Qualification and Registration Requirements of Schedule C
TO: All NASD Members and Interested Persons
ATTN: Compliance and Registration Personel
This notice reviews the application of certain qualification and registration requirements of Schedule C of the NASD By-Laws for persons who solicit new accounts on behalf of members. It also announces the Securities and Exchange Commission's approval of an amendment to Schedule C, which expands the products that may be sold by Limited Representatives—Investment Company and Variable Contracts Products.
Registration of Persons Soliciting Accounts on Behalf of Members
The Qualifications Committee of the NASD Board of Governors recently reviewed some members' use of unregistered personnel to solicit new accounts by telephone. The content of these solicitations may include representations regarding the general products and services of the member, an interview format designed to prequalify potential customers, or a specific description of a security offered by the member. The Qualifications Committee concluded that these and similar activities require registration pursuant to Schedule C of the NASD By-Laws.
Section (l)(b), Part III of Schedule C of the By-Laws defines "representatives" as:
"Persons associated with a member ... who are engaged in the investment banking or securities business for the member including the functions of supervision, solicitation or conduct of business in securities...."
This definition has been consistently interpreted by the NASD to require registration of persons who engage in activities that only constitute a portion of registered representatives' traditional dealings with public customers. Thus, for example, members are required to register persons who are hired to accept orders from public customers, even if these orders are unsolicited; persons who share in the commissions generated from customer accounts; and persons who solicit accounts on behalf of members, notwithstanding any limitation of such solicitations to prepared scripts discussing generic products and services offered by the member.
Part V of Schedule C provides an exemption from the registration requirement for persons performing clerical or ministerial functions for the member. Historically, this exemption has been applied to salaried clerical and administrative staff whose jobs are oriented to the internal operations of sales offices. The Qualifications Committee has long recognized that, on occasion and in the absence of appropriately registered personnel, these exempted employees may transcribe an order from a customer for submission to registered personnel or provide customers with approved market quotations. The occasional nature of these activities contrasts with those described above for account solicitors who are assigned the specific function of interacting with public customers on a regular basis, and for persons who are assigned to accept orders from the public on a regular basis.
The NASD's position with respect to account solicitors is substantially the same as that taken by the Municipal Securities Rulemaking Board (MSRB) in its Interpretative Notice on Professional Qualification, MSRB Manual (CCH), paragraph 3511, pages 3514-15, dated December 21, 1984.
The activities of account solicitors may also come within the definition of "offers to sell" pursuant to various state securities laws and regulations and may, therefore, require agent licensing of persons performing these functions in certain state jurisdictions.
Members are advised to review the activities of unregistered personnel having contact with existing or potential public customers to assure that their functions do not require registration pursuant to NASD rules, qualification pursuant to MSRB rules, or agent licensing pursuant to various state laws and regulations.
Expansion Of Products That May Be Sold By Limited Principals And Limited Representatives — Investment Company And Variable Contracts Products
The SEC has approved an amendment to Part n, Section 2 of Schedule C of the NASD By-Laws. The amendment, which is reprinted at the end of this notice, permits persons registered as Limited Principals and Limited Representatives—Investment Company and Variable Contracts Products to sell contracts that are issued by the general accounts of life insurance companies and registered under the Securities Act of 1933 (1933 Act). The amendment became effective upon approval.
Contracts issued by the general accounts of life insurance companies, which transfer part of the investment risk to the purchaser, may be required to be registered under the 1933 Act. Because such registered contracts do not fit the definition of variable contracts, which are securities issued by the separate accounts of life insurance companies, persons selling them have been required to register as General Securities Principals or General Securities Representatives.
The depth of knowledge required to market these contracts, their product features and the marketing methods used in their distribution do not differ substantially from those involved in the sale of variable contracts. Consequently, the limited qualification requirements that apply to registered principals and registered representatives for investment companies and variable contracts products are appropriate for persons who engage in the marketing of registered securities issued by the general accounts of life insurance companies.
Questions regarding this notice may be directed to Frank J. McAuliffe, Vice President, Qualifications, at (202) 728-8136.
John T. Wall
Executive Vice President
Member and Market Services
AMENDMENT TO SCHEDULE C NASD BY-LAWS
The following is the full text of the amendment to Part n, Section 2(c) of Schedule C of the NASD By-Laws. New language is underlined; deleted language is bracketed.
Remainder of text is unchanged.