TO: All NASD Members and Other Interested Persons
EXECUTIVE SUMMARY
This notice announces the adoption of amendments to Article III, Section 28 of the NASD Rules of Fair Practice and were made effective by the SEC on December 12, 1986. The amendments were adopted in response to a concern of the NASD Board of Governors regarding members' ability to supervise associated persons at non-NASD members.
The amendments impose disclosure requirements for securities activities in securities accounts held at any non-NASD member by NASD members' associated persons.
The text of the amended section is attached.
BACKGROUND
The proposed amendments were adopted in response to a concern of the NASD Board of Governors that the inapplicability of the Rules of Fair Practice to securities activities in accounts of associated persons at non-NASD members would undermine NASD members' ability to supervise their associated persons and may possibly lead to abuses. The Board of Governors has also noted the dramatic increase in the securities activities of investment advisers, banks and other financial institutions, which are not members of the NASD.
SUMMARY OF AMENDMENTS
The amendments add a new paragraph (d) to Section 28 that imposes the additional disclosure obligation on NASD members' associated persons if they intend to open a securities account at a non-NASD member. Paragraph (e) was added to provide that the disclosure obligation of Section 28 should only apply to accounts or orders in which an associated person has a financial interest or discretionary authority. In addition, transactions in unit investment trusts were added to the list of transactions in paragraph (f) that are exempt from the disclosure provisions of Section 28.
Questions regarding this notice should be directed to Craig Landauer, Attorney, NASD Office of the General Counsel, at (202) 728-8291.
Sincerely
Frank J. Wilson
Executive Vice President
Legal and Compliance
Attachment
AMENDMENTS TO ARTICLE HI, SECTION 28 OF THE NASD RULES OF FAIR PRACTICE
The following is the full text of the amendments to Article III, Section 28. New language is underlined; deleted language is bracketed.
Transactions for [Personnel of Another Member] or by Associated Persons
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 the employer member of the executing member's intention to [transmit] provide the notice and [the] information required by paragraphs (1) and (2) of this subsection (b).
Obligations of Associated Persons [Associated] Concerning an Account with a Member.
[(d)]
(c) A person associated with a member who opens an account or places an order for the purchase or sale of securities with [any other] another 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] the employer member [regardless of any other function, capacity, employment or affiliation of such associated person. If] ; provided, however, that if the account [is] was established prior to the association of [such] the person with [an] the employer member, the associated person shall notify the executing member promptly after becoming so associated.
Obligations of Associated Persons Concerning an Account with an Investment Adviser, Bank, or Other Financial Institution
(d) A person associated with a member who opens a securities account or places an order for the purchase or sale of securities with a domestic or foreign investment adviser, bank, or other financial institution, except a member, shall:
(1) notify his or her employer member in writing, prior to the execution of any initial transaction, of the intention to open the account or place the order; and
(2) upon written request by the employer member, request in writing and assure that the investment adviser, bank, or other financial institution provides the employer member with duplicate copies of confirmations, statements, or other information concerning the account or order;
provided, however, that if an account subject to this subsection (d) was established prior to a person's association with a member, the person shall comply with this subsection promptly after becoming so associated.
(e) Subsections (c) and (d) of this section shall apply only to an account or order in which an associated person has a financial interest or with respect to which such person has discretionary authority.
Exemption for Transactions in Investment Company Shares and Unit Investment Trusts
[(c)]
(f) The provisions [of subsection (b)] of this section shall not be applicable to transactions in unit investment trusts and 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.
