Applicability of NASD Rule 3070 to the operations of a mutual fund variable product distributor broker/dealer with a separately registered transfer agent.


 

May 28, 1996

 

Re: Interpretive Request Regarding Article III, Section 50 of the NASD's Rules of Fair Practice

 

We are in receipt of your letter requesting interpretive guidance with the provisions of Article III, Section 50 of the NASD's Rules of Fair Practice (the "Rule") which references our earlier conversation regarding this issue. Specifically, your letter requests guidance as to the applicability of the rule to the operations of a mutual fund distributor broker-dealer with a separately registered transfer agent.

 

According to your letter, [Broker/dealer] is both a NASD member and a registered transfer agent with the U.S. Securities and Exchange Commission. [Broker/dealer] primarily acts as a principal underwriter and distributor to its fund group. In addition, [Broker/dealer] funds are only sold to the public through outside retail broker-dealers with whom [Broker/dealer] has executed a sales agreement. [Broker/dealer] also acts as the funds' transfer agent which services include establishing accounts, processing payments, confirming transactions, transferring registrations, and responding to customer inquiries related to the transfer function.

 

As a result of the above, you seek guidance as to what type of correspondence received by [Broker/dealer] from a customer is required to be submitted by the Rule through the customer complaint reporting system. Since your letter does not request further guidance on the specified disclosure events, this information is excluded from this discussion.

 

The Rule requires [Broker/dealer], as a member, to submit information to the NASD regarding customer complaints. Under the Rule, the term customer is defined to exclude other broker-dealers. Since [Broker/dealer] does not maintain direct retail contact, the volume of customer complaints should be limited. For example, if [Broker/dealer] provides "sales literature" for its funds and distributes this information to retail broker-dealers, it may be subject to customer complaints regarding these materials when the materials are used by the public in connection with the purchase or sale of mutual fund securities.

 

In addition, the Rule further describes customer complaints as "written grievances" by the customer. Therefore, the Rule specifically requires the member to distinguish between written grievances and regular customer correspondence (i.e., customer inquiries and observations). Based on the above, a member is required to submit all written customer grievance information to the NASD on a quarterly basis.

 

Lastly, if a mutual fund distributor broker-dealer receives a written customer complaint and the complaint involves another retail broker-dealer, we would suggest that the mutual fund distributor broker-dealer forward the customer complaint to the retail broker-dealer and notify the complaining customer of this action.

 

If you should have any questions with the above, please contact me at (202) 728-8014.

 

Sincerely,

 

David A. Spotts