Notice To Members 92-18

SEC Approval of Amendments to the Definition of the Term "Branch Office" in Article III, Section 27 of the Rules of Fair Practice

Published Date:

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EXECUTIVE SUMMARY

On March 24, 1992, the Securities and Exchange Commission (SEC) approved amendments to Article III, Section 27(g) of the Rules of Fair Practice codifying certain interpretations of the term "branch office." The amendments will become effective April 30, 1992. The text of the amendments follows the discussion below.

BACKGROUND AND DESCRIPTION OF AMENDMENTS

On March 24, 1992, the SEC approved amendments to the NASD's supervision rule in Article III, Section 27 of the Rules of Fair Practice regarding the definition of the term "branch office" in Subsection 27(g). The amendments codify interpretations of the term that have been applied to the activities of certain members in the last few years.

In 1989, in response to requests from members, a committee of the Board of Governors ("Board") issued several interpretations under Article III, Section 27(g)(2) of the NASD Rules of Fair Practice to clarify the rule's definition of branch office and the exemptions from branch-office registration available for nonbranch business locations that meet certain conditions under the rule. These interpretations were reviewed by the Board in November 1989 and were approved for publication in the NASD Regulatory & Compliance Alert (February 1990). The interpretations were relied on for more than a year and were found to be workable in practice. Consequently, the NASD decided to codify the terms of the interpretations.

Under the current language of Article III, Section 27(g) of the Rules of Fair Practice, a location could be exempt from registration as a branch office if it was identified to the public only in telephone-book listings, on business cards, or on stationery, that also included the address and telephone number of the branch office or the office of supervisory jurisdiction (OSJ) responsible for supervising the nonbranch business location. Under new Subsection (g)(2)(ii) to Article III, Section 27, a location is also exempt from registration if the member's advertisement includes a local telephone number and/or a local post-office box so long as the advertisement also identifies the location and telephone number of the appropriate supervising branch office or OSJ. The advertisement may not, however, include the address of the nonbranch location. In addition, under new Subsection (g)(2)(iii), a member's sales literature may also include the local address of a nonbranch business location, so long as the location and telephone number of the appropriate supervisory branch office or OSJ of the member is identified.

New Subsection (g)(3) allows a member to use the firm's main-office address and telephone number on sales literature, advertisements, business cards, and business stationery instead of the address and telephone number of the supervisory branch office or OSJ so long as the member can demonstrate that it maintains a significant and geographically dispersed supervisory system appropriate to its business. Moreover, any complaints received by the main office must be forwarded to the office or offices with jurisdiction over the non-branch business location.

The new exemptions from the branch-office definition in Article III, Section 27(g)(2) are intended as a reasonable accommodation to member firms with widely dispersed sales personnel selling limited product lines such as variable contracts and mutual funds. Any office location that (i) performs any function of an OSJ, (ii) publicly displays sign-age, (iii) operates from public areas of buildings, such as bank branches, even when such locations are temporarily staffed, or (iv) advertises an address in any public media would still be required to register as a branch office. Such locations hold themselves out to the public as being places where the member conducts a securities business and, thus, come within the definition of a branch office. The NASD will not, however, regard a listing in a lobby directory or a sign on an interior corridor door as holding the location out to the public in such a way as to require branch-office registration unless other indicia of the location's status as a branch office are present.

Article III, Section 27 and the exclusions in the amendments are designed to avoid requiring the registration of locations as branch offices unless their securities activity would require the continuous direct supervision of a principal (i.e., OSJ-type activity) or the location is being held out to the public as a place where the full range of securities activity is being conducted (requiring supervisory oversight of the initial interactions between customers and the member).

Questions regarding this notice may be directed to R. Clark Hooper, Director, Advertising Department, at (202) 728-8330; P. William Hotchkiss, Director, Surveillance Department, at (202) 728-8221; and Elliott R. Curzon, General Counsel's Office, at (202) 728-8451.

Article III of the NASD Rules of Fair Practice

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

Supervision

Sec. 27.

Definitions

(g)(2) "Branch Office" means any location identified by any means to the public or customers as a location at which the member conducts an investment banking or securities business, excluding:
(i) any location identified [solely] in a telephone directory line listing or on a business card or letterhead, which listing, card, or letterhead also sets forth the address and telephone number of the branch office or OSJ of the firm from which the person(s) conducting business at the non-branch location are directly supervised[.];
(ii) any location referred to in a member advertisement, as this term is defined in Article III, Section 35 of the NASD Rules of Fair Practice, by its local telephone number and/or local post office box provided that such reference may not contain the address of the non-branch location and, further, that such reference also sets forth the address and telephone number of the branch office or OSJ of the firm from which the person(s) conducting business at the non-branch locations are directly supervised; or
(iii) any location identified by address in a member's sales literature, as this term is defined in Article III, Section 35 of the NASD Rules of Fair Practice provided that the sales literature also sets forth the address and telephone number of the branch office or OSJ of the firm from which the person(s) conducting business at the non-branch locations are directly supervised.
(g)(3) A member may substitute a central office address and telephone number for the supervisory branch office and OSJ locations referred to in paragraph (g)(2) above provided it can demonstrate to the NASD District Office having jurisdiction over the member that it has in place a significant and geographically dispersed supervisory system appropriate to its business and that any investor complaint received at the central site is provided to and resolved in conjunction with the office or offices with responsibility over the non-branch business location involved in the complaint.