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Notice To Members 91-46

Request for Comments on Exemption for Directly Marketed Mutual Funds From Article III, Section 21(c)(2)(ii) and (iii) of the Rules of Fair Practice Re: Customer Account Information Regarding Employment; Last Date for Comments: July 31, 1991

Published Date:
Last Date for Comments: July 31, 1991


Senior Management
Internal Audit
Legal & Compliance
Mutual Fund
*These are suggested departments only. Others may be appropriate for your firm.


On January 1, 1991, amendments to Article III, Sections 2 and 21 (c) of the Rules of Fair Practice ("Rules"), which require NASD members to make reasonable efforts to obtain information pertaining to customer accounts, became effective. Since that time, the NASD has received and considered comments from members of the mutual fund industry regarding their objections to the collection of customers' employment data pursuant to Article III, Subsections 21(c)(2)(ii) and (iii). Members of the industry have argued that the collection of such employment data is really intended to permit members to evaluate the suitability of an investment recommendation for a customer, and that such data is unnecessary for directly marketed mutual funds because no investment recommendation is ever involved.

The NASD is considering an interpretation of Article III, Section 21 (c) that would state that the provisions of Subsections (2)(ii) and (iii) thereof are inapplicable to directly marketed mutual funds. In addition, the NASD wishes to determine whether other segments of the industry also desire an exemption for similarly valid reasons. Accordingly, the NASD is soliciting member comment on this requested exemption.


On May 2, 1990, the SEC approved an NASD rule change that requires NASD members to make reasonable efforts to obtain information pertaining to customer accounts.1 These amendments became effective January 1, 1991.2

As amended, Section 21 (c) requires a member to make reasonable efforts to obtain, prior to the settlement of the initial transaction in a noninstitutional customer account, the tax identification or Social Security number of the customer, and the occupation and name and address of the employer of each customer for each account. In addition, the member must inquire as to whether the customer is associated with another member.

Amended Section 21(c) specifically excludes transactions and accounts in which investments are limited to money market mutual funds.

Members of the mutual fund industry have asked the NASD to interpret amended Section 21(c) so that directly marketed mutual funds are also exempt from the obligation to gather the employment data required by Subsections 21(c)(2)(ii) and (iii). The mutual fund industry members have argued that they sell shares of mutual funds to the public primarily through direct mail and through newspaper, magazine, radio, and television advertisements. They contend that interested investors are encouraged to secure a prospectus that contains all the essential information necessary for the prospective customer to make an informed investment decision, and that the investor may also utilize a variety of other source materials in deciding whether to purchase the shares of a mutual fund. In such a situation, the members argue that the investor makes his or her own investment decision, and that the NASD member's role is limited to furnishing information on request and answering factual questions.

Section 21(c) requires each NASD member to "make reasonable efforts to obtain, prior to the settlement of the initial transaction in the account, the . . . [employment data] . . . to the extent it is applicable to the account..." Because no investment recommendation is made by the NASD member that effects a mutual fund transaction, the members argue that the employment data should be deemed not "applicable to the account." The members argue that the only purpose for collecting employment data is to evaluate the suitability of an investment recommendation for the account in later instances. The members state that the expense of collecting and storing the unnecessary employment data must either be absorbed by the member firm or passed on to the investing public through one of the mutual fund's agents. They also assert that data processing programs must be modified to create new data fields for the employment data, which inevitably increases expense and slows down the other data processing associated with essential functions. Members argue that account applications are already very long and complex documents, and that adding more requests for information increases the possibility that an investor's application will be incomplete and that his or her investment will be delayed. They contend that significant expense is also incurred when inventory of existing applications must be discarded and new forms printed.

The NASD believes that there is merit to the requested interpretation of Section 21(c), and is soliciting comments from other members of the industry regarding this instance or similar requests for interpretive exemptions for their products. Such requests should specifically address any similarities to directly marketed mutual funds, (i.e., no possibility of recommendation to customers' accounts) and any other arguments that might justify an interpretive exemption.

The NASD encourages all members and other interested persons to comment on the proposed interpretive exemption. Comments should be directed to:

Stephen D. Hickman, Secretary
National Association of Securities
Dealers, Inc.
1735 K Street, NW
Washington, DC 20006-1506.

Comments must be received no later than July 31, 1991. Comments received by this date will be considered by the NASD National Business Conduct Committee and Board of Governors.

Questions concerning this notice may be directed to Deborah F. Mcllroy, Senior Attorney, NASD Office of General Counsel, at (202) 728-8816.

1 See Securities and Exchange Commission Release No. 34-27982 (May 2, 1990), 55 F.R. 19402 (May 9, 1990).

2 See Securities and Exchange Commission Release No. 34-28312 (August 3, 1990), 55 F.R. 32722 (August 10, 1990).