1 Securities Exchange Act Release No. 3698, 61 Fed. Reg. 11913 (March 22, 1996).
2 See Memorandum to Bank Investment Management Members No. 10-95, SEC Rules Committee No. 28-95, and
Subcommittee on Advertising No. 3-95, dated February 23, 1995.
March 26, 1996
TO: BANK INVESTMENT MANAGEMENT MEMBERS No. 5-96
SEC RULES COMMITTEE No. 22-96
SUBCOMMITTEE ON ADVERTISING No. 4-96
RE: SEC REQUEST FOR COMMENT ON NASD RULES CONCERNING BANK
BROKER-DEALER ACTIVITIES
______________________________________________________________________________
The National Association of Securities Dealers, Inc., recently filed with the Securities
and Exchange Commission its proposed rules governing member sales activities on bank
premises. In the attached release, the Commission requests public comment on the proposed
rules.1 We are pleased to report that the NASDs proposal reflects many of the Institutes
comments on an earlier NASD proposal.2 The comment period for the proposed rules expires
on May 21, 1996. Please provide your comments on the proposed rules to me (at 202/326-5819)
by Friday, April 12, 1996.
1. Written Agreement
The proposed rules would require that an NASD member operating on bank premises
enter into a written agreement with the bank, which must stipulate that:
supervisory personnel of the member and staff of the Commission and NASD may
inspect the books and records and other relevant information maintained by the member on
the banks premises;
unregistered bank employees will not receive any compensation conditioned upon
whether a referral results in a transaction; and
the member will notify the bank if any associated person of the member who is also
employed by the bank is terminated for cause by the member.
2. Bank Premises
Wherever possible, the members services would have to be conducted in a physical
location distinct from the banks deposit-taking area. The proposed rules would not apply in
trust areas and other parts of a bank that do not generally provide access to the public without
an appointment. The rules would apply, however, to broker-dealer services provided via
telephone to customers who are on bank premises even if no broker-dealer personnel are on the
premises. The NASD believes that it may be particularly difficult to distinguish between bank
and broker-dealer activities when banks conduct business from kiosks or desks in public places
(e.g., supermarkets).
3. Interagency Disclosures
A member would have to provide risk disclosures similar to those required by the
federal bank agencies Interagency Statement on Retail Sales of Nondeposit Investment
Products and make reasonable efforts to obtain a written customer acknowledgment of these
disclosures, when a customers account is opened by the member on bank premises.
4. Confidential Information
A member could use confidential financial information provided by a bank, with the
customers prior written consent. "Confidential financial information" would be defined
generally to exclude customer names, addresses, and telephone numbers and information
available from unaffiliated credit bureaus in the ordinary course of business. A member would
not be able to use a customer list sorted by the bank according to information that would be
confidential if it pertained to an individual customer (e.g., lists of customers with expiring
certificates of deposit or net worth over $100,000).
5. Joint Statements and Other Member Communications
All member communications regarding a customers securities transactions would have
to indicate that the broker-dealer services are provided by the member and make the
Interagency Statement disclosures. The rules would permit the use of joint account statements
of the member and bank, but the member would have to distinguish uninsured securities from
the banks FDIC-insured products. The NASD intends to review the entire contents of all joint
sales material to determine if the context within which the members material appears complies
with the NASDs advertising rules. Sales materials issued by the member that relate only to its
services would be deemed to be the members materials and would have to indicate
prominently the members identity. The bank could be referenced in a "nonprominent manner"
to identify the location where broker-dealer services are available and, where appropriate, to
disclose a material relationship between the member and the bank, such as when the member is
affiliated with a bank that serves as adviser to a mutual fund.
6. Compensation/Referral Fees
The member would not be permitted to provide compensation to bank employees who
are not registered with an NASD member. According to the release accompanying the
proposed rules, the NASDs long-standing position has been that if an unregistered individual
receives a series of regular, ongoing payments from a member, the recipient is required to
register as an associated person. Moreover, an NASD member may not compensate bank
employees for referrals through indirect payments to the bank.
Thomas M. Selman
Associate Counsel
Attachment