Notice To Members 90-62

Proposed Amendment Re: Use and Disclosure of Member Names; Last Voting Date: November 5, 1990

Published Date:
Last Voting Date: November 5, 1990

SUGGESTED ROUTING*

Senior Management
Legal & Compliance

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

MAIL VOTE

EXECUTIVE SUMMARY

The NASD invites members to vote on a proposed revision to an amendment to Article ill, Section 35 of the NASD Rules of Fair Practice. The membership has previously approved an amendment to Section 35 to establish standards regarding the use and disclosure of member names in public communications, including business cards and letterhead.

Following membership approval, the NASD filed the proposed amendment with the Securities and Exchange Commission (SEC), which published the amendment for public comment. In response to comments that the SEC received regarding the proposed amendment, the NASD proposes to make certain revisions to the planned amendment.

The revisions would create a limited exception to the general requirement that all advertising and sales literature contain the full name of a member. Under the proposed exception, advertising and sales literature would be permitted to include only a "derivative" of a member's name if the derivative name was used to promote a specific area of the member's business and was not misleading in context. The text of the amendment, as revised, follows this notice.

BACKGROUND AND SUMMARY

Pursuant to Board of Governors approval and membership vote, the NASD filed with the SEC a proposed amendment to Article III, Section 35 of the Rules of Fair Practice. The proposed amendment would establish standards regarding the use and disclosure of member names in public communications, including business cards and letter-head. The proposed amendment reflects the concern of the Board that members of the public may be confused by public communications that either fail to refer to an NASD member firm by its registered name or include unclear references to both NASD member firms and entities that are not NASD members. The proposed amendment rests on the premise that, unless the identity of and the products offered by an NASD member firm are made clear in such communications, there is a possibility that the public will be confused or misled regarding the identity of the entity that is, in fact, offering securities. The proposed amendment seeks to address this problem by establishing both general and specific standards governing the manner in which member names must be disclosed in communications with the public. Currently, Section 35(d)(2)(A) of the Rules requires the disclosure of the member's name in all advertising and sales literature.

The proposed amendment was submitted to the membership for comment in 1988. In response to the 41 detailed comment letters that were received, the NASD made significant modifications to the proposed amendment. Notices to Members 88-65 and 89-22 should be consulted regarding the differences between the amendment as originally proposed and as approved by the membership. The proposed amendment was filed with the SEC on April 25, 1990, and was published for comment in the Federal Register. The SEC received three comment letters.

In response to these comment letters, the NASD proposes to revise the amendment so as to create a narrow exception to the general requirement that the full name of a broker-dealer appear in all of its advertising and sales literature. Under this proposed exception, a member would be permitted to use a "derivative" of its name, without also including the member's full name, if: (1) the derivative name was used to promote a specific area of the firm's business; and (2) use of the derivative would not be misleading in context. Thus, for example, if a member firm had a "derivative" name that it used to promote its investment banking business, the firm might be permitted to omit the full firm name from typical "tombstone" advertisements on the ground that the use of a derivative would not be misleading in the context of advertisements that are primarily directed to an institutional, nonretail audience.

The NASD contemplates that the availability of the proposed exception would be limited to instances in which the use of a derivative name would not be misleading in a particular context. In this regard, the NASD emphasizes that, while the use of derivative names (without disclosure of the full broker-dealer name) might not be misleading in the context of advertising and sales literature directed to an institutional audience, the use of derivative names may well be deemed misleading if used in promotional materials disseminated to the general public.

EFFECTIVE DATE

If the foregoing proposal is approved by the membership and by the SEC, the Board of Governors believes that it is appropriate to provide members with sufficient time following SEC approval to use existing supplies of such business stationery as letterhead, business cards, confirmation forms, and similar printed material. Accordingly, the Board has concluded that, insofar as the proposed amendment affects printed business stationery, the amendment should not take effect until six months after publication of a Notice to Members announcing SEC approval of the amendment. The Board contemplates, however, that in all other respects the proposed amendment would become effective 30 days after the publication of a Notice to Members announcing SEC approval of the amendment.

The Board believes that the proposed revision to the amendment is necessary and appropriate and 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 November 5, 1990.

Questions concerning this notice can be directed to R. Clark Hooper, Director, NASD Advertising Department, at (202) 728-8330 or Anne H. Wright, Senior Attorney, NASD Office of General Counsel, at (202) 728-8815.

COMMUNICATIONS WITH THE PUBLIC

(Note: Language that has been deleted from the version of Section 35 that was previously approved by the membership is bracketed; language that has been added to that version is underlined.)

Sec. 35.

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(d) Standards Applicable to Communications With the Public
(1) General Standards
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(C) When sponsoring or participating in a seminar, forum, radio or television interview, or when otherwise engaged in public appearances or speaking activities which may not constitute advertisements, members and persons associated with members shall nevertheless follow the standards of [paragraph] subsections (d) and (g) of this [s]Section.
(2) Specific Standards
In addition to the foregoing general standards, the following specific standards apply:
(A) Necessary Data: Advertisements and sales literature shall contain the name of the member, unless such advertisements and sales literature comply with subsection (g) of this Section. Sales literature shall contain the name of the person or firm preparing the material, if other than the member, and the date on which it is first published, circulated or distributed [(except that, in advertisements, only the name of the member need be stated and except also that, in any so-called "blind" advertisement used for recruiting personnel, the name of the member may be omitted)]. If the information in the material is not current, this fact should be stated.

