Notice To Members 95-37

SEC Approves NASD Proposal Amending The Foreign-Associate Provisions Of Schedule C To The NASD By-Laws

Published Date:

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Executive Summary

On February 13, 1995, in SEC Release No. 34–35361, File No. SR-NASD-94–51, the Securities and Exchange Commission (SEC) approved amendments to Parts VI and X of Schedule C of the NASD By-Laws relating to foreign finders and foreign associates. These amendments will permit the payment of transaction-related compensation to non-registered foreign finders who are not subject to the jurisdiction of U.S. securities laws, subject to certain disclosure and recordkeeping requirements by the U.S. broker/ dealer. The rule change was effective February 13, 1995.

Background And Description

The NASD has consistently limited the payment of finders' fees by members. Permission to do so has only been granted in isolated circumstances, where the amount paid has been nominal and the recipient did not routinely engage in making referrals to brokerage firms. The new rule allows members the opportunity to enhance their competitive position in foreign countries where new accounts are opened on a referral basis with ongoing compensation to the foreign finder.

Under the rule as amended, member firms and persons associated with a member may pay transaction-related compensation to non-registered foreign persons, based on the business of customers such persons direct to member firms. The following conditions must be met for this "foreign-finder" exemption to apply:

  • the member firm must assure itself that the non-registered foreign person who will receive the compensation (the finder) is neither required to register in the United States as a broker/dealer nor is subject to a disqualification as defined in Article II, Section 4 of the NASD By-Laws;

  • the member firm must further assure itself that the compensation arrangement does not violate applicable foreign law;

  • the finder must be a foreign nation al or a foreign entity domiciled abroad;

  • the customers directed to the member firm by the finder must be foreign nationals or foreign entities domiciled abroad transacting business in foreign or U.S. securities;

  • the customers must receive a descriptive document, similar to that required by Rule 20b(4)-3(b) of the Investment Advisers Act of 1940, that discloses the compensation being paid to the finder;

  • the customers must provide written acknowledgement of the existence of the compensation arrangement to the member firm and it must be retained and available for inspection by the NASD;

  • records reflecting payments to the finder must be maintained on the member firm's books and the actual agreement between the member firm and the finder must be available for inspection by the NASD; and

  • the confirmation of each transaction must indicate that a finder's fee is being paid pursuant to a compensation arrangement.

The amendments also change the requirements with respect to foreign associates. Those persons designated as foreign associates pursuant to Part X of Schedule C of the NASD By-Laws now are subject to Form U-4 registration, but still are not required to pass a qualification examination.

Also, the scope of permissible business activities and the associated regulatory requirements differ between foreign finders and foreign associates. The foreign associate will be registered with the NASD and will be deemed an associated person or employee of the member. The foreign associate, therefore, may act in any registered capacity on behalf of the member, consistent with their designation as a foreign associate. This can include acting as a trader or being the registered person responsible for servicing the accounts of a foreign national. The foreign finder is not considered an associated person of the member and their activities, therefore, are limited to those discussed in the rule. Under the rule as amended, the sole involvement of a foreign finder in the business of a member firm is the initial referral of non-U.S. customers to the firm.

Questions regarding this Notice may be directed to Craig Landauer, Office of General Counsel, at (202) 728–8291.

Text Of Amendments To Parts VI And X Of Schedule C Of NASD By-Laws

(Note: New text is underlined; deletions are in brackets).

PART VI

PERSONS EXEMPT FROM REGISTRATION

(1) No change.
(2) Member firms, and persons associated with a member, may pay to nonregistered foreign persons transaction-related compensation based upon the business of customers they direct to member firms if the following conditions are met:
(a) the member firm has assured itself that the nonregistered foreign person who will receive the compensation (the "finder") is not required to register in the U.S. as a broker/dealer nor is subject to a disqualification as defined in Article II, Section 4 of the NASD By-Laws, and has further assured itself that the compensation arrangement does not violate applicable foreign law:
(b) the finders are foreign nationals (not U.S. citizens) or foreign entities domiciled abroad:
(c) the customers are foreign nationals (not U.S. citizens) or foreign entities domiciled abroad transacting business in either foreign or U.S.
(d) customers receive a descriptive document similar to that required by Rule 206(4)(3(b) of the Investment Advisers Act of 1940. that discloses what compensation is being paid to finders:
(e) customers provide written acknowledgement to the member firm of the existence of the compensation arrangement and that such acknowledgement is retained and made available for inspection by the Association:
(f) records reflecting payments to finder are maintained on the member firm's books and actual agreements between the member firm and persons compensated are available for inspection by the Association: and
(g) the confirmation of each transaction indicates that a referral or finders fee is being paid pursuant to an agreement.

Part VII through Part IX No change.

PART X

FOREIGN ASSOCIATES

All persons associated with a member who are designated as Foreign Associates shall [not] be required to be registered [and] but shall be exempt from the requirement to pass a Qualification Examination.