed by a member firm forms a new company and files a membership application with the NASD pursuant to NASD Rule 1013. You state that in light of the recent tragedies of September 11, 2001 and their impact on the economy and the securities markets, this issue has greater significance because many registered persons who are concerned about their employing member firm terminating business, or anticipate being laid off, have contacted your law firm about setting up their own broker/dealers.
You provide the following as a typical scenario:
XYZ BD currently employs RR Doe. While still working for XYZ, RR Doe submits an application seeking approval to open NEW BD (with RR Doe filing a Form U-4 as an associated person and principal of the new firm). During this nascent stage, no business is being conducted at NEW BD and RR Doe currently receives no compensation from the new firm. Additionally, at this stage RR Doe is not engaged in activity that is in actual conflict or competition with XYZ BD. Given that NEW BD has not commenced a securities business, RR Doe does not believe that the mere application for and subsequent approval of NEW BD places her current BD employer at any regulatory or arbitration risk.
In addition, you state that for purposes of this interpretive letter, you acknowledge that the raising of capital for a broker/dealer would likely trigger the notice/approval requirements of the private securities transaction provisions of NASD Rule 3040 - Private Securities Transactions of an
NASD Rule 3030 provides that no associated person of a member shall be employed by, or accept compensation from, any other person as a result of any business activity (other than passive investment) outside the scope of his/her relationship with his/her employer firm, unless prompt written notice is provided to the member. NASD Notice to Members 88-5 (Request for Comments on Proposed NASD Rule of Fair Practice Regarding Outside Business Activities) indicates that the stated purpose of this rule is to enable member firms to receive prior notification of all outside business activities of their associated persons so that members can exercise appropriate supervision over the activities of their associated persons.
Under the facts as you have described them in your letter, the staff believes that the notice requirements of NASD Rule 3030 are not triggered when, in an effort to apply for membership as a new broker/dealer, an associated person takes the following steps: (1) forms a company; (2) files an application on behalf of the company to become a member in accordance with NASD Rule 1013; and (3) files a Form U-4 with NASD designating such associated person as a principal of such company; provided, however, the associated person does not (1) accept any compensation from such company or other person (other than compensation received from the current member firm with which he or she is associated) ; (2) engage in any securities or investment banking activity on behalf of such company; (3) raise capital for such company; (4) solicit customers for such company; or (5) generally engage in any business activity on behalf of such company.
During our phone conversations, you noted that the new membership application process requires RR Doe to file a Form U-4 as an associated person and principal of the applicant broker/dealer, and that the Central Registration Depository ("CRD") system discloses the filing of this Form U-4 (i.e., the associated person’s current member firm could search the individual’s records and see the filing of the second Form U-4). You raised some concern that this disclosure could have a potentially negative impact on RR Doe. Staff of the Office of General Counsel is discussing your concerns with staff in the CRD Department, as well as with staff in the Department of Member Regulation responsible for the membership application program.
I hope this letter responds 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 to 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 NASD, or all the possible regulatory and legal issues involved.
Kosha K. Dalal
Assistant General Counsel
|Emily Gordy, Director
NASDR, Member Regulation/Regulation Policy
Richard Pullano, Director
NASDR, CRD/Membership-Policy and Guideline
Catherine Shine, Senior Vice President and Director
NASDR, District 10