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Notice To Members 83-17

Amendments to Rules Governing Transactions Executed for Persons Associated with Another Member

Published Date:

TO: All NASD Members

The Securities and Exchange Commission has approved amendments to Article III, Section 28 of the Association's Rules of Fair Practice and the amendments are hereby declared effective as of May 1, 1983. These amendments were previously approved by the Association's Board of Governors and by a vote of the membership.

Section 28 addresses the responsibilities of members to avoid adversely affecting the interests of other members when executing transactions for persons associated with such other members. It requires written notice to "employer members" as well as the provision of duplicate confirmations and/or statements, if requested.

The amendments to the Rule accomplish several distinct results. First, the basic notification requirements of the Rule has been extended to transactions or accounts over which associated persons exercise discretion, as well as accounts in which such associated persons have a financial interest. For example, an account for a relative of a registered representative of another member is subject to the reporting requirements if the registered representative places the orders for the account.

Secondly, the Rule as amended places an affirmative obligation on persons associated with another member to notify the "executing member" of such association. This requirement will facilitate compliance by such executing members with the notification requirements of Section 28, as well as the "Free-Riding and Withholding" Interpretation and the requirement, in Article III, Section 21(b) of the Rules of Fair Practice, that such association be recorded. The amended Rule specifies that this notification requirement applies even if the associated person has another occupation or affiliation (e.g. insurance agent, real estate broker, etc). The amended Rule also makes it clear that the notification requirement applies to accounts which exist at the time the person becomes associated with a member, as well as to new accounts. Members should therefore take appropriate steps to advise their associated persons of their obligation to notify other members of their association with respect to both existing and prospective accounts.

The Rule has also been amended to provide an exemption from the notification requirements for transactions in redeemable securities of registered investment companies (e.g. mutual funds, unit investment trusts and variable contracts). It does not appear that such transactions present the same potential for adverse impact on an employer member as might exist with respect to other transactions and the notification requirement appears to be unnecessarily burdensome with respect to such transactions. A comparable exemption has been adopted with respect to the reporting requirements of the Private Securities Transaction Interpretation of Article III, Section 27 of the Rules of Fair Practice.

Finally, in accordance with the Association's continuing project of updating rules and codifying interpretations, the prior Board of Governors' Interpretation of Section 28 has been incorporated into the Rule and the Interpretation has been repealed.

Questions about the proposed amendment should be directed to Robert L. Butler at 1735 K Street, N.W., Washington D.C. 30006 (Telephone Number (202) 728-8329).


Frank J Wilson
Executive Vice President
Legal and Compliance

Article III, Section 28 of the Rules of Fair Practice

(as effective 5/1/83)

Determine Adverse Interest

(a) A member ("executing member") who knowingly executes a transaction for the purchase or sale of a security for the account of a person associated with another member ("employer member"), or for any account over which such associated person has discretionary authority, shall use reasonable diligence to determine that the execution of such transaction will not adversely affect the interests of the employer member.

Obligations of Executing Member

(b) Where an executing member knows that a person associated with an employer member has or will have a financial interest in, or discretionary authority over, any existing or proposed account carried by the executing member, the executing member shall:
(1) notify the employer member in writing, prior to the execution of a transaction for such account, of the executing member's intention to open or maintain such an account;
(2) upon written request by the employer member, transmit duplicate copies of confirmations, statements, or other information with respect to such account; and
(3) notify the person associated with an employer member of the executing member's intention to transmit the information required by paragraphs (1) and (2) of this subsection (b).

Exemption for Transactions in Investment Company Shares

(c) The provisions of subsection (b) of this section shall not be applicable to transactions in variable contracts or redeemable securities of companies registered under the Investment Company Act of 1940, as amended, or to accounts which are limited to transactions in such securities.

Obligations of Person Associated with a Member

(d) A person associated with a member who opens an account or places an order for the purchase or sale of securities with any other member, shall, where such associated person has a financial interest in such transaction and/or any discretionary authority over such account, notify the executing member of his or her association with an employer member, regardless of any other function, capacity, employment or affiliation of such associated person. If the account is established prior to the association of such person with an employer member, the associated person shall notify the executing member promptly after becoming so associated.