[Federal Register Volume 62, Number 217 (Monday, November 10, 1997)]
[Notices]
[Pages 60542-60547]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-29600]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-39294; File No. SR-NASD-95-63]
Self-Regulatory Organizations; Order Approving Proposed Rule
Change by the National Association of Securities Dealers, Inc. and
Notice of Filing and Order Granting Accelerated Approval of Amendment
No. 5 to Proposed Rule Change Governing Broker-Dealers Operating on the
Premises of Financial Institutions
November 4, 1997.
On December 28, 1995, the National Association of Securities
Dealers, Inc. (``NASD'') filed with the Securities and Exchange
Commission (``SEC'' or ``Commission'') the original proposed rule
change relating to broker-dealers operating on the premises of
financial institutions. The NASD subsequently filed Amendment Nos. 1,
2, 3 and 4 to the filing. The Commission published the proposed rule
and amendments for comment in the Federal Register. The Commission
received 11 comment letters in response to the publication of Amendment
No. 4 of the proposed rule change. In response to comments on Amendment
No. 4, on July 17, 1997, the NASD filed Amendment No. 5 to the
[[Page 60543]]
proposed rule change. For the reasons discussed below, the Commission
is approving the proposed Amendment No. 5 on an accelerated basis.
I. The Rule
Below is the approved text of the rule change incorporating the
amendments submitted by the NASD:
Conduct Rules
2350. Broker-Dealer Conduct on the Premises of Financial Institutions
(a) Applicability
This section shall apply exclusively to those broker-dealer
services conducted by members on the premises of a financial
institution where retail deposits are taken. This section does not
alter or abrogate members' obligations to comply with other applicable
NASD rules, regulations, and requirements, nor those of other
regulatory authorities that may govern members operating on the
premises of financial institutions.
(b) Definitions
(1) For purposes of this section, the term ``financial
institution'' shall mean federal and state-chartered banks, savings and
loan associations, savings banks, credit unions, and the service
corporations of such institutions required by law.
(2) ``Networking arrangement'' and ``brokerage affiliate
arrangement'' shall mean a contractual or other arrangement between a
member and a financial institution pursuant to which the member
conducts broker-dealer services for customers of the financial
institution and the general public on the premises of such financial
institution where retail deposits are taken.
(3) ``Affiliate'' shall mean a company that controls, is controlled
by, or is under common control with, a member as defined in Rule 2720.
(4) ``Broker-Dealer services'' shall mean the investment banking or
securities business as defined in paragraph (o) of Article I of the By-
Laws.
(c) Standards for Member Conduct
No member shall conduct broker-dealer services on the premises of a
financial institution where retail deposits are taken unless the member
complies initially and continuously with the following requirements:
(1) Setting
Wherever practical, the member's broker-dealer services shall be
conducted in a physical location distinct from the area in which the
financial institution's retail deposits are taken. In all situations,
members shall identify the members' broker-dealer services in a manner
that is clearly distinguished from the financial institution's retail
deposit-taking activities. The member's name shall be clearly displayed
in the area in which the member conducts its broker-dealer services.
(2) Networking and Brokerage Affiliate Agreements
Networking and brokerage affiliate arrangements between a member
and a financial institution must be governed by a written agreement
that sets forth the responsibilities of the parties and the
compensation arrangements. The member must ensure that the agreement
stipulates that supervisory personnel of the member and representatives
of the Securities and Exchange Commission and the Association will be
permitted access to the financial institution's premises where the
member conducts broker-dealer services in order to respect the books
and records and other relevant information maintained by the member
with respect to its broker-dealer services.
(3) Customer Disclosure and Written Acknowledgment
At or prior to the time that a customer account is opened by a
member on the premises of a financial institution where retail deposits
are taken, the member shall:
(A) Disclose, orally and in writing, that the securities products
purchased or sold in a transaction with the member:
(i) Are not insured by the Federal Deposit Insurance Corporation
(``FDIC'');
(ii) Are not deposits or other obligations of the financial
institution and are not guaranteed by the financial institution; and
(iii) Are subject to investment risks, including possible loss of
the principal invested; and
(B) Make reasonable efforts to obtain from each customer during the
account opening process a written acknowledgment of receipt of the
disclosures required by paragraph (c)(3)(A).
