Interpretive Letter to Name Not Public
November 13, 1990
In your letter of November 2, 1990 to the Association you asked whether the recent amendments to Article III, Sections 2 and 21(c), of the Rules of Fair Practice, published in Notice to Members 90-52 (August 1990), apply to member firms who do not recommend securities transactions to their customers, but rather, limit their business to accepting unsolicited orders from customers.
Article III, Section 2, of the Rules of Fair Practice relates to the "suitability" of investment recommendations made by member firms to their customers. The amendment to Section 2 published in Notice to Members 90-52 added a new subsection (b) which requires a member to attempt to obtain certain information from a customer prior to executing a recommended transaction. The purpose of the amendment is to ensure that member firms obtain sufficient information about a customer to permit the firm to make a more informed determination of the suitability of an investment recommendation.
Article III, Section 21(c), of the Rules of Fair Practice relates to a member firm's recordkeeping obligations with respect to customer account information. The amendment to Section 21(e) published in Notice to Members 90-52 replaced the existing subsection (c) customer account information requirement with new provisions applicable to accounts opened after January 1, 1991. The amended subsection also requires a member firm to attempt to obtain some of the additional information prior to the settlement of the initial transaction in the account.
The new provisions require more information to be maintained about customer accounts than was previously required. With respect to Section 2, as amended, the rule by its terms applies only where the member firm is making a recommendation to a customer. Thus, as long as a member firm accepts only unsolicited orders it would not be required to make the suitability determinations or obtain the information required by the rule. With respect to Section 21(e), as amended, the provision applies only to accounts opened after January 1, 1991, however, it does not distinguish between recommended and unsolicited transactions. Thus, Section 21(c) applies to all accounts opened after January 1, 1991, even if the member limits its activity to accepting unsolicited orders.
If you have any questions about the above response, please contact the undersigned at (202) 728-8451.
Very Truly Yours,
Elliott R. Curzon
Office of the General Counsel