[Federal Register Volume 62, Number 76 (Monday, April 21, 1997)]
[Notices]
[Pages 19378-19383]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-10223]
[[Page 19378]]
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38506; File No. SR-NASD-95-63]
Self-Regulatory Organizations; Notice of Filing of Amendment No.
4 to Proposed Rule Change by National Association of Securities
Dealers, Inc. Relating to Proposed Rule Governing Broker/Dealers
Operating on the Premises of Financial Institutions
April 14, 1997.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on March
25, 1997, NASD Regulation, Inc. (``NASD Regulation'') filed with the
Securities and Exchange Commission (``SEC'' or ``Commission'')
Amendment No. 4 \1\ to the proposed rule change as described in Items
I, II, and III below, which Items have been prepared by NASD
Regulation. The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons.
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\1\ The Commission previously published a Notice of NASD's
proposed rule change in this matter and three amendments thereto.
See Securities Exchange Act Release No. 36980 (March 15, 1996), 61
FR 11913 (March 22, 1996).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
NASD Regulation is proposing to amend the proposed rule change
filed in SR-NASD-95-63. Below is the amended text of the proposed rule
change. Proposed new language is in italics; proposed deletions are in
brackets.
Conduct Rules
2350. Broker/Dealer Conduct on the Premises of Financial Institutions
(a) Applicability
This section shall apply exclusively to those broker/dealer
services conducted by members on the premises of a financial
institution where retail deposits are taken. This section does not
alter or abrogate members' obligations to comply with other applicable
NASD rules, regulations, and requirements, nor those of other
regulatory authorities that may govern members operating on the
premises of financial institutions.
(b) Definitions
(1) For purposes of this section, the term ``financial
institution'' shall mean federal and state-chartered banks, savings and
loan associations, savings banks, credit unions, and the service
corporations of such institutions required by law [of such
institutions].
(2) ``Networking arrangement'' and ``brokerage affiliate
arrangement'' shall mean a contractual arrangement between a member and
a financial institution pursuant to which the member conducts broker/
dealer services for customers of the financial institution and the
general public on the premises of such financial institution where
retail deposits are taken.
(3) ``Affiliate'' shall mean a company [which] that controls, is
controlled by or is under common control with a member as defined in
[Schedule E of the By-Laws] Rule 2720.
(4) ``Broker/dealer services'' shall mean the investment banking or
securities business as defined in [Paragraph] paragraph (1) of Article
I of the By-Laws.
[(5) ``Confidential financial information'' shall not include: (A)
customers' names, addresses, and telephone numbers, unless a customer
specifies otherwise; or (B) information that can be obtained from
unaffiliated credit bureaus or similar companies in the ordinary course
of business.]
(c) Standards for Member Conduct
No member shall conduct broker/dealer services on the premises of a
financial institution where retail deposits are taken unless the member
complies initially and continuously with the following requirements:
(1) Setting
Wherever [possible] practical, the member's broker/dealer services
shall be conducted in a physical location distinct from the area
[where] in which the financial institution's retail deposits are taken.
In all situations, members shall identify the member's broker/dealer
services in a manner that is clearly distinguished from the financial
institution's retail deposit-taking activities. The member's name shall
be clearly displayed in the area in which the member conducts its
broker/dealer services.
(2) Networking and Brokerage Affiliate Agreements
Networking and brokerage affiliate arrangements between a member
and a financial institution must be governed by a written agreement
that sets forth the responsibilities of the parties and the
compensation arrangements. The member must ensure that the agreement
stipulates that [: (A)] supervisory personnel of the member and
representatives of the Securities and Exchange Commission and the
Association will be permitted access to the financial institution's
premises where the member conducts broker/dealer services in order to
inspect the books and records and other relevant information maintained
by the member with respect to its broker/dealer services [;].
[(B) unregistered employees of the financial institution will not
receive any compensation, cash or non-cash, that is conditioned or
whether a referral of a customer of the financial institution to the
member results in a transaction; and
(C) the member will notify the financial institution if any
associated person of the member who is employed by the financial
institution is terminated for cause by the member.]
[(3) Compensation of Registered/Unregistered Persons
The member shall not provide cash or non-cash compensation to
employees of the financial institution who are not registered with an
NASD member in connection with, but not limited to, locating,
introducing, or referring customers of the financial institution to the
member.]