(4) Communications with the Public
(A) All member confirmations and account statements must indicate
clearly that the broker-dealer services are provided by the member.
(B) Advertisement and sales literature that announce the location
of a financial institution where broker-dealer services are provided by
the member or that are distributed by the member on the premises of a
financial institution must disclose that securities products: are not
insured by the FDIC; are not deposits or other obligations of the
financial institution and are not guaranteed by the financial
institution; and are subject to investment risks, including possible
loss of the principal invested. The shorter, logo format described in
paragraph (c)(4)(C) may be used to provide these disclosures.
(C) The following shorter, logo format disclosures may be used by
members in advertisements and sales literature, including material
published, or designed for use in radio or television broadcasts,
Automated Teller Machine (``ATM'') screens, billboards, signs, posters,
and brochures, to comply with the requirements of paragraph (c)(4)(B),
provided that such disclosures are displayed in a conspicuous manner:
Not FDIC Insured
No Bank Guarantee
May Lose Value
(D) As long as the omission of the disclosures required by
paragraph (c)(4)(B) would not cause the advertisement or sales
literature to be misleading in light of the context in which the
material is presented, such disclosures are not required with respect
to messages contained in:
Radio broadcasts of 30 seconds or less;
Electronic signs, including billboard-type signs that are
electronic, time, and temperature signs and ticker tape signs, but
excluding messages contained in such media as television, on-line
computer services, or ATMs' and
Signs, such as banners and posters, when used only as location
indicators.
(5) Notifications of Terminations
The member must promptly notify the financial institution if any
associated person of the member who is employed by the financial
institution is terminated for cause by the member.
II. Description of the Proposal
A. Procedural History of the Filing
The NASD initially published this bank broker-dealer rule for
member comment in an NASD Notice to Members.\1\ The NASD substantially
revised its proposed rule in response to the 284 comment letters that
it received about the proposed rule. The NASD filed the proposed rule
with the Commission on December 28, 1995, and subsequently submitted
Amendment Nos. 1, 2 and 3 to the filing of January 24, January 29, and
March 7, 1996,
[[Page 60544]]
respectively.\2\ The Commission published the proposed rule and
amendments for comment in the Federal Register on March 22, 1996,\3\
and received 98 comments on the proposed rule amendments. While about
one-third of the commenters supported the proposal,\4\ most suggested
modifications to the proposed rule.\5\ More than half of the commenters
opposed some or all of the provisions of the proposed rule. In response
to these comments, on March 25, 1997, the NASD filed substantial
amendments to the proposed rule in the form of Amendment No. 4, and the
Commission published notice of the amendments in the Federal Register
on April 21, 1997.\6\ In response to the 11 public comments received on
Amendment No. 4, on July 17, 1997, the NASD submitted Amendment No. 5
to the proposal, which contains further amendments to the rule.\7\ In
addition to approving the proposed rule change, as amended, the
Commission is granting accelerated approval to Amendment No. 5.
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\1\ NASD Notice to Members 94-94.
\2\ See Letters from Elliot R. Curzon, Associate General
Counsel, NASD, to Mark P. Barracca, Branch Chief, Division of Market
Regulation, SEC (January 24, 1996 and march 7, 1996), and Letter
from Suzanne E. Rothwell, Associate General Counsel, NASD, to Mark
P. Barracca, Branch Chief, Division of market Regulation, SEC
(January 29, 1996).
\3\ Securities Exchange Act Release No. 36980 (March 15, 1996),
61 FR 11913.
\4\ See, e.g., Letter from Dr. Janice C. Shields, Coordinator,
Consumer Finance Project, center for Study of Responsive Law, to
Jonathan Katz, Secretary, SEC (May 15, 1996); Letter from Dee
Riddell Harris, President, North American Securities Administrators
Association, Inc., to Jonathan Katz, Secretary, SEC (May 21, 1996).
\5\ See, e.g., Letter from Maureen Ryan, Senior Counsel, Barnett
Banks, Inc., to Jonathan Katz, Secretary, SEC (May 20, 1996); Letter
from Sarah Miller, Senior Government Relations Counsel, American
Bankers Association to Jonathan Katz, Secretary, SEC (May 21, 1996)
(``ABA Letter''); Letter from Steven J. Freiberg, Chairman & CEO,
Citicorp Investment Services to Jonathan Katz, Secretary, SEC (May
20, 1996).
