SEC Approval of Amendment Re: Use and Disclosure of Member Names

EXECUTIVE SUMMARY

The Securities and Exchange Commission (SEC or "Commission") has approved an amendment to Article 111, Section 35 of the NASD Rules of Fair Practice that establishes standards regarding the use and disclosure of member names in public communications, including business cards and letterhead. The amendment reflects the NASD's concern that members of the public may be confused by public communications that either fail to refer to an NASD member firm by its registered name or include unclear references to both NASD member firms and entities that are not NASD members. Unless the identity of and the products offered by an NASD member firm are made clear in such communications, there is a possibility that the public will be confused or misled regarding which entity is, in fact, offering securities. The amendment seeks to address this problem by establishing both general and specific standards governing the manner in which member names must be disclosed in communications with the public. The text of the amendment follows this notice.

BACKGROUND AND SUMMARY

The amendment establishes standards regarding the use and disclosure of member names in public communications, including business cards and letterhead. The change reflects the concern of the Board of Governors that members of the public may be confused by public communications that either fail to refer to an NASD member firm by its registered name or include unclear references to both NASD member firms and entities that are not NASD members. The amendment is based on the premise that, unless the identity of and the products offered by an NASD member firm are made clear in such communications, there is a possibility that the public will be confused or misled regarding which entity is, in fact, offering securities. The revision seeks to address this problem by establishing both general and specific standards governing the manner in which member names must be disclosed in communications with the public.

The proposed amendment was submitted to the membership for comment in 1988. In response to the comment letters received, significant modifications were made to the proposed amendment. Consult Notice to Members 88-65 and 89-22 regarding the differences between the amendment as originally proposed and as approved by the membership. The proposed amendment was filed with the SEC April 25, 1990, and was published for comment in the Federal Register. In response to comment letters received by the SEC, the NASD made further modifications to the amendment that were approved by the membership. Consult Notice to Members 90-62 regarding these modifications. The revised version of the amendment was filed with the SEC January 28, 1991. The SEC approved the amendment March 27, 1991, in Exchange Act Release No. 34-29016.

The general standards contained in the amendment require, among other things, that the names of NASD members be disclosed clearly and prominently; that when multiple entities are named in one communication, the nature of the relationships, if any, between the NASD member and the named entities, and the products offered by each entity be clear; and that when an individual and multiple entities are named in one communication, the nature of the individual's relationship with the NASD member be clearly identified. The general standards also prohibit communications from including references to nonexistent degrees or designations, and bar the use of bona fide degrees or designations in a misleading manner when referring to individuals.

SPECIFIC STANDARDS

In addition to general standards, the amendment sets forth a number of specific standards to address certain recurring problem areas.

• Fictional Names — Under the amendment, members may voluntarily use fictional or DBA designations in communications when the DBA name has been filed with the NASD and the SEC on the Form BD and is the only name under which the member is recognized. In cases in which a state or other regulatory authority requires a member to use a DBA (e.g., because the member's NASD-approved name was deemed too similar to that of another corporation registered in the state), the amendment permits the member to use the DBA only in the jurisdiction that requires its use. With respect to required use of DBA names, the amendment also requires that, whenever possible, the member use the same DBA name in every jurisdiction that requires the use of a DBA. In addition, the amendment requires, with respect to a required DBA, that members clearly disclose both the name of the member as set forth on the Form BD and the fact that the firm is using a DBA designation in the particular state or jurisdiction.
  
  
• Generic Names — Under certain circumstances, the amendment permits members to use altered versions of the firm name to promote certain areas of a member firm's business or to use an "umbrella" tag line to promote name recognition. The amendment allows the use of generic names so long as the member name is clearly and prominently disclosed, the relationship between the generic name and the member is clear, and there is no implication that the generic is the name of the registered broker-dealer.
  
  
• "Division of" Designations — With respect to use of "division of" and similar designations, the amendment permits members to designate a portion of their business in this manner only when the designation is used with respect to a bona fide division of the member (i.e., a division that results from a merger or acquisition, or a functional division that conducts a specialized aspect of the member's business). The amendment also requires that the member name be clearly and prominently disclosed, and that the division be clearly identified as a division of the member.
  
  
• "Service of" and "Securities Offered Through" —With respect to the use by financial planners or other nonmember entities of phrases such as "service of" or "securities offered through" followed by the name of a member firm, the amendment requires that the name of the member be clearly and prominently disclosed. In addition, it mandates that the securities function be clearly identified as a function of the member rather than of the financial planning or other entity that also is named in the communication.
  
  
• Derivative Names — Under certain limited circumstances, the amendment permits a member to use a "derivative" of its name, without also including the member's full name, if: (1) the derivative name is used to promote a specific area of the firm's business, and (2) use of the derivative would not be misleading in context. Thus, for example, if a member firm uses a "derivative" name to promote its investment banking business, the firm might be permitted to omit the full firm name from typical "tombstone" advertisements on the ground that the use of a derivative would not be misleading in the context of advertisements that are primarily directed to an institutional, nonretail audience that will not be confused by the absence of the full broker-dealer name.

EFFECTIVE DATE

In order to provide members with sufficient time to consume existing supplies of such business stationery as letterhead, business cards, confirmation forms, and similar printed material, the amendment will not take effect with respect to such printed business stationery until November 1, 1991. In all other respects, the amendment becomes effective June 1, 1991.

Questions concerning this notice can be directed to R. Clark Hooper, Director, NASD Advertising Department, at (202) 728-8330, or Anne H. Wright, Senior Attorney, NASD Office the of General Counsel, at (202) 728-8815.

TEXT OF AMENDED ARTICLE III, SECTION 35 OF NASD RULES OF FAIR PRACTICE

(Note: New language is underlined; deleted language is in brackets.)

COMMUNICATIONS WITH THE PUBLIC

Sec. 35.

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