Interpretive Letter to Name Not Public
September 15, 1994
This is in response to your recent letter to myself and Daniel Sibears. You requested that the staff provide an opinion as to the application of Article III, Section 40 of the NASD Rules of Fair Practice to the activities of persons registered with [Broker/dealer] as registered representatives and as registered investment advisers.
Article III, Section 40 of the NASD Rules of Fair Practice provides that any person associated with a member who participates in a private securities transaction must, prior to participating in the transaction, provide written notice to the member with which he is associated. The NASD member firm must advise the individual in writing as to whether it approves or disapproves of the person's participation in a transaction in which the associated person has received or may receive selling compensation. If the member approves the transaction, the transaction must be recorded on the member firm's books and records, and the member firm must supervise the associated person's participation as if the transaction were executed by the member firm.
We understand the pertinent facts to be the following: [Broker/dealer] is a member of the National Association of Securities Dealers, Inc. ("NASD") and is registered as a broker-dealer in those states where it conducts brokerage activities. [Broker/dealer]'s RR's are generally independent contractors and are registered as broker-dealer agents of [Broker/dealer] with the NASD and in those states where they conduct business. [Broker/dealer] is also registered as an investment adviser with the Securities and Exchange Commission ("SEC") and in those states where [Broker/dealer] conducts investment advisory activities. [Broker/dealer]'s RRs who engage in an advisory activities are also registered with the SEC and any applicable state(s) as one of the following: an investment adviser representative of [Broker/dealer] (in [Broker/dealer]'s capacity as an investment adviser); or an investment adviser registered independently from [Broker/dealer]; or an investment adviser representative registered independently from [Broker/dealer].
Specifically, you inquired whether Section 40 or Section 43 of Article III of the NASD Rules of Fair Practice applies when a RR of [Broker/dealer] who is registered as an investment adviser or investment adviser representative independently from [Broker/dealer] conducts financial planning seminars and receives a fee from participants at the seminars. You also asked what are the general compliance and recordkeeping responsibilities of [Broker/dealer] for these activities.
In Notice to Member 94-44, the NASD Board of Governors stated:
In clarifying its previous position in Notice to Members 91-32, the Board focused primarily upon the RR/RIA's participation in the execution of the transaction--meaning participation that goes beyond a mere recommendation. Article III, Section 40, therefore, applies to any transaction in which the dually registered person participated in the execution of the trade.
It appears in the situation that you presented that since the conduct of the investment seminar itself does not result in the execution of a securities transaction, Article III, Section 43 of the Rules of Fair Practice would apply to the conduct of the seminar. Please be advised, however, that after the seminar is concluded and once seminar participants begin to discuss matters with the [Broker/dealer] representatives, Article III, Section 40 could apply to activities that the [Broker/dealer] representatives conduct on behalf of those participants. Notice to Members 94-44 contains a detailed discussion of the kinds of activities that are covered by Article III, Section 40.
Based on the foregoing analysis, it is the opinion of the staff that the conduct of investment seminars where participants are charged a fee does not in and of itself cause the seminar to be conducted in compliance with the provisions of Article III, Section 40 of the Rules of Fair Practice.
Very truly yours,
Craig L. Landauer