[(4)](3) Customer Disclosure and Written Acknowledgment
[(A) When] At or prior to the time that a customer account is open
by a [broker/dealer] member on the premises of a financial institution
where retail deposits are taken, the member shall:
(A) disclose, orally and in writing, that the securities products
purchased or sold in a transaction with the member:
(i) are not insured by the Federal Deposit Insurance Corporation
(``FDIC'') or other [applicable] deposit insurance;
(ii) are not deposits or other obligations of the financial
institution and are not guaranteed by the financial institution; and
(iii) are subject to investment risks, including possible loss of
the principal invested; and [.]
[(B) For all accounts opened by a broker/dealer on the premises of
a financial institution where retail deposits are taken, the member
shall]
(B) make reasonable efforts to obtain from each customer during the
account opening process a written acknowledgment of the disclosures
required by [Subsections (c)(4)(i) through (iii)] paragraph (c)(3)(A).
[(6)] (4) Communications with the Public
(A) All members [communications regarding customers' securities
transactions and long and short positions, including] confirmations and
account statements[,] must indicate
[[Page 19379]]
clearly that the broker/dealer services are provided by the member.
[Communications that include information regarding nondeposit-insured
transactions and positions with the member and deposit-insured
transactions and positions or accounts with the]
(B) Advertisements and other promotional and sales material that
announce the location of a financial institution [should clearly
distinguish between the two. Securities transactions conducted by the
member should be introduced with the member's identity and, at a
minimum, the member] where broker/dealer services are provided by the
member, or that are distributed by the member on the premises of a
financial institution, must disclose that securities products: are not
insured by the FDIC or other applicable deposit insurance; are not
deposits or other obligations of the financial institution and are not
guaranteed by the financial institution; and are subject to investment
risks, including possible loss of the principal invested. The shorter,
logo format described in paragraph (c)(4)(C) may be used to provide
these disclosures. [Advertisements, sales literature, and other similar
materials issued by the member that related exclusively to its broker/
dealer services will be deemed to be the materials of the member and
must indicate prominently the identity of the member providing the
broker/dealer services. The financial institution may be referenced in
a non-prominent manner in advertising or promotional materials for the
purposes of identifying the location where broker/dealer services are
available and, where appropriate, to disclose a material relationship
between the member and the financial institution, for example, where
the member is affiliated with a financial institution that serves as
investment adviser to an open-end investment company (``mutual
fund'').]
(C) The following shorter, logo format disclosures may be used by
members in visual media, such as television broadcasts, Automated
Teller Machine (``ATM'') screens, billboards, signs, posters, and in
written advertisements and promotional materials, such as brochures, to
comply with the requirements of paragraph (c)(4)(B), provided that such
disclosures are displayed in a conspicuous manner:
Not FDIC Insured
No Bank Guarantee
May Lose Value
[Advertisements, sales literature, and other similar materials jointly
issued by the member and a financial institution that discuss services
or products offered by both entities must distinguish clearly the
products and services offered from those offered by the member. The
name of the member must be displayed prominently in the section of the
materials that describes the broker/dealer services offered by the
member, which section will be deemed materials of the member.]
(D) As long as the omission of the disclosures required by
paragraph (c)(4)(B) would not cause the advertisement or sales
literature to be misleading in light of the context in which the
material is presented, such disclosures are not required with respect
to messages contained in:
radio broadcasts of 30 seconds or less;
electronic signs, including billboard and similar signs,
but excluding messages contained on television, on-line computer
services, or ATMs; and
signs, such as banners and posters, when used only as
location indicators.
(5) Notifications of Terminations
The member must promptly notify the financial institution if any
associated person of the member who is employed by the financial
institution is terminated for cause by the member.
II. Procedures of the Self-Regulatory Organization
The Board of Directors (``Board'') of NASD Regulation approved the
revisions to the proposed rule change at its meeting on January 27,
1997 and authorized the filing of the rule change with the SEC. The
Nasdaq Stock Market, Inc. has been provided an opportunity to consult
with respect to the proposed rule change, pursuant to the Plan of
Allocation and Delegation of Functions by NASD to Subsidiaries. The
NASD Board of Governors reviewed the proposed rule change at its
meeting on January 28, 1997. No other action by the NASD is necessary
for the filing of the proposed rule change. Section 1(a)(2) to Article
VII of the NASD By-Laws permits the NASD Board of Governors to amend
the NASD Conduct Rules without recourse to the membership for approval.
III. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
(a) Purpose
(i) Background
On December 28, 1995, the NASD filed the original proposed rule
change with the SEC. The filing subsequently was amended on January 24,
January 29, and March 7, 1996.\2\ The Commission received 98 comments
in response to the proposed rule change.\3\ About one-third of the
comment letters expressed support for the proposal. While a few
commenters supported the proposal as published, most were generally
supportive of the proposal's goals but suggested modifications to the
proposed rule. More than half of the commenters opposed some or all of
the provisions of the proposal. This amendment responds to public
comments received.
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\2\ See, note 1, supra.
\3\ These comment letters are available for copying and
inspection at the Commission's Public Reference Room and at the
principal office of the NASD.
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(ii) Major Revisions to Proposed rule
The major revisions to the original proposed rule change filed with
the SEC include the following:
Setting. The setting provision has been revised to make the rule
more consistent with the standards imposed by the Interagency Statement
on Retail Sales of Nondeposit Investment Products (``Interagency
Statement'') issued by the banking regulators on February 15, 1994.
Confidential Financial Information and Compensation of Unregistered
Persons. These provisions have been deleted from the proposed rule, and
comment is being separately solicited on proposed rules governing the
use and release of confidential financial information and regulating
the payment of referral fees that would apply to all members.
Communications with the Public. This provision has been revised to
make the rule more consistent with the Interagency Statement and a
September 12, 1995 interpretation of the Interagency Statement (``1995
Interpretation'') and to eliminate requirements that duplicated
existing NASD rules.
Termination for Cause. The proposed rule as filed with the SEC
specified that networking and brokerage affiliate agreements must
contain a provision requiring a member to notify a financial
institution if a dual employee of the member and the financial
institution is terminated for cause by the member. This provision has
been made into a separate affirmative requirement.
(iii) Description of Proposed Amendments and Other Responses to
Comments
Applicability [Paragraph (a)]. Many of the 17 commenters on this
provision have requested clarification of the rule's applicability to
brokerage services provided ``on the premises of a financial
[[Page 19380]]
institution where retail deposits are taken.'' Commenters believe the
rule should not apply to telecommunications with customers when a
customer uses a telephone or a computer terminal on the premises of the
bank to contact a broker/dealer that is not present on the premises on
the ground that, in their view, there is no chance for customer
confusion. In response, the staff plans to issue a Notice to Members in
a Question and Answer (``Q&A'') format after the rule is approved,
clarifying this and other interpretive questions about how the rule
will be applied. The Q&A will clarify that the applicability of the
proposed rule is limited to situations where the account is opened
either in person, over the telephone, or through any other electronic
medium on the premises of a financial institution where retail deposits
are taken by a broker/dealer that has a physical presence on the
premises.
Definitions [Paragraph (b)]. Because the provision governing a
member's use of confidential financial information has been deleted
(see discussion below), the definition of ``confidential financial
information'' has been deleted.
Standards for Member Conduct [Paragraph (c)]. Two commenters
suggested the addition of language to this paragraph, which contains
introductory language to the specific requirements of the proposed
rule, to clarify that the rule is applicable to broker/dealer
operations conducted on the premises ``where retail deposits are
taken.'' This revision has been made.
Setting [Paragraph (c)(1)]. This provision as proposed specifies
certain requirements, including physical separation, designed to reduce
customer confusion between deposit taking and securities activities.
The overwhelming majority of the 41 commenters that addressed this
provision, including the American Bankers Association (``ABA''),\4\
Association of Financial Services Holding Companies (``AFSHC''),\5\
Bank Securities Association (``BSA''),\6\ Consumer Bankers Association
(``CBA''),\7\ and NationsBank,\8\ criticized language in the commentary
section of the proposed rule that indicated that there may be certain
business settings where the member may not be able to comply with the
rule and may, therefore, be prevented from conducting business in such
a location. These commenters indicated that this position conflicts
with the Interagency Statement. They have requested a clarification
that this provision would not prohibit members from conducting a
brokerage business in one-person branches, in walkup windows, kiosks,
or desks in public places such as supermarkets, as long as adequate
safeguards are adopted, including adequate disclosure and signage. One
of the commenters, The Bankers Roundtable (``BR''),\9\ requested that
this provision be deleted. Commenters also have requested guidance as
to the degree of physical separation that is necessary to comply with
this provision, and several, including First Union Corporation (``First
Union''),\10\ have suggested that ``wherever possible'' should be
changed to ``wherever practicable.'' One commenter, the Center for
Study of Responsive Law,\11\ which favors the provision, believes more
specific language should be used, and that broker/dealer and financial
institution services should be segregated.
