Notice To Members 86-38

Membership Vote on Proposed Amendments to Article III, Section 28 of the NASD Rules of Fair Practice and Article VII, Section 8 of the NASD By-Laws

Published Date:

IMPORTANT MAIL VOTE

OFFICERS, PARTNERS AND PROPRIETORS

TO: All NASD Members

LAST VOTING DATE IS JUNE 21, 1986.

Members of the National Association of Securities Dealers, Inc. (NASD), are invited to vote on certain amendments to the NASD Rules of Fair Practice and By-Laws contained in Exhibits A and B to this notice. These amendments are described below. Prior to becoming effective, the amendments must be approved by the membership and by the Securities and Exchange Commission.

Amendments Concerning Associated Persons' Accounts with Investment Advisers, Banks and Other Financial Institutions

The proposed changes to the Rules of Fair Practice relate to associated persons who have securities accounts at firms that are not NASD members, such as investment advisers, banks and other financial institutions. The Board of Governors is concerned that the inapplicability of the Rules of Fair Practice to securities accounts of associated persons with non-members may undermine members' ability to supervise their associated persons and may possibly lead to abuses. On June 20, 1985, the NASD issued Notice to Members 85-41 soliciting comments on proposed amendments to Article III, Section 28 of the Rules of Fair Practice. These amendments would impose disclosure requirements on associated persons of members in connection with their securities accounts with investment advisers, banks and other financial institutions.

A total of 13 comment letters were received. Of these, nine expressed unqualified approval. Two comments suggested amending the transactional exemption to include unit investment trusts, direct participation programs and other pro-duets not subject to free-riding and withholding restrictions or market manipulation, and shares of money market funds, certificates of deposit and like instruments. One of these comments suggested adopting requirements similar to NYSE Rule 407 to avoid unnecessary correspondence between the associated person and his or her member firm. One comment suggested that expansion to investment advisers and other financial institutions was too broad and placed an unnecessary burden on compliance by broker-dealers. One comment favored the approach but questioned the consequences if the associated person failed to notify the broker-dealer. An informal comment noted that under Subsection (d)(l) a literal reading might require notice for each transaction, even though a blanket notice had already been given. Lastly, one comment suggested that the proposal placed an unnecessary burden on broker-dealers that outweighed any benefits. This comment suggested that the rule should be limited to securities transactions. To accomplish this, it recommended deleting the language in paragraph (d)(l) after the word "transaction" and limiting paragraph (d)(2) to require duplicate copies of confirmations and statements.

In response to the comments received, the Board adopted three changes to the proposed amendments:

1. Unit investment trusts were added to the transactional exemption contained in the rule.
2. The rule was changed to reflect its applicability to an initial transaction only.
3. An affirmative obligation was imposed on the associated person to notify his or her member firm.

The Board of Governors approved amending Article III, Section 28 of the Rules of Fair Practice to require any associated person to notify his or her employer member when opening a securities account with an investment adviser, bank or other financial institution or before placing an order to buy or sell securities with such an organization. The amendment would apply to any account or transaction in which the associated person has a financial interest or discretionary authority. The amendment would also require associated persons to arrange for the employer member to receive duplicate confirmations and account statements upon request. The amendments appear in Exhibit A.

Proxy Voting by Members of the NASD Board of Governors

The change to the By-Laws relates to voting by proxy by members of the NASD Board of Governors who are absent from Board meetings. Questions have arisen from time to time as to whether a member of the Board of Governors who is absent from a meeting of the Board can vote by proxy on issues before the Board. To avoid any further confusion in this area, the Board of Governors approved an amendment to Article VII, Section 8 of the By-Laws specifically stating that Board members may not vote by proxy. This is consistent with the law in Delaware, the NASD's state of incorporation. The amendment appears in Exhibit B.

* * * * *

The Board of Governors believes these amendments to the Rules of Fair Practice and By-Laws are necessary and appropriate. It recommends that members vote their approval.

Please mark the attached ballot according to your convictions and return it in the enclosed, stamped envelope to "The Corporation Trust Company." Ballots must be postmarked no later than June 21, 1986.