\6\ Securities Exchange Act Release No. 38506 (April 14, 1997),
62 FR 19378.
\7\ See Letter from May Revell, Assistant General Counsel, NASD
Regulation, to Belinda Blaine, Associate Director, SEC (July 17,
1997). The changes made in Amendment No. 5 to the proposed rule
change are discussed in detail in Section II.C of this approval
order, infra.
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B. Overview of Amendment No. 4
Amendment No. 4 proposed by the NASD included the following
substantial revisions to the proposed rule originally filed with the
Commission:
1. Setting
The original proposed rule specified certain requirements regarding
the setting of the conduct of a broker-dealer's services, including
physical separation, that were designed to reduce customer confusion
about the differences between deposit taking and securities activities.
The great majority of the commenters that addressed this provision of
the original proposal criticized it. They argued that the language in
the originally proposed rule did not take into account that there may
be certain business settings where the member may be unable to comply
with the rule and may, therefore, be prevented from conducting business
in such a location. These commenters also indicated that the rule as
originally proposed conflicts with the Interagency Statement on Retail
Sales of Nondeposit Investment Products (``Interagency Statement'')
issued by the banking regulators on February 15, 1994. These commenters
requested clarification that this provision would not prohibit a member
from conducting a brokerage business in a one-person branch, as long as
adequate safeguards are adopted, including adequate disclosure and
signs announcing the type of business being conducted.
In response to these comments, the setting provision has been
revised to make the rule more consistent with the standards of the
Interagency Statement. Amendment No. 4 clarifies that the rule will
impose the same standards on broker-dealers as are generally imposed on
financial institutions by the Interagency Statement, and require only
that broker-dealer services should be provided in a physically distinct
location wherever practical. Under the Amendment No. 4, broker-dealers
will not be prohibited from conducting business in the event that a
physical separation is not practical. The location, however, must be
identified in a manner that clearly distinguishes the broker-dealer
services from the activities of the financial institution, and the
member's name must be clearly displayed in the area in which the member
conducts its broker-dealer services.
2. Confidential Financial Information and Compensation of Unregistered
Persons
The original proposal stated that an NASD member shall not use
confidential financial information regarding its customers unless a
customer granted to the financial institution prior approval for such
use. Most of the commenters who addressed this provision objected to
the proposed restriction on the use of confidential financial
information, and 7requested that the provision either be deleted or
substantially revised.\8\ These commenters argued that, to the extent
there are special concerns when a bank provides confidential financial
information about its customers to a broker-dealer, these concerns are
properly the subject of federal and state banking and privacy laws.
They further argued that the NASD lacks jurisdiction to regulate a
financial institution's use of customer information.
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\8\ See, e.g., Letter from Sandra L. Caruba, Counsel, First
National Bank of Chicago, to Jonathan Katz, Secretary, SEC (May 20,
1996); Letter from David A. Hebner, Vice President and Assistant
General Counsel, First Union Corporation, to Jonathan Katz,
Secretary, SEC (May 20, 1996); Letter from Steven Alan Bennett,
Senior Vice President and General Counsel, Banc One Corporation, to
Jonathan Katz, Secretary, SEC (May 21, 1996); Letter from Robert M.
Kurucza, General Counsel, Bank Securities Association, to Jonathan
Katz, Secretary, SEC (May 21, 1996).
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The commenters also argued that a member should be able to use such
confidential financial information, provided proper disclosure is made
and consent for such use has been obtained in accordance with
applicable state law, which, according to commenters, does not require
written consent. Alternatively, these commenters argued that a member
should be able to rely on a representation by the financial institution
that customer consent was obtained. In addition, the commenters stated
that complying with this provision represented an unwarranted
operational burden not justified by the NASD's stated objective of
avoiding customer confusion. Finally, some commenters maintained that
their customers expect and welcome this sharing of information to
enable the financial institution to present them with an array of
investment alternatives.