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\4\ See letter from Sarah A. Miller, American Bankers
Association, to Jonathan G. Katz, SEC, dated May 21, 1996.
\5\ See letter from Patrick A. Forte, Association of Financial
Services Holding Companies, to Jonathan G. Katz, SEC, dated May 21,
1996.
\6\ See letter from Robert M. Kurucza, Bank Securities
Association, to Jonathan G. Katz, SEC, dated May 21, 1996.
\7\ See letter from Marcia Z. Sullivan and Steven I. Zeisel,
Consumer Bankers Association, to Jonathan G. Katz, SEC, dated May
21, 1996.
\8\ See letter from Paul J. Polking, NationsBank, to Jonathan G.
Katz, SEC, dated May 20, 1996.
\9\ See letter from Richard Whiting, The Bankers Roundtable, to
Jonathan G. Katz, SEC, dated May 21, 1996.
\10\ See letter from David A. Hebner, First Union Corporation,
to Jonathan G. Katz, SEC, dated May 20, 1996.
\11\ See letter from Janice C. Shields, Center for Study of
Responsive Law, to Jonathan G. Katz, SEC, dated May 15, 1996.
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In response, ``wherever possible'' has been changed to ``wherever
practical'' to clarify that the proposed rule imposes the same
standards on broker/dealers as are imposed on financial institutions by
the Interagency Statement and requires only that sales of non-deposit
products should be conducted in a physically distinct location wherever
practical. Where a physically distinct location is not practical
because, for example, joint services are provided in a kiosk location,
the broker/dealer would not be prohibited from conducting business in
this manner. However, the location must be identified in a manner that
clearly distinguishes the broker/dealer services from the activities of
the financial institution, and the member's name must be clearly
displayed in the area in which the member conducts its broker/dealer
services.
Networking and Brokerage Affiliate Agreements [Paragraph (c)(2)].
Former paragraph (c)(2)(B) required that networking and brokerage
affiliate agreements between a member and a financial institution
stipulate that transaction-related cash or non-cash compensation to
unregistered financial institution employees for referrals is
prohibited. Many of the 11 commenters on this provision maintained this
provision would result in exerting NASD jurisdiction over the
compensation practices of financial institutions. In response,
Paragraph (c)(2)(B) has been deleted (see discussion below). In
addition, the requirement on the part of members to notify financial
institutions of the termination of dual employees has been deleted from
Paragraph (c)(2) and added as new paragraph (c)(5), in order to
emphasize the importance of this provision.
Compensation of Registered/Unregistered Persons [former Paragraph
(c)(3)]. This provision stipulates that members may not provide cash or
non-cash compensation to employees of the financial institution in
connection with referring customers of the financial institution to the
member. Strenuous opposition has been expressed by many of the 65
commenters who addressed this provision, including the ABA, BSA, BR,
Office of the Comptroller of the Currency (``OCC''),\12\ CBA, Federal
Deposit Insurance Corporation (``FDIC''),\13\ Independent Bankers
Association of America (``IBAA''),\14\ and Securities Industry
Association (``SIA'').\15\
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\12\ See letter from Douglas E. Harris, Comptroller of the
Currency, to Jonathan G. Katz, SEC, dated May 21, 1996.
\13\ See letter from Nicholas J. Ketcha Jr., Federal Deposit
Insurance Corporation, to Jonathan G. Katz, SEC, dated July 30,
1996.
\14\ See letter from Leland M. Stenehjem, Jr., James R. Lauffer,
and William W. Reid, Jr., Independent Bankers Association of
America, to Jonathan G. Katz, SEC, dated May 21, 1996.
\15\ See letter from Brewster Ellis, Securities Industry
Association, to Jonathan G. Katz, SEC, dated May 22, 1996.