Any questions regarding this notice should be directed to Craig L. Landauer, Attorney, NASD Office of the General Counsel, at (202) 728-8291.

Sincerely,

Frank J. Wilson
Executive Vice President and General Counsel

Attachments

Exhibit A

PROPOSED AMENDMENTS TO ARTICLE III, SECTION 28 OF THE NASD RULES OF FAIR PRACTICE

The following are the proposed changes to the NASD Rules of Fair Practice. New language is underlined; deleted language is in brackets.

See. 28

Transactions for [Personnel of Another Member] or by Associated Persons

Determine Adverse Interest

(a) A member ("executing member") who knowingly executes a transaction for the purchase or sale of a security for the account of a person associated with another member ("employer member"), or for any account over which such associated person has discretionary authority, shall use reasonable diligence to determine that the execution of such transaction will not adversely affect the interests of the employer member.

Obligations of Executing Member

(b) Where an executing member knows that a person associated with an employer member has or will have a financial interest in, or discretionary authority over, any existing or proposed account carried by the executing member, the executing member shall:
(1) notify the employer member in writing, prior to the execution of a transaction for such account, of the executing member's intention to open or maintain such an account;
(2) upon written request by the employer member, transmit duplicate copies of confirmations, statements, or other information with respect to such account; and
(3) notify the person associated with the employer member of the executing member's intention to [transmit] provide the notice and [the] information required by paragraphs (1) and (2) of this subsection (b)

Obligations of Associated Persons_ [Associated] Concerning an Account with a Member

[(d)]
(c) A person associated with a member who opens an account or places an order for the purchase or sale of securities with [any other] another member, shall[, where such associated person has a financial interest in such transaction and/or any discretionary authority over such account] notify the executing member of his or her association with [an] the employer member [regardless of any other function, capacity, employment or affiliation of such associated person. If]; provided, however, that if the account [is] was established prior to the association of [such] the person with [an] the employer member, the associated person shall notify the executing member promptly after becoming so associated.

Obligations of Associated Persons Concerning an Account with an Investment Adviser, Bank, or Other Financial Institution

(d) A person associated with a member who opens a securities account or places an order for the purchase or sale of securities with a domestic or foreign investment adviser, bank, or other financial institution, except a member, shall:
(1) notify his or her employer member in writing, prior to the execution of any initial transaction, of the intention to open the account or place the order; and
(2) upon written request by the employer member, request in writing and assure that the investment adviser, bank, or other financial institution provides the employer member with duplicate copies of confirmations, statements, or other information concerning the account or order;
provided, however, that if an account subject to this subsection (d) was established prior to a person's association with a member, the person shall comply with this subsection promptly after becoming so associated.
(e) Subsections (c) and (d) of this section shall apply only to an account or order in which an associated person has a financial interest or with respect to which such person has discretionary authority.
Exemption for Transactions in Invesment Company Shares and Unit Investment Trusts
[(c)]
(f) The provisions [of subsection (b)] of this section shall not be applicable to transactions in unit investment trusts and variable contracts or redeemable securities of companies registered under the Investment Company Act of 1940, as amended, or to accounts which are limited to transactions in such securities.

Exhibit B

PROPOSED AMENDMENT TO ARTICLE VII, SECTION 8 OF THE NASD BY-LAWS

The following is a proposed change to the NASD By-Laws. New language is underlined.

Meetings of Board

Sec. 8. Meetings of the Board of Governors shall be held at such times and places, upon such notice, and in accordance with such procedure as the Board of Governors in its discretion may determine. A quorum of the Board of Governors shall consist of a majority of the members, and any action taken except as otherwise provided in these By-Laws, shall constitute the action of the Board. Meetings of the Board of Governors may be held by mail, telephone or telegraph, in which case any action taken by a majority vote of the Board of Governors shall constitute the action of the Board. Any action taken by telephonic vote shall be confirmed in writing at a regular meeting of the Board of Governors. No member of the Board of Governors shall vote by proxy at any meeting of the Board.