As with other portions of the originally proposed rule, commenters
stated that this provision was unreasonably discriminatory and anti-
competitive, noting that restrictions regarding the use of confidential
financial information are not applied similarly to broker-dealers who
are not operating on the premises of a financial institution. These
commenters stated that a more equitable approach would be for the NASD
to adopt rules that regulate the use of confidential information by all
members--not just those members that operate on the premises of
financial institutions.
In response to these concerns, the provision has been deleted, and
the NASD Board has issued a Notice to Members soliciting comment on a
proposed rule governing the use and release of confidential financial
[[Page 60545]]
information that would apply to all members.\9\
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\9\ See NASD Notice to Members 97-12.
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3. Communications With the Public
The original proposal set forth requirements for all communications
with customers, including account statements, advertisements, and sales
literature. Several of the commenters who addressed this provision
asked whether the disclosures required by the rule could be provided in
the abbreviated format allowed by a 1995 interpretation of the
Interagency Statement (``1995 Interpretation'').\10\ Several commenters
also stated that the requirements of the provision are duplicative of
the requirements in existing NASD rules.
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\10\ Interpretation of the Interagency Statement (September 12,
1995).
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In response to these comments, this provision has been revised to
make the rule more consistent with the Interagency Statement and the
1995 Interpretation. In addition, those provisions of the originally
proposed rule that are duplicative of requirements in existing NASD
advertising rules have been deleted.\11\ Moreover, several new
provisions have been added to clarify the circumstances under which
abbreviated risk disclosures may be used and when such disclosures are
not required.\12\
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\11\ For example, pursuant to NASD Rule 2210, any joint account
statement must clearly identify and distinguish securities products
from non-securities products, and should clearly identify securities
products as being offered by the member. See NASD Rule
2210(f)(2)(C).
\12\ See Rule 2350(c)(4), supra.
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4. Compensation of Registered/Unregistered Persons
The original rule proposal stated that members may not provide cash
or non-cash compensation to financial institutions in connection with
referring customers of the financial institution to the member. A
related provision required that networking and brokerage affiliate
agreements between a member and a financial institution stipulate that
the payment of transaction-related cash or non-cash compensation to
unregistered financial institution employees for referrals is
prohibited. Commenters who addressed these provisions argued that they
were unclear and should be revised. Among other things, they suggested
that the NASD clarify that its prohibition on payment of referral fees
does not prevent bank management from paying referral fees to bank
employees.\13\
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\13\ See e.g., ABA Letter, supra note 5.
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Commenters also were concerned with NASD statements in the original
rule filing that a member may not do indirectly what it is prohibited
from doing directly, by compensating employees of a financial
institution for referrals through payments that were directed in the
first instance to a financial institution. Commenters were particularly
concerned that this provision be clarified to ensure that the NASD was
not attempting to regulate a financial institution's compensation
practices with respect to its own employees--practices that are subject
to regulation by the banking agencies. Finally, some commenters stated
that this provision was unreasonably discriminatory and anti-
competitive because it would prohibit payment of referral fees by bank
broker-dealers, and not prohibit such payments by all member firms. In
response to these criticisms, these provisions have been deleted, and
the NASD has solicited comment on a proposed rule governing
compensation of unregistered persons that would apply to all
members.\14\
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\14\ See NASD Notice to Members 97-11.
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5. Termination for Cause
As originally filed, the proposed rule specified that networking
and brokerage affiliate agreements must contain a provision requiring a
member to notify a financial institution if a dual employee of the
member and the financial institution is terminated for cause by the
member. This provision has been deleted from the paragraph of the bank
broker-dealer rule pertaining to matters that must be addressed by
networking and brokerage affiliate agreements, and is now a separate
affirmative requirement.\15\
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\15\ See Rule 2350(c)(5), supra.
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C. Overview of Amendment No. 5
In response to the comment letters submitted on Amendment No. 4,
the NASD submitted Amendment No. 5 \16\ to the proposed rule change.
The major issues raised by the commenters, and the changes in Amendment
No. 5 in response to those comments, are discussed below.
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\16\ Supra note 7.
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1. Summary of Comments
Some of the commenters to Amendment No. 4 continued to question the
need for the rule. Most commenters, however, believed that the NASD had
appropriately amended the rule in response to the issues raised by the
98 commenters on the original proposal. These commenters applauded the
NASD for revising the original proposal to eliminate the provisions
that they considered objectionable and for making the requirements of
the rule more consistent with the guidelines in the Interagency
Statement. The commenters also suggested several additional revisions
that they believed would result in a clearer, less ambiguous rule that
would be even more in accord with the standards in the Interagency
Statement.