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(g) Standards Applicable to the Use and Disclosure of the NASD Member's Name
(1) In addition to the provisions of subsection (d) of this Section, members' public communications shall conform to the following provisions concerning the use and disclosure of member names. The term "communication" as used herein shall include any item defined as either "advertising" or "sales literature" in subsection (a) of this Section. The term "communication" shall also include, among other things, business cards and letterhead.
(2) General Standards
(A) Any communication used in the promotion of a member's securities business [(except those forms of advertising excluded under subsection (d)(2)(A) of this Section) shall] must clearly and prominently set forth the name of the NASD member. This requirement shall not apply to so-called "blind" advertisements used for recruiting personnel or to those communications meeting the provisions of subsection (g)(3) of this Section.
(B) If a nonmember entity is named in a communication in addition to the member, the relationship, or lack of relationship, between the member and the entity shall be clear.
(C) If a nonmember entity is named in a communication in addition to the member and products or services are identified, no confusion shall be created as to which entity is offering which products and services. Securities products and services shall be clearly identified as being offered by the member.
(D) If an individual is named in a communication containing the names of the member and a non-member entity, the nature of the affiliation or relationship of the individual with the member shall be clear.
(E) Communications that refer to individuals may not include, with respect to such individuals, references to nonexistent or self-conferred degrees or designations, nor may such communications make reference to bona fide degrees or designations in a misleading manner.
(F) If a communication identifies a single company, the communication shall not be used in a manner which implies the offering of a product or service not available from the company named.
(G) The positioning of disclosure can create confusion even if the disclosures or references are entirely accurate. To avoid confusion, a reference to an affiliation (e.g., registered representative) shall not be placed in proximity to the wrong entity.
(H) Any reference to memberships (e.g., NASD, SIPC, etc.) shall be clearly identified as belonging to the entity that is the actual member of the organization.
(3) Specific Standards
[In addition to the foregoing general standards, the following specific standards apply:]
The foregoing standards set forth in subsections (g)(l) and (g)(2) shall apply to all communications unless at least one of the following special circumstances exists, in which case the standards set forth herein would supersede the standards in subsections (g)(l) and (g)(2).
(A) Doing Business As: An NASD member may use a fictional name in communications provided that the following conditions are met:
(i) Non-Required Fictional Name: A member may voluntarily use a fictional name provided that the name has been filed with the NASD and the SEC, all business is conducted under that name and it is the only name by which the firm is recognized.
(ii) Required Fictional Name: If a state or other regulatory authority requires a member to use a fictional name, the following conditions shall be met:
(1) The fictional name shall be used to conduct business only within the state or jurisdiction requiring its use.
(2) If more than one state or jurisdiction requires a firm to use a fictional name, the same name shall be used in each, wherever possible.
(3) Any communication shall disclose the name of the member and the fact that the firm is doing business in that state or jurisdiction under the fictional name, unless the regulatory authority prohibits such disclosure.
(B) Generic Names: An NASD member may use an "umbrella" designation to promote name recognition [or use altered versions of the firm name to promote certain areas of the firm's business], provided that the following conditions are met:
(i) The name of the member shall be clearly and prominently disclosed[.];
(ii) The relationship between the generic name and the member shall be clear[.]; and
(iii) There shall be no implication that the generic name is the name of a registered broker/dealer.
(C) Derivative Names: An NASD member may use a derivative of the firm name to promote certain areas of the firm's business, provided that the name of the member is clearly and prominently disclosed. Absent such disclosure, the following conditions must be met:
(i) The name used to promote a specific area of the firm's business shall be a derivative of the member name; and,
(ii) The derivative name shall not be misleading in the context in which it is being used
(D)
[(C)] "Division of: An NASD member firm may designate an aspect of its business as a division of the firm, provided that the following conditions are met:
(i) The designation shall only be used by a bona fide division of the member. This shall include:
(1) a division resulting from a merger or acquisition that will continue the previous firm's business; or
(2) a functional division that conducts or will conduct one specialized aspect of the firm's business.
(ii) The name of the member shall be clearly and prominently disclosed,
(iii) The division shall be clearly identified as a division of the member firm.
(E)
[(D)] "Service of/Securities Offered Through": An NASD member firm may identify its brokerage service being offered through other institutions as a service of the member, provided that the following conditions are met:
(i) The name of the member shall be clearly and prominently disclosed,
(ii) The service shall be clearly identified as a service of the member firm.
(F)
[(E)] Telephone Directory Line Listings, Business Cards and Letterhead: All such listings, cards or letterhead shall conform to the provisions of Article III, Section 27(g)(2) of the Rules of Fair Practice.