Notice To Members 83-48

Proposed New Rule of Fair Practice Relating To Permission For Members to Carry Customer Accounts

Published Date:

TO: All NASD Members

The Association's Board of Governors is publishing for comment a proposed new Rule of Fair Practice relating to permission for members to carry customer accounts. Interested persons are advised that comments must be received by the Association by September 22, 1983, in order to receive consideration. After the comment period has closed, the proposal will again be reviewed by the Board of Governors. Thereafter, the proposed rule will be submitted to the membership for vote. Upon completion of such, if approved, the proposal will be submitted to the Securities and Exchange Commission for approval.

BACKGROUND OF PROPOSED RULE

In January 1982, the Board of Governors authorized the Capital and Margin Committee (the "Committee") to proceed with the development of a rule, or rules, which would provide the Association with additional regulatory tools to evaluate the financial and operational condition of members. One recommendation which emerged from the Committee's deliberations is the proposed new Rule of Fair Practice regarding permission for members to carry customer accounts.

The proposed rule requires that an existing member obtain the Association's prior approval before it begins carrying customer accounts. At the present time, a member is not required to obtain such approval. As long as a member has the minimum amount of net capital prescribed by SEC Rule 15c3-l, (the "Net Capital Rule") and an appropriately qualified financial and operations principal, it may begin carrying customer accounts at any time without prior notification. In the Committee's opinion, these are very minimal requirements given the significance a change of operations from non-clearing to clearing presents with respect to a member's financial and operational viability. Such a change also presents potential risks to customers, particularly in times of heavy volume. The current requirements do not provide a means whereby the Association can evaluate, in advance, a firm's capacity, in terms of facilities and trained personnel, to process and clear its own transactions; nor do they provide the means to evaluate management's understanding of and ability to comply with applicable rules designed to safeguard customers' property.

In light of the foregoing considerations, the Committee determined that it is necessary for the Association to ensure that a member has the proper mechanisms in place prior to carrying customer accounts. The proposed rule is designed to provide the Association with that mechanism. Upon its review of this matter, the Board of Governors determined that this proposal should be circulated to the membership for comment.

DISCUSSION OF THE PROPOSAL

The proposed rule prohibits a member from carrying customer accounts, i.e., holding customer funds and/or securities, without having obtained the written approval of the Association prior to commencing this activity. The request for such approval must be submitted to the appropriate District Director of the District in which the main office of the member is located. The member is required to describe in detail the reasons why it has decided to carry customer accounts and the procedures it has established to supervise this activity. In turn, the proposed rule requires the District Director to advise the member, in writing, of a decision within five business days of the receipt of the member's request.

The proposed rule specifies several conditions which will be considered by a District Director in making a determination as to the approval or disapproval of a proposed arrangement. Such considerations include, but are not limited to, the following:

  • the type of business conducted by the member;
  • the training, experience and qualifications of the member and its associated persons;
  • the member's procedures for safeguarding customer funds and securities;
  • the member's overall financial and operational condition; and,
  • any other relevant information under the circumstances.

If permission to carry customer accounts is denied by the District Director, the rule provides that a member may appeal to the District Committee and thereafter to the Board of Governors.

* * *

All comments pertaining to the proposal should be in writing and sent to S. William Broka, Secretary, National Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C. 20006, and be received on or before September 22, 1983, in order to receive consideration. Questions concerning the proposal may be directed to James M. Cangiano, Assistant Director, Department of Policy Research, at (202) 728-8273.

Sincerely,

Frank J. Wilson
Executive Vice President Legal and Compliance

Enclosure

PROPOSED RULE OF FAIR PRACTICE

Article III, Section ____

a. No member shall commence carrying customer accounts, i.e., the holding of customers' funds and/or securities, without first having obtained the written approval of the Association. Application for such approval may be made by filing a request to carry customer accounts with the Director of the District within whose jurisdiction the member's principal place of business is located. Such notice shall be in writing and shall detail the reasons which precipitated the member's decision to carry customer accounts and the methods the member has established to manage such activity. Within five (5) business days of the receipt of the application, the District Director shall inform the member, in writing, of his decision to approve or deny the request.
b. In making the determination as to whether to approve the application required in subsection (a) above, the District Director shall take into account relevant matters including the type of business done and securities sold, the training, experience and qualifications of persons associated with the member, the member's procedures for the safeguarding of customer funds and securities, its overall financial and operational condition and any other information deemed relevant in the particular circumstances.
c. Whenever permission to carry customer accounts is denied by the District Director, the member may petition the District Committee for review of such decision and thereafter the Board of Governors. Review before the District Committee and/or the Board of Governors shall be on the record unless the District Committee and/or Board of Governors determines that a personal appearance is necessary.