2. Applicability
The rules applies to broker-dealer services conducted by members
``on the premises'' of a financial institution. Two commenters
suggested that the scope of the rule be limited to face-to-face
communications with customers on bank premises and that the rule not
apply where broker-dealer services are provided by means of
telecommunication.\17\ The rule, however, is not limited in this way
because the potential for confusion exists whenever brokerage services
are conducted either in person, over the telephone, or through other
electronic medium, by a broker-dealer that has a physical presence on
the premises of a financial institution. In addition, two commenters
suggested that the disclosure requirements of the rule should be
applied to all NASD members that offer both insured products and
uninsured securities products.\18\ The Commission notes that the NASD
has issued a Notice to Members soliciting comment on such a rule.\19\
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\17\ See Letter from Barry E. Simmons, Investment Company
Institute, to Jonathan Katz, Secretary, SEC (May 12, 1997) (``1997
ICI Letter''); and Letter from Jack Kopnisky, President & CEO,
KeyInvestments, to Jonathan Katz, Secretary, SEC (May 9, 1997)
(``1997 KeyInvestments Letter'').
\18\ See Letter from Kimberly Crichton, General Counsel and Vice
President, Citicorp Investment Services, to Jonathan Katz,
Secretary, SEC (May 12, 1997); and Letter from Valorie Seyfert,
President, CUSO Financial Services, L.P., to Jonathan Katz,
Secretary, SEC (May 21, 1997) (``1997 CUSO Letter'').
\19\ See NASD Notice to Members 97-26.
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3. Definition of ``Broker-Dealer Services''
Two commenters requested that the definition of ``broker-dealer
services'' be clarified to indicate that the rule does not apply to
fiduciary activities or to mutual fund distributors and
underwriters.\20\ The rule has not been revised to reflect these
comments. While the rule most often would be applied to broker-dealer
services provided to retail customers, the rule would also apply to
brokerage services provided to fiduciary accounts, if such services are
provided
[[Page 60546]]
on the premises of a financial institution where retail deposits are
taken. Furthermore, the Interagency Statement does not exclude
fiduciary activities from the scope of the guidelines; it merely states
that the guidelines ``generally do not apply to the sale of nondeposit
investment products to non-retail customers, such as sales to fiduciary
accounts administered by an institution'' (emphasis added). The 1995
Interpretation also clarifies that issue. It states: ``[F]or fiduciary
accounts where the customer directs investments, * * * the disclosures
prescribed by the Interagency Statement should be provided.''
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\20\ See Letter from Robert R. Davis, Director, Government
Relations, America's Community Bakers, to Jonathan Katz, Secretary,
SEC (May 13, 1997) (``1997 ACB Letter''); and 1997 ICI Letter, supra
note 17.
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In addition, the NASD rule would apply by its terms to mutual fund
distributors and underwriters if they are engaged in brokerage
activities on the premises of a financial institution. For these
reasons, the rule has not been revised to respond to this comment.
4. Setting
As discussed above, the revised rule requires that, wherever
practical, broker-dealer services must be conducted in a physical
location distinct from the area where retail deposits are taken. One
commenter suggested amending the rule to require that broker-dealer
services be separated from the area of the financial institution where
retail deposits are routinely taken to make clear that brokerage
services must be offered away from the teller line.\21\ Because of
concern that this proposal could lead to confusion, the rule has not
been changed in response to this comment. However, the NASD intends to
clarify in a Notice to Members announcing the approval of the rule that
brokerage services should be separated from the teller line, the area
of the bank where retail deposits are routinely taken. The NASD also
intends to clarify that the rule is not meant to preclude certificates
of deposit from being offered in the brokerage area if that particular
product, rather than an uninsured investment product, is best suited to
the customer's investment needs. The rule therefore would not preclude
a bank customer from purchasing an array of investment products,
including certificates of deposit, so long as the brokerage area is
appropriately separated from the other areas of the financial
institution with appropriate signs indicating the type of business
being conducted and other lines of demarcation, and the customer is
given the appropriate disclosures.