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In particular, these commenters were concerned with language in the
rule filing accompanying the proposed rule stating that a NASD member
may not do indirectly what it is prohibited from doing directly, i.e.,
an NASD member may not compensate employees of a financial institution
for referrals through payments directed in the first instance to a
financial institution. Commenters were particularly concerned that this
provision should be clarified to ensure that the NASD is not attempting
to regulate a financial institution's compensation practices with
respect to its own employees, a practice that is subject to regulation
by bank regulators.
Moreover, some commenters, including BSA and the Investment
[[Page 19381]]
Company Institute (``ICI''),\16\ maintain that prohibiting such
referral payments would create a competitive disadvantage for broker/
dealers operating on the premises of a financial institution because
they believe that members operating independent of financial
institution premises are entitled to greater flexibility in providing
de minimis payments to unregistered persons under existing SEC no-
action letters. Commenters also have advised that the restriction in
the proposed rule on the payment of referral fees is inconsistent with
the one-time nominal fee that may be paid to unregistered financial
institution employees pursuant to the guidelines set forth in the
Interagency Statement and a November 23, 1993 SEC No-Action Letter,\17\
provided the fee is not tied to the successful sale of securities.
Finally, one commenter, the North American Securities Administration
Association (``NASAA''),\18\ expressed an opinion that the NASD should
prohibit all referral fees.
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\16\ See letter from Paul Schott Stevens, Investment Company
Institute, to Jonathan G. Katz, SEC, dated May 21, 1996.
\17\ Chubb Securities Corporation, SEC No-Action Letter
(November 23, 1993).
\18\ See letter from Dee Riddell Harris, North American
Securities Administrators Association, Inc., to Jonathan G. Katz,
SEC, dated May 21, 1996.
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In response, Paragraph (c)(3) has been deleted, and the NASD
Regulation Board has approved the solicitation of comment on a proposed
rule governing compensation of unregistered persons that would apply to
all members.\19\ This proposal would clarify existing policy and would
respond to concerns that the policy would otherwise appear to be
applied differentially to different classes of members.
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\19\ See NASD Notice to Members 97-11 (March 1997).
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Customer Disclosure and Written Acknowledgment [Paragraph (c)(4)].
This provision specifies the disclosures a member must make when a
customer opens an account, and also requires members to make reasonable
efforts to obtain a written acknowledgment of the required disclosures
during the account-opening process. Many of the 17 commenters on this
provision have asked the NASD to consider allowing the use of
abbreviated disclosures allowed by the federal banking agencies under a
September 12, 1995 interpretation of the Interagency Statement (``1995
Interpretation'') under appropriate circumstances. Other commenters
have argued that NASD-required disclosure and the disclosure required
by banking regulators (as reflected in the Interagency Statement)
should be the same. One commenter has argued that the NASD should
regulate all members equally and should require all members to provide
risk disclosure, while two other commenters believe that further
disclosure should be required, including disclosure of any fees and
compensation relating to a transaction.
The Interagency Statement requires the longer, written disclosures
contained in the proposed rule when an account is opened. Accordingly,
this provision has not been revised, since as currently drafted it is
consistent with banking regulator requirements. However, in order to
ensure that the proposed rule is consistent with the 1995
Interpretation, a new Paragraph (c)(4)(C) has been added to permit the
use of abbreviated disclosures under limited circumstances (see
discussion below). In addition, the NASD Regulation Board has approved
the issuance of an interpretive Notice to Members reminding member
firms of their risk disclosure obligations in connection with the sale
of insured products and uninsured securities products under existing
NASD rules and soliciting comment on whether a new rule, prescribing
point-of-sale disclosure in specified circumstances, should be
adopted.\20\
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\20\ This Notice will appear in a future issue of NASD Notices
to Members and will also be available on NASD Regulation's Web Site.
