April 30, 1997
TO: BROKER/DEALER ADVISORY COMMITTEE No. 9-97
COMPLIANCE ADVISORY COMMITTEE No. 16-97
INVESTMENT ADVISERS COMMITTEE No. 15-97
SEC RULES COMMITTEE No. 47-97
STATE LIAISON COMMITTEE No. 9-97
RE: INSTITUTE COMMENTS ON NASAA PROPOSAL RELATING TO
SUITABILITY
______________________________________________________________________________
In March, the Sales Practices Committee of the North American Securities
Administrators Association ("NASAA") published for comment a proposed Statement of Policy
relating to "Dishonest or Unethical Sales Practices in Connection with Customer Suitability",
which would impose suitability requirements beyond those of the NASDR Rules of Conduct.
In particular, the proposal would require broker-dealers, investment advisers, and their
representatives to obtain eleven different items of information from each customer prior to
making a recommendation to such customer. Additionally, if a broker-dealer or investment
adviser had reason to know that an unsolicited order was unsuitable, the broker-dealer or
investment adviser would be required to warn the customer of its unsuitability.
In response to the Committee’s request for comments, the Institute has filed the attached
letter. The Institute’s letter notes that the Committee is developing a Statement of Policy
defining dishonest or unethical practices in connection with the offer or sale of investment
company securities. Accordingly, we strongly recommend that the suitability concerns relating
to investment company securities be expressly excluded from the Committee’s suitability
proposal and included instead in the investment company proposal.
In case the Committee rejects our recommendation, the Institute’s letter discusses in
detail both general and specific concerns we have with the Committee’s proposal. Discussed
under our general concerns are the following:
There is no indication that the Rules of Conduct of the NASDR (1) are inadequate to
redress unsuitable recommendations and (2) should be replaced with the more
extensive requirements proposed by the Committee.
The proposal would inappropriately impose on all securities transactions suitability
standards that, under the rules of the NASDR, are tailored to specific risky securities
transactions, such as penny stocks or options.
The proposal would reduce a flexible suitability standard to a mechanized function,
to the disservice of customers, and could result in a person being found to have
violated the Statement of Policy even in the absence of such person effecting an
unsuitable transaction.
The proposal would require inquiries that likely would be considered by many
customers to be unduly intrusive, offensive, and patronizing.
The provision in the proposal imposing a duty to warn investors of unsuitable
transactions is completely contrary to existing securities law and attempts to shift
responsibility to a broker-dealer for conduct that is not and should not be the
broker-dealer’s responsibility.
The proposal would result in current compliance systems having to be completely
revamped.
A significant portion of the proposal appears to be violative of the National
Securities Markets Improvement Act of 1996 ("NSMIA").
Under our specific concerns we recommend that each discrete portion of the rule be amended
to be substantively identical to the requirements of the NASDR Rules of Conduct.
Attached is a copy of the Committee’s proposal as well as the Institute’s comment letter.
Tamara Cain Reed
Associate Counsel
Attachments (in.pdf format)