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\21\ See Letter from Sarah A. Miller, Senior Government
Relations Counsel, American Bankers Association, to Jonathan Katz,
Secretary, SEC (May 12, 1997) (``1997 ABA Letter'').
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5. Customer Disclosure and Written Acknowledgment
The rule requires NASD members to make certain disclosures at or
prior to the time that a customer account is opened by the member.\22\
One provision requires disclosure that securities products are not
insured. Three commenters addressed this requirement in response to
Amendment No. 4. Two suggested deleting the phrase ``or other deposit
insurance'' to ensure consistency with the Interagency Statement.\23\
The third suggested simply stating that securities products are not
federally insured.\24\ In response to these comments, the phrase ``or
other deposit insurance'' has been deleted from the rule.
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\22\ The Commission notes that requiring disclosure at or prior
to the time of the opening of an account is consistent with other
SEC rules. See e.g., Exchange Act Rule 11Ac1-3, 17 CFR 240.11Ac1-3
(regarding payment for order flow).
\23\ See 1997 ABA Letter, supra note 21, and 1997 ICI Letter,
supra note 17.
\24\ See 1997 CUSO Letter, supra note 18.
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Another commenter suggested that, in addition to the disclosures
required by the current version of the rule, disclosure should be made
that products sold by a dual employee are offered by a person who
accepts deposits and sells nondeposit investment products.\25\ In order
to keep the NASD rule consistent with the Interagency Statement, and
because the current disclosures are designed to adequately apprise
investors of the risks of securities products, this change has not been
made.
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\25\ Id.
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6. Communications With the Public
Paragraph (c)(4)(B) permits shorter, logo format disclosures in
visual media. One commenter suggested that the rule should also allow
these abbreviated disclosures in radio advertisements.\26\ Because the
definition of ``advertisement'' in NASD Rule 2210 (Communications with
the Public), includes material designed for use in radio, the rule
language has been revised to be consistent with Rule 2210.
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\26\ See Letter from Kimberly Crichton, General Counsel and Vice
President, Citicorp Investment Services, to Jonathan Katz,
Secretary, SEC (May 12, 1997).
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The rule also allows the required disclosures to be omitted in
specified advertisements and sales literature, provided the omission
will not cause the advertisement or sales literature to be misleading.
One commenter suggested deleting any reference to the ``misleading''
nature of such omissions.\27\ This language has been retained to
appropriately reflect the general prohibitions on misleading
advertising in NASD rules.\28\ Another commenter requested that the
rule allow omission of the required disclosures in letters that
introduce the broker-dealer to bank customers and do not contain an
offer or a solicitation.\29\ This suggested change has not been made.
Generally, a personalized letter to an individual customer is not
included in either the definition of advertisements or sales literature
in NASD Rule 2210. The letter would be considered ``correspondence''
subject to the requirements of NASD Rule 3010 (Supervision).\30\
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\27\ See 1997 Key Investments Letter, supra note 17.
\28\ See NASD Rule 2210.
\29\ See Letter from Bill Sones, President, Independent Bankers
Association of America, to Jonathan Katz, Secretary, SEC (May 12,
1997).
\30\ But see NASD Notice to Members 97-37 (requesting comment on
proposed definition of correspondence for rules regarding
communications with the public).
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Paragraphs (c)(4)(B), (C), and (D) have been revised to make other
clarifying changes, many of which merely make the rule language in
Paragraph (c)(4) more consistent with language in NASD Rule 2210. For
example, the phrase ``promotional and sales material'' has been
replaced with the phrase ``sales literature'' in Paragraph (c)(4)(A),
consistent with Rule 2210. Also, Paragraph (c)(4)(C) has been revised
to clarify that logo disclosures may be used in all advertisements and
sales literature. Finally, in order to ensure consistency with the
standards in the Interagency Statement, Paragraph (c)(4)(D) has been
revised to add language to the rule that mirrors language in the 1995
Interpretation. These minor revisions clarify the meaning of the rule
and make the rule consistent with the Interagency Statement.
