SEC APPROVES NASD PROPOSED RULE GOVERNING BANK BROKER/DEALER ACTIVITIES AND REQUEST ADDITIONAL COMMENTS

1 See Securities Exchange Act Release No. 34-39294 (Nov. 4, 1997), 62 Fed. Reg. 60542 (Nov. 10, 1997). 2 See Memorandum to Advertising Subcommittee No. 15-97, SEC Rules Committee No. 44-97, and Bank Mutual Fund Task Force, dated April 28, 1997. 3 The NASD will announce approval of the Proposed Rule in a Notice to Members no later than January 9, 1998. The effective date of the final rule will be 60 days after publication of the Notice to Members. [9419] November 17, 1997 TO: ADVERTISING SUBCOMMITTEE No. 38-97 SEC RULES COMMITTEE No. 110-97 BANK MUTUAL FUND TASK FORCE RE: SEC APPROVES NASD PROPOSED RULE GOVERNING BANK BROKER/DEALER ACTIVITIES AND REQUEST ADDITIONAL COMMENTS ______________________________________________________________________________ The Securities and Exchange Commission recently approved a proposed rule of the National Association of Securities Dealers, Inc. governing broker-dealers operating on the premises of financial institutions (the "Proposed Rule").1 The Proposed Rule as approved represents the fifth amendment to the NASD
s original filing with the SEC, and responds in certain respects to comments made to Amendment No. 4 to the Proposed Rule, which the SEC published for comment in April 1997.2 Although the SEC has approved Amendment No. 5 to the Proposed Rule on an accelerated basis,3 it is still requesting comment on it. Accordingly, attached for your review, and summarized below, is a copy of the SEC
s release approving, and the Institute
s draft comment letter on, Amendment No. 5 to the Proposed Rule. Comments must be filed with the SEC by December 1, 1997. Please contact me at (202) 326-5923 or by e-mail to simmonbe@ici.org by Monday, November 24, 1997, if you have any comments to the attached draft letter. Amendment No. 5 to the Proposed Rule Amendment No. 5 to the Proposed Rule makes a few changes to Amendment No. 4 as published for comment in April 1997, but otherwise generally leaves the Proposed Rule in the same form as previously proposed. The Proposed Rule would apply to broker-dealer services conducted by members "on the premises" of a financial institution. Contrary to the Institute
s recommendations, the Proposed Rule would apply both to face-to-face meetings with customers on financial institutions
premises and to broker-dealer services provided by means 4 Interagency Statement on Retail Sales of Nondeposit Investment Products (Feb. 15, 1994) ("Interagency Statement"). 5 See Interpretation of the Interagency Statement (Sept. 12, 1995). of telecommunications from such premises. In addition, as defined, "broker-dealer services" would include the services of mutual fund distributors and underwriters "if they are engaged in brokerage activities on the premises of a financial institution." The Proposed Rule requires that, wherever practical, broker-dealer services must be conducted in a physical location distinct from the area where retail deposits are taken. One commenter suggested amending the rule to make clear that this separation requirement applies to areas where deposits are routinely taken (such as teller windows). The SEC declined to change the rule in response to this comment, but stated that the NASD intends to clarify this issue in a Notice to Members that will accompany the final rule. The NASD does not intend the rule to preclude offering certificates of deposit in the brokerage area if that product is best suited for a customer. In response to the Institute
s and others
comments, the SEC agreed to slightly revise the required disclosure regarding FDIC insurance that broker-dealers must give at the time a member opens a customer account. Previously, the rule required a disclosure that securities products are "not insured by the Federal Deposit Insurance Corporation (‘FDIC
) or other deposit insurance" (emphasis supplied). To make the disclosure consistent with the Interagency Statement,4 the SEC agreed to delete "or other deposit insurance" from this required disclosure. The SEC also made several minor revisions to the provisions regarding communications with the public. For example, the rule was revised to permit abbreviated disclosures in radio advertisements along the lines allowed under a September 1995 interpretation of the Interagency Statement.5 The Institute
s Draft Comment Letter The Institute
s draft comment letter is generally supportive of the Proposed Rule and commends the SEC and NASD in their efforts to reduce the level of customer confusion while creating a workable framework for NASD members operating on bank premises. The Institute
s letter discusses certain areas of continuing concern that we believe need to be addressed. In this regard, we continue to believe that the Proposed Rule should not apply to the services of investment company distributors and underwriters. At the very least, it appears that the NASD does not intend for the phrase "broker-dealer services" to include the services of mutual fund distributors and underwriters that are not physically located on the premises of financial institutions; this should be confirmed. We also continue to believe that the Proposed Rule should only apply to face-to-face meetings occurring on financial institutions
premises and should not apply to telecommunications generated from such premises, since there would be little, if any, risk of customer confusion under those circumstances. Finally, the letter reiterates the ICI
s prior request for procedural clarification regarding the disclosure and customer acknowledgment requirements. It should be made clear that NASD members have flexibility in determining the location of such disclosures and acknowledgments, such as providing the information on account applications. 3Barry Simmons Assistant Counsel Attachment (in .pdf format)