SEC REQUEST FOR COMMENT ON AMENDMENTS TO NASD RULES CONCERNING BANK BROKER/DEALER ACTIVITIES

1 See Securities Exchange Act Release No. 34-38506, 62 Fed. Reg. 19378 (April 21, 1997). 2 See Letter to Jonathan G. Katz, Secretary, SEC, from Paul Schott Stevens, Senior Vice President and General Counsel, Investment Company Institute (May 21, 1996). 3 The banking regulators that issued the Interagency Statement are the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and the Office of Thrift Supervision. 1 April 28, 1997 TO: ADVERTISING SUBCOMMITTEE No. 15-97 SEC RULES COMMITTEE No. 44-97 BANK MUTUAL FUND TASK FORCE RE: SEC REQUEST FOR COMMENT ON AMENDMENTS TO NASD RULES CONCERNING BANK BROKER/DEALER ACTIVITIES ______________________________________________________________________________ NASD Regulation, Inc. recently filed with the Securities and Exchange Commission amendments to its proposed rules regulating broker/dealer conduct on the premises of financial institutions.1 In the attached release, the Commission requests public comment on the proposed rules. We are pleased to report that the NASD
s proposed rule amendments reflect many of the Institute
s comments on the earlier NASD proposal.2 The proposed changes to the rule proposals are summarized below. Comments on the rule proposals must be filed by May 12, 1997. Please provide your comments to me at (202) 326-5923, or to Frances Stadler at (202) 326-5822 by Monday, May 5, 1997. 1. Physical Setting The proposed rules have been revised to provide that wherever practical (as opposed to "wherever possible"), sales of non-deposit products should be conducted in a physical location distinct from the area in which the financial institution*s retail deposits are taken. This revision is intended to make the rule more consistent with the standards imposed by the Interagency Statement on Retail Sales of Nondeposit Investment Products (the "Interagency Statement"), which was issued by the banking regulators on February 15, 1994.3 The NASD believes that where a physically distinct location is not practical because, for example, joint services are provided in a kiosk location, the broker/dealer would not be prohibited from conducting business in this manner. 2. Networking and Brokerage Affiliate Agreements As in the earlier proposal, networking and brokerage affiliate arrangements between an NASD member and a financial institution would have to be governed by a written agreement. A provision that prohibited unregistered employees of financial institutions from receiving any compensation, cash or non- cash, that is conditioned, or whether a referral of a customer of the financial institution to the member results in a transaction has been deleted. In addition, a provision requiring that networking and brokerage affiliate agreements contain a provision that requires members to notify a financial institution if a dual employee of the member and the financial institution is terminated for cause by the member has been made into a separate affirmative requirement under new Paragraph (c)(5). 3. Compensation of Registered/Unregistered Persons The provision prohibiting members from providing cash or non-cash compensation to employees of the financial institution who are not registered with an NASD member in connection with, but not limited to, locating, introducing, or referring customers of the financial institution to the member has been 4 See NASD Notice to Members 97-11 (March 1997). 5 In addition, the NASD Regulation Board has approved the issuance of an interpretive Notice to Members (to be issued in the near future) reminding member firms of their risk disclosure obligations in connection with the sale of insured products and uninsured securities products under existing NASD rules, and solicited comment on whether a new rule, prescribing point-of-sale disclosure in specified circumstances, should be adopted. 6 See NASD Notice to Members 97-12 (March 1997). 2 deleted from the revised proposal. The NASD has proposed a separate rule governing referral fee compensation of unregistered persons that would apply to all NASD members.4 4. Customer Disclosure and Written Acknowledgment This provision specifies the disclosures a member must make when a customer opens an account, and also requires members to make reasonable efforts to obtain written acknowledgment of the required disclosures from the customer at or prior to the time the account is opened. The NASD made no material revisions to this provision since, as drafted, it is consistent with the banking regulator requirements. However, in order to ensure consistency with a September 1995 interpretation of the Interagency Statement ("1995 Interpretation"), the NASD added new Paragraph (c)(4)(C) to permit the use of abbreviated disclosures under limited circumstances.5 5. Use of Confidential Financial Information The provision prohibiting an NASD member from using confidential financial information provided by the financial institution regarding its customer unless prior written approval has been granted to the financial institution by the customer to release the information has been deleted. The NASD has proposed a separate rule governing the use and release of customer confidential financial information that would apply to all members.6 6. Communications with the Public This provision sets forth requirements for all communications with customers, including account statements, advertisements, and sales literature. It has been revised to make the rule more consistent with the Interagency Statement and the 1995 Interpretation, and to eliminate requirements that duplicated existing NASD rules. In addition, 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. The attached release indicates that the NASD staff plans to issue a Notice to Members in a question and answer format after the rule is approved that will clarify the rule*s applicability to brokerage services provided "on the premises of a financial institution where retail deposits are taken," and clarify other interpretive questions about how the rule will be applied. Barry E. Simmons Assistant Counsel Attachment (in .pdf format)