INSTITUTE COMMENT LETTER ON PROPOSED NASD RULES CONCERNING BANK BROKER-DEALER ACTIVITIES

1 See Memorandum to Bank Investment Management Members No. 5-96, SEC Rules Committee No. 22-96, and Subcommittee on Advertising No. 4-96, dated March 26, 1996. May 29, 1996 TO: BANK INVESTMENT MANAGEMENT MEMBERS No. 8-96 SEC RULES COMMITTEE No. 48-96 SUBCOMMITTEE ON ADVERTISING No. 9-96 RE: INSTITUTE COMMENT LETTER ON PROPOSED NASD RULES CONCERNING BANK BROKER-DEALER ACTIVITIES ______________________________________________________________________________ As we previously informed you, 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.1 The Institute recently submitted the attached comment letter on the NASD
s proposal. 1. Referral Fees The NASD
s proposal would prohibit a member from paying referral fees to unregistered bank employees and from entering into agreements with banks that compensate their unregistered employees according to whether a referral results in a transaction. The proposing release indicates that the referral fee prohibitions are consistent with the NASD
s "long-standing position" on the payment of referral fees to unregistered persons. The Institute
s letter states that if this is true, then the prohibitions are unnecessary and should be deleted. In fact, however, the current proposal would conflict with the NASD
s historic position that limited referral fees are permissible. Moreover, the proposing release could be read to preclude not only referral fee payments by the member to unregistered employees, but also payments by the bank to its unregistered employees, a prohibition that would conflict with the bank agencies
Interagency Statement. The Institute
s letter also states that referral fee prohibitions specific to the bank channel are unnecessary. Any concerns about potential confusion would arise not from the compensation arrangement but from the circumstances of the referral, and the other provisions of the NASD
s proposal would address these concerns. Moreover, federal banking law is the proper avenue to address any concerns unique to the bank channel. For these reasons, the Institute urges the Commission not to approve the referral fee prohibitions. 2. Confidential Financial Information The NASD
s proposal would prohibit members from using confidential financial information provided by a bank unless the customer has provided prior written approval to release the information. The Institute
s letter points out that this prohibition would conflict with the NASD
s position that purchases of a mailing list of prospective customers are permissible. Moreover, as is the case with referral fees, the use of customer lists alone should have little bearing on whether a bank customer will be confused by the uninsured nature of securities products, and any concerns about a bank
s potential misuse of confidential financial information are properly the subject of bank regulation and financial privacy laws. Finally, the proposed requirement that banks obtain written customer approval for release of confidential information is impractical. For these reasons, the Institute urged that the Commission not approve the restriction on the use of confidential customer information. 3. Other Issues The Institute
s letter also seeks clarification that the NASD
s proposal:
would not apply to mutual fund distributors and underwriters;
would not impose requirements on the physical setting of member activities that are inconsistent with the Interagency Statement and current, appropriate industry practice;
would apply only to broker-dealer services provided on bank premises where retail deposits are being taken;
would not apply to broker-dealer services provided by telephone or computer;
would not apply to broker-dealer services provided from walkup windows, kiosks or desks in public places, such as supermarkets, where the risk of investor confusion would appear to be minimal;
would not require that confirmation statements and account statements with respect to bank-sold funds provide the Interagency Statement disclosures;
would permit references in member sales material to immaterial (as well as material) relationships between members and banks and relationships between products (such as mutual funds) and banks; and
would permit members to provide the required disclosures and customer acknowledgment form on an account application. Thomas M. Selman Associate Counsel Attachment