7. Notification of Termination
The rule requires members to promptly notify the financial
institution if an associated person of the member who also is employed
by the financial institution (a dual employee) is terminated for cause
by the member. Two commenters suggested that such notification should
also be provided in situations where an associated person who is
employed only by the member and not directly by the financial
institution is terminated.\31\ This change has not been made because
the purpose
[[Page 60547]]
of the provision is to permit banks and broker-dealers to maintain open
communications about dual employees, and it is unclear what purpose
would be served by the revision.
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\31\ See 1997 ACB Letter, supra note 20. See also Letter from
Nicholas J. Ketcha, Jr., Director, Division of Supervision, FDIC, to
Belinda Blaine, Associate Director, Division of Market Regulation,
SEC, (August 29, 1997).
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III. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning Amendment No. 5. Persons making written
submissions should file six copies thereof with the Secretary,
Securities and Exchange Commission, 450 Fifth Street, N.W., Washington,
D.C. 20549. Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for inspection and
copying in the Commission's Public Reference Room. Copies of such
filing will also be available for inspection and copying at the
principal office of the NASD. All submissions should refer to file
number SR-NASD-95-63 and should be submitted by December 1, 1997.
IV. Commission Findings
The Commission finds that the rule change is consistent with the
requirements of Section 15A(b)(6) of the Act.\32\ Section 15A(b)(6)
specifies that the rules of a national securities association be
designed, among other things, to prevent fraudulent and manipulative
acts, to promote just and equitable principles of trade, and, in
general, to protect investors and the public interest. The Commission
believes that the rule will provide enforceable standards designed to
reduce potential customer confusion in dealing with broker-dealers that
conduct business on the premises of financial institutions. The rule
also should clarify the relationship between a broker-dealer and a
financial institution entering into a networking arrangement.\33\ The
rule should help prevent confusion by clarifying that securities
purchased by customers on the premises of a financial institution are
not insured by the FDIC or the financial institution. The disclosures
required by the rule, and the written acknowledgement of disclosures
obtained pursuant to the rule, are intended to assist investors in
making investment decisions based on a better understanding of the
distinctions between insured deposits and uninsured securities
products. Although the rule requires only that members ``make
reasonable efforts'' to obtain written customer acknowledgment of the
required disclosures in the account opening process, the Commission
expects members to obtain such written acknowledgement in all but rare
circumstances (e.g. when a customer refuses to sign the
acknowledgment). It is anticipated that, as is the case today, many
firms will provide these disclosures in the new account opening form
which, when signed by the customer, constitutes written acknowledgment.
The Commission believes that in the rare circumstances where
acknowledgment is not obtained, heightened supervisory procedures would
be necessary. Reasonable supervisory procedures would include
procedures for the registered representative receiving approval from
the member's compliance department prior to opening the account, and
documenting that the customer has refused to sign the written
acknowledgment of such disclosure.
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\32\ 15 U.S.C. 78o-3(b)(6).
\33\ In approving the proposal, the Commission has considered
the proposal's impact on efficiency, competition, and capital
formation. 15 U.S.C. 78c(f).
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The Commission also agrees with the NASD that the activities of
NASD member firms operating on the premises of financial institutions
and related customer protection issues are not adequately addressed by
existing NASD rules. Because the Interagency Statement is not part of
the securities laws or rules, the basis for NASD Regulation
disciplinary action against member firms that do not comply with the
Interagency Statement is unclear. The proposed rule establishes a clear
standard of conduct governing the practices of member firms operating
on the premises of financial institutions that is enforceable by the
NASD.
The Commission finds good cause for approving Amendment No. 5 prior
to the thirtieth day after the date of the publication of notice of
filing thereof in the Federal Register, because Amendment No. 5
reflects and responds to earlier comments about the proposal and
further clarifies the proposal. In addition, accelerated approval of
Amendment No. 5 will permit the rule to go into effect without further
delay.
V. Effective Date
The NASD will announce the approval of this rule in a Notice to
Members no later than 60 days after publication of this Order in the
Federal Register. The effective date of this rule will be 60 days after
publication of the NASD's Notice to Members.
It is therefore ordered, pursuant to Section 19(b)(2) \34\ of the
Act, that the proposed rule change (SR-NASD-95-63), as amended be, and
hereby is, approved.
\34\ 15 U.S.C. 78s(b)(2).
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By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-29600 Filed 11-7-97; 8:45 am]
BILLING CODE 8010-01-M