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Use of Confidential Financial Information [former Paragraph
(c)(5)]. This provision states that an NASD member shall not use
confidential financial information provided by the financial
institution regarding its customer unless prior written approval has
been granted to the financial institution by the customer to release
the information. Most of the 84 commenters who addressed this provision
expressed significant objections to the proposed restriction on the use
of confidential financial information, stating that this provision
should either be deleted or substantially revised. Those opposed to
this provision include the ABA, AFSHC, BSA, BR, OCC, CBA, IBAA, ICI,
SIA, and the major bank commenters, including Chase Manhattan Bank,\21\
Chemical Bank,\22\ First Union, and NationsBank. Most of these
commenters are of the opinion that, to the extent there are special
concerns when a bank provides confidential financial information, the
concerns are properly the subject of federal and state banking and
privacy laws, and the NASD has no jurisdiction to regulate a financial
institution's use of customer information.
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\21\ See letter from Jay No. Soloway, The Chase Manhattan Bank,
to Jonathan G. Katz, SEC, dated May 20, 1996.
\22\ See letter from Jay N. Soloway, Chemical Bank, to Jonathan
G. Katz, SEC, dated May 20, 1996.
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The commenters also believe that a member should be able to use
such information, provided proper disclosure is made and consent has
been obtained in accordance with applicable law, which the commenters
state does not require written consent. Commenters believe that,
alternatively, a member should be able to rely on a representation by
the financial institution that customer consent was obtained. Further,
the commenters state that it would be an operational burden to comply
with this provision, citing as examples the difficulty of obtaining
consent from both existing and future customers, the impracticality of
requiring a person employed by both a broker/dealer and a bank to
obtain verification of a customer's consent before using confidential
financial information inadvertently obtained in the regular course of
business, additional record-keeping requirements, and the costs of
redesigning database systems that were built in compliance with
existing laws and that now aggregate financial information for use by
integrated firms. Also, many commenters believe that customers expect
and welcome this sharing of information.
As with other provisions of the proposed rule, commenters stated
that this provision is discriminatory and anti-competitive, noting that
restrictions regarding the use of confidential financial information
are not applied similarly to broker/dealers who are not operating on
the premises of a financial institution. In this regard, commenters are
of the opinion that there is no public policy reason why customer
information possessed by affiliates or broker/dealers that are not
operating on the premises of a financial institution that include, for
example, information regarding real estate holdings, consumer finance
loans, insurance, or other financial matters, should be treated
differently than customer information provided by a financial
institution. Commenters also believe that any rule adopted the NASD to
regulate the use of confidential information should apply to all
members. Commenters further state that this provision has no
relationship to one of the major stated purposes of the proposed rule:
the prevention of customer confusion. Further, if the purpose of this
provision is to prevent customer abuse of a sales practice nature, they
believe that existing NASD suitability, cold-calling, and disclosure
rules address this concern.
[[Page 19382]]
Finally, because Congress was considering the sharing of customer
information between financial institutions and their affiliates and
subsidiaries at the time the rule was proposed for comment, some
commenters believed that the NASD should refrain from issuing
guidelines on privacy until Congress has had an opportunity to develop
a federal policy on the issue. Two commenters, NASAA and the Consumer
Federation of America,\23\ expressed support for this provision.
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\23\ See letter from Barbara Roper, Consumer Federation of
America; Mary Griffin, Consumers Union; Gerri Detweiler, National
Council of Individual Investor; and Edmund Mierzwinski, U.S. Public
Interest Research Group to Jonathan G. Katz, SEC, dated August 9,
1996.
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Since the close of the comment period, some provisions of the
legislation discussed by the commenters have been adopted. In
particular, the recently-enacted amendments to the Fair Credit
Reporting Act (``FCRA''), 15 U.S.C. Section 1681 et seq., address the
use and release of confidential financial information. The FCRA
regulates the consumer reporting industry by imposing certain
restrictions and requirements on consumer reporting agencies. Any
entity, including a broker/dealer, that accumulates and disseminates
certain consumer information may be subject to the FCRA. In particular,
an entity that provides so-called ``non-experience information'' (e.g.,
information contained in credit applications or reports from credit
bureaus, demographic firms, or other third parties) to a non-affiliate
could be considered a consumer reporting agency and might be required
to comply with FCRA requirements. On the other hand, an entity may
share without limitation ``experience information'' (i.e., information
derived from transactions or experiences with the consumer) with both
affiliates and non-affiliates without becoming subject to the FCRA. In
addition, as a result of the recent amendment to the FCRA, members of
the same corporate family now may share non-experience consumer
information without becoming subject to FCRA requirements. In
particular, the amendments allow affiliates to share non-experience
information, either directly or through a central database, so long as
it is clearly and conspicuously disclosed to the consumer that
information may be shared among the affiliates, and the consumer is
given the opportunity, before the information is initially
communicated, to opt out of the sharing arrangement.
