Notice to Members 96-66
SEC Expands Scope of Conduct Rules and Other NASD Rules to Government Securities; Approves New Suitability Interpretation
The Government Securities Act Amendments of 1993 (GSAA) eliminated the statutory limitations on NASD® authority to apply sales-practice rules to transactions in exempted securities, including government securities, other than municipals. On August 20, 1996, the Securities and Exchange Commission (SEC) approved amendments implementing the expanded sales-practice authority granted to the NASD pursuant to the GSAA.
General Provisions Rule 0114 is retitled "Effect on Transactions in Municipal Securities" and amended to apply the NASD Conduct Rules and other Rules to transactions in exempted securities, including government securities, other than municipals. Rule 0115 "Applicability" is amended to apply the NASD Conduct Rules and other Rules to members registered with the SEC solely under the provisions of Section 15(C) of the Securities Exchange Act of 1934 (Act), and to persons associated with such members.
The application of the Conduct Rules to government securities transactions is provided in Table 1 of this Notice. Amendments to the text of certain Conduct Rules are amended to further clarify their application to exempted securities, including government securities, other than municipals. As indicated in Table 1, certain Conduct Rules will not immediately apply to transactions in government securities. These are IM-2110-2 "Trading Ahead of Customer Limit Order"; IM-2110-3 "Front-Running Policy"; IM-2110-4 "Trading Ahead of Research Reports"; Rule 2440 "Fair Prices and Commissions"; IM-2440 "Mark-Up Policy"; and Rule 2760 "Offerings At the Market." The NASD intends to review the specific application of these rules to the government securities market. In the interim, NASD members are reminded that actions for conduct generally encompassed by these Rules occurring in the government securities market may be brought under Rule 2110 "Standards of Commercial Honor and Principles of Trade."
Rule 1060 "Persons Exempt from Registration" is amended to eliminate the registration exemption for persons associated with a member whose functions are related solely and exclusively to transactions in exempted securities. Rule 1060, however, continues to exempt persons associated with a member whose functions are related solely and exclusively to transactions in municipal securities.
As indicated in Table 2, the NASD's Government Securities Rules are merged, where applicable, into the NASD's Conduct Rules and other Rules. Conforming amendments also are made throughout the NASD Manual to delete references to the Government Securities Rules and to replace the term exempted securities with the term municipal securities.
The SEC also approved the NASD Board of Governors interpretation regarding Suitability Obligations to Institutional Customers. The interpretation further clarifies how the NASD's Suitability Rule 2310 "Recommendations to Customers" is applicable to institutional customers. The new interpretation applies to all debt and equity securities, except municipals. Changes regarding Rule 2340 "Customer Account Statements," Rule 3010 "Supervision," Rule 3020 "Fidelity Bonds," and Rule 3110 "Books & Records" will be effective on November 18, 1996. All other changes were effective on August 20, 1996.
Please refer to your NASD Manual Conversion chart for references to the old Rule language if necessary.
Questions regarding this Notice may be directed to any of the following NASD RegulationSM staff: Robert M. Broughton, Compliance, at (202) 728-8361, Samuel Luque, Jr., Associate Director, Compliance, at (202) 728-8472, and Thomas R. Cassella, Vice President, Compliance, at (202) 728-8237.