Notice To Members 88-91

Proposed Amendment to Article III, Section 21 (c) of the Rules of Fair Practice Re: Customer Account Information; Last Date for Comments: December 1, 1988

Published Date:
Last Date for Comments: December 1, 1988

SUGGESTED ROUTING*

Senior Management
Internal Audit
Legal & Compliance
Operations
Trading

*These are suggested departments only. Others may be appropriate for your firm.

REQUEST FOR COMMENTS

EXECUTIVE SUMMARY

The NASD requests comments on a proposed amendment to Article III, Section 21 (c) of the Rules of Fair Practice that would require NASD members to make reasonable efforts to obtain, prior to the settlement of the initial transaction in the account, certain information pertaining to retail customer accounts, including discretionary and corporate accounts. The proposed amendment also would require the member to make reasonable efforts to obtain certain additional information prior to making a recommendation to a customer.

The text of the proposed amendment is attached.

BACKGROUND AND SUMMARY OF AMENDMENT

Pursuant to Article III, Section 21(c) of the Rules of Fair Practice (Rules), the accounts of customers now are required to be maintained in such form and manner as to show name, address, age, signatures of the introducing representative and member, partner, officer or manager accepting the account for the member, and a customer's association with or employment by another member. In discretionary accounts, the customer's occupation also is required to be noted under the current procedure, along with the signature of each person authorized to exercise discretion in such account.

The NASD Board of Governors believes that these procedures should be strengthened to require that sufficient information be obtained on each retail customer account to permit the member firm to make more informed determinations as to accounts and investment recommendations.

The Board, upon the recommendation of the Advisory Council and the National Business Conduct Committee, therefore proposes that members be required to request information regarding customers beyond that set forth in the current procedure contained in Section 21(c) of Article III of the Rules. The new proposal requires a member to make reasonable efforts to obtain, prior to the settlement of the initial transaction in the account, information deemed applicable to that account. That information would include, in addition to the above-listed information previously required to be obtained, the tax identification or social security number of the customer, and the occupation and name and address of the employer of each cus tomer for each account. If the customer is a corporation, the member also must obtain the names of any persons authorized to transact business on behalf of the corporation. With respect to discretionary accounts, a member would be under the additional obligation of obtaining the signature of each person authorized to exercise discretion in the account, and the written approval of the member or partner, officer, or manager with respect to each transaction in the account, indicating the time and date of approval.1

Moreover, the proposed amendment provides that, prior to making a recommendation to a customer pursuant to Article III, Section 2 of the Rules, a member must make reasonable efforts to obtain information concerning the customer's financial background, tax status, and investment objectives, and such other information used or considered to be reasonable and necessary by the member or registered representative.

The Board believes that the proposed amendment to Article III, Section 21(c) of the Rules will provide extra protection for both customers and firms. The Board believes that the requirement of "reasonable effort" can be met by prepared questionnaires for customers to complete and return, or by telephone inquiry. It is not necessary to obtain a written statement from a customer in each instance in order to be in compliance with the rule. The requirement that information be obtained prior to the settlement of the initial transaction also allows for freedom in opening new accounts. In addition, it may be advisable for members to keep a record of efforts that they have made to obtain a customer's tax identification or social security number, as required by section 103.35, Part 103 of Title 31 of the Code of Federal Regulations adopted by the Treasury Department, effective June 1972.

The NASD encourages all members and other interested persons to comment on the proposed amendment. Comments should be directed to:

Mr. Lynn Nellius, Secretary
National Association of Securities Dealers, Inc.
1735 K Street, NW
Washington, DC 20006-1506

Comments must be received no later than December 1, 1988. Comments received by this date will be considered by the NASD National Business Conduct Committee and Board of Governors. Any changes to the NASD Rules of Fair Practice that are approved by the Board must be voted on by the membership and filed with, and ap proved by, the Securities and Exchange Commission before becoming effective.

Questions concerning this notice may be directed to Deborah F. Mcllroy, Attorney, NASD Office of General Counsel, at (202) 728-8816.

PROPOSED AMENDMENT TO ARTICLE III SECTION 21(C) OF THE NASD RULES OF FAIR PRACTICE

(Note: New language is underlined; deleted language is in brackets.)

¶2171 Books and Records

Sec. 21.

[Information on accounts

(c) Each member shall maintain accounts of customers in such form and manner as to show the following information: name, address, and whether the customer is legally of age; the signature of the registered representative introducing the account and the signature of the member or the partner, officer, or manager accepting the ac count for the member. If the customer is associated with or employed by another member, this fact must be noted. In discretionary accounts, the member shall also record the age or approximate age and occupation of the customer as well as the signature of each person authorized to exercise discretion in such account.]

Customer Account Information

(c)
(1) For each account other than an institutional account, each member shall make reasonable efforts to obtain, prior to the settlement of the initial transaction in the account, the following information to the extent it is applicable to the account:
(i) customer's name and residence or principal business address;
(ii) whether customer is of legal age;
(iii) tax identification or social security number;
(iv) occupation;
(v) name and address of employer;
(vi) signature of the registered representative introducing the account and signature of the member or partner, officer, or manager who accepts the account;
(vii) whether customer is an associated per son of another member; and
(viii) if the customer is a corporation, the names of any persons authorized to transact business on behalf of the corporation.
(2) For discretionary accounts, in addition to compliance with (1) above, and Article III, Section 15(b) of these rules, the member shall obtain the signature of each person authorized to exercise discretion in the account, and the written approval of the member or partner, officer, or manager duly designated by the member in accordance with Article III, Section 27 of these rules, with respect to each transaction in the account, indicating the time and date of approval.
(3) Prior to making a recommendation to a customer pursuant to Article III, Section 2 of these rules, a member shall also make reasonable efforts to obtain information concerning the customer's financial background, tax status, and investment objectives, and such other information used or considered to be reasonable and necessary by such member or registered representative.
(4) For purposes of this section, the term "institutional account" shall mean the account of an investment company as defined in Section 3(a) of the Investment Company Act of 1940, a bank, an insurance company, or any other institutional-type account.

1 The proposed rule also incorporates a cross reference to a member's obligation under Article III, Section 15(b) of the Rules. It requires that "[n]o member or registered representative shall exercise any discretionary power in a customer's account unless such customer has given prior written authorization to a stated individual or individuals and the account has been accepted by the member, as evidenced in writing by the member or the partner, office, or manager duly designated by the member ..."