The provision in the proposed rule regarding confidential
information was not intended to regulate a financial institution's use
of customer information. Rather, the proposal was intended to limit the
use NASD members could make of confidential financial information. In
addition, NASD Regulation is sensitive to concerns that this provision
as proposed could have a differential impact on members with financial
institution affiliates and those without such affiliates that is not
justified by differences in business practices. Consequently, this
provision has been deleted, and the NASD Regulation Board has approved
the issuance of a Notice to Members soliciting comment on a rule
governing the use and release of confidential financial information
that would apply to all members.\24\
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\24\ See NASD Notice to Members 97-12 (March 1997).
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The proposed rule discussed in the Notice to Members would apply to
the sharing of information pertaining to natural persons. In
particular, before a member may share confidential information with
parties other than business affiliates, the member would have to (i)
provide to the customer notice that the information may be released and
(ii) obtain from the customer his or her affirmative written consent.
This restriction would not apply to the release of information pursuant
to regulatory, self-regulatory, or court process. In addition, before a
member may release confidential information to a business affiliate,
the member would have to provide to the customer (i) notice that the
information may be released and (ii) a reasonable opportunity to object
to the sharing of the information before it occurs. Similarly,
information that is provided by a business affiliate may not be used
unless the member follows this same procedure or determines that the
business affiliate has done so.
Communications with the Public [Paragraph (c)(4)]. This provision
sets forth requirements for all communications with customers,
including account statements, advertisements, and sales literature.
Several of the 30 commenters who addressed this provision have asked
that the risk disclosure requirement in former Paragraph (c)(6)(A) be
modified or deleted based on their belief that disclosure at the time
the account is opened or in solicitations is sufficient to achieve the
purpose of the provision. Commenters also have asked whether such
disclosure may be provided in the abbreviated format allowed by the
1995 Interpretation to the Interagency Statement. Several commenters
also stated that the provision in redundant and duplicative of existing
NASD rules, and that all members should be subject to the same
disclosure rules.
Paragraphs (B) and (C) of former Paragraph (c)(6) have been deleted
in response to these comments and to prevent duplication of existing
NASD advertising rules. Also, several new provisions have been added to
new Paragraph (c)(4), clarifying the circumstances under which
abbreviated risk disclosures may be used and when such disclosures are
not required.
(b) Statutory Basis
NASD Regulations believes that the amendment to the proposed rule
change is consistent with the provisions of Section 15A(b)(6) of the
Act,\25\ which requires, among other things, that the Association's
rules must be designed to promote just and equitable principles of
trade, prevent fraudulent and manipulative acts and practices, and
protect investors and the public interest. The NASD believes that
regulating the conduct of broker/dealers conducting business on the
premises of financial institutions will alleviate customer confusion in
dealing with such entities and provide a regulatory framework for
regulating such broker/dealer activities with the result that investors
will be able to make more informed investment decisions with a better
understanding of the distinctions between the securities industry and
other segments of the financial services industry, in furtherance of
the requirement.
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\25\ 15 U.S.C. 78o-3.
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(B) Self-Regulatory Organization's Statement on Burden on Competition
NASD Regulation does not believe that the proposed rule change will
result in any burden on competition that is not necessary or
appropriate in furtherance of the purposes of the Act, as amended.
(C) Self-Regulatory Organization's Statement on Comments on the
Proposed Rule Change Received From Members, Participants, or Others
Written comments were neither solicited nor received regarding
Amendment No. 4 to the proposed rule change.
IV. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 35 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and
[[Page 19383]]
publishes its reasons for so finding or (ii) as to which the self-
regulatory organization consents, the Commission will:
A. By order approve such proposed rule change, or
B. Institute proceedings to determine whether the proposed rule
change should be disapproved.
V. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549.
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for inspection and copying in the
Commission's Public Reference Room. Copies of such filing will also be
available for inspection and copying at the principal office of the
NASD. All submissions should refer to the file number in the caption
above and should be submitted by May 12, 1997.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\26\
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\26\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-10223 Filed 4-18-97; 8:45 am]
BILLING CODE 8010-01-M
