SEC REQUEST FOR COMMENTS ON PROPOSED NASD INTERPRETATION OF BROKER-DEALER SUITABILITY OBLIGATIONS

1 See Memorandum to Investment Advisers Committee No. 46-95, SEC Rules Committee No. 122-95, Small Funds Committee No. 20-95, dated November 15, 1995. 2 Securities Exchange Act Release No. 36973, 61 Fed. Reg. 11655 (March 21, 1996). March 27, 1996 TO: INVESTMENT ADVISERS COMMITTEE No. 5-96 SEC RULES COMMITTEE No. 23-96 SMALL FUNDS COMMITTEE No. 3-96 RE: SEC REQUEST FOR COMMENTS ON PROPOSED NASD INTERPRETATION OF BROKER-DEALER SUITABILITY OBLIGATIONS ______________________________________________________________________________ As we previously informed you, the Institute submitted a comment letter to the Securities and Exchange Commission on a proposed interpretation of the National Association of Securities Dealers, Inc., concerning a broker-dealer
s suitability obligations to institutional customers under the NASD
s Rules of Fair Practice.1 In the attached release, the Commission recently requested comment on a revised version of the NASD
s proposal.2 The comment period expires on April 22, 1996. Please provide your comments to me (at 202/326-5819) by Monday, April 8, 1996. The NASD*s interpretation would provide guidance concerning the factors that a member should consider in determining the scope of its suitability obligations to institutional customers (e.g., the customer*s ability to evaluate risk independently and the extent to which the customer is exercising independent judgment in evaluating the member*s recommendations). The interpretation states that it is more appropriately applied to an institutional customer with at least $10 million in securities under management. The Institute*s letter had sought clarification that a member*s suitability obligation and the guidance provided by the interpretation would apply identically with respect to all registered investment companies, regardless of the amount of assets that a particular investment company has under management. The release accompanying the reproposal states that the reference to $10 million accounts is not intended to establish a definitive threshold that distinguishes capable from noncapable institutional customers, and the NASD does not intend to create a presumption either above or below that amount that the interpretation will apply to a particular institutional customer. Consequently, according to the NASD, the $10 million threshold should not result in inadvertent discrimination against investment companies with less than $10 million under management. Thomas M. Selman Associate Counsel Attachment