Interpretive Letter to Name Not Public
July 23, 1996
Re: NASD Conduct Rule 3040 (formerly Article III, Section 40 of the NASD's Rules of Fair Practice)
We are in receipt of your letter to [NASDR Employee] dated June 11, 1996 which was referred to our office for a response. Specifically, your letter requests guidance as to the applicability of NASD's Conduct Rule 3040 (e.g., private securities transactions) to "certain investment advisory activities of a non-registered employee of a broker-dealer".
According to your letter, certain non-registered employees of the broker-dealer have filed Form ADVs with the SEC and have made recommendations to and effected securities transactions away from the broker-dealer for investment advisory clients. As a result, your letter queries: Is the employing broker-dealer required to record and supervise the transaction(s) by such non-registered persons?
In response, NASD Conduct Rule 3040 applies to associated person of a member as well as to registered persons. Specifically, paragraph (a) of the Rule states that: "No person associated with a member shall participate in any manner in a private securities transaction except in accordance with the requirements of this rule."
In addition, the NASD provided in Notices to Members 96-33 and 94-44 the analysis that members should follow in determining whether the investment advisory activity of a registered or associated person of a member falls within the provisions of Conduct Rule 3040.
Under the fact scenario provided and utilizing the analysis of the Notices, it would appear that the member broker-dealer would be required to comply with the provisions of Conduct Rule 3040. If the non-registered employee is proposing to receive selling compensation, the member shall receive notification and either approve or disapprove of the transaction. If the member approves the transaction, the member shall record the transaction on its books and records and supervise the person's participation in the transaction. See paragraph (c) of Conduct Rule 3040.
If you should have any additional questions, please call me at (202) 728-8014.
David A. Spotts
Office of General Counsel, NASDR