[Federal Register Volume 59, Number 217 (Thursday, November 10, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-27890]
[[Page Unknown]]
[Federal Register: November 10, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34941; International Series Release No. 744; File No.
SR-NASD-94-51]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by National Association of Securities Dealers, Inc. Relating to
Amendments to Parts VI and X of Schedule C of the NASD By-Laws Relating
to Foreign Finders and Foreign Associates
November 4, 1994.
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
September 27, 1994, the National Association of Securities Dealers,
Inc. (``NASD'' or ``Association'') filed with the Securities and
Exchange Commission (``SEC'' or ``Commission'') the proposed rule
change as described in Items I, II, and III below, which Items have
been prepared by the NASD. The Commission is publishing this notice to
solicit comments on the proposed rule change from interested persons.
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The NASD is proposing to amend Parts VI and X of Schedule C of the
NASD By-Laws relating to foreign finders and foreign associates. Below
is the text of the proposed rule change. Proposed new language is
italicized and proposed deletions are bracketed.
PART VI
PERSONS EXEMPT FROM REGISTRATION
* * * * *
(2) Member firms, and persons associated with a member, may pay to
nonregistered foreign persons transaction-related compensation based
upon the business of customers they direct to member firms if the
following conditions are met:
(a) the member firm has assured itself that the nonregistered
foreign person who will receive the compensation (the ``finder'') is
not required to register in the U.S. as a broker/dealer nor is subject
to a disqualification as defined in Article II, Section 4 of the NASD
By-Laws, and has further assured itself that the compensation
arrangement does not violate applicable foreign law;
(b) the finders are foreign nationals (not U.S. citizens) or
foreign entities domiciled abroad;
(c) the customers are foreign nationals (not U.S. citizens) or
foreign entities domiciled abroad transacting business in either
foreign or U.S. securities;
(d) customers receive a descriptive document, similar to that
required by Rule 206(4)-3(b) of the Investment Advisers Act of 1940,
that discloses what compensation is being paid to finders;
(e) customers provide written acknowledgement to the member firm of
the existence of the compensation arrangement and that such
acknowledgement is retained and made available for inspection by the
Association;
(f) records reflecting payments to finder are maintained on the
member firm's books and actual agreements between the member firm and
persons compensated are available for inspection by the Association;
and
(g) the confirmation of each transaction indicates that a referral
or finder's fee is being paid pursuant to an agreement.
PART X
FOREIGN ASSOCIATES
All persons associated with a member who are designated as Foreign
Associates shall [not] be required to be registered [and] but shall be
exempt from the requirement to pass a Qualification Examination.
* * * * *
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the NASD included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The NASD has prepared summaries, set forth in Sections
(A), (B), and (C) below, of the most significant aspects of such
statements.
(A) Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
At its January 1994 meeting, the NASD Board of Governors approved
the issuance of a Notice to Members soliciting comments on amendments
to the foreign associate provisions in Part X of Schedule C to the NASD
By-Laws. These proposed amendments would substantially conform NASD
requirements for ``foreign finders'' to certain interpretations under
New York Stock Exchange (NYSE) Rule 345 recently approved by the
Commission in SEC Rel. No. 34-32431; File No. SR-NYSE-92-33. These
amendments would permit the payment of transaction-related compensation
to non-registered foreign finders who are not subject to the
jurisdiction of U.S. securities laws, subject to certain disclosure and
recordkeeping requirements by the U.S. broker-dealer.
The proposed amendment to Part VI of Schedule C of the NASD By-Laws
is limited in application only to compensation arrangements that
involve foreign (i.e., non-U.S. citizens) finders who are domiciled
abroad and customers who are not U.S. citizens or U.S. institutions
that are also domiciled abroad. Additionally, as one of the conditions
under the proposed interpretation, customers must acknowledge receipt
of information, in the form of a descriptive document, regarding the
compensation arrangement. If all the specified conditions of the
proposed interpretation are met, members may pay transaction-related
compensation to nonregistered foreign finders based on the business of
non-U.S. customers that the finders refer to the member. The proposed
amendment would also require member firms to verify that these foreign
finders are not subject to a disqualification as defined in Article II,
Section 4 of the NASD By-Laws.
While the foreign finders' sole involvement would be the initial
referral to a member or a member organization, compensation could be
made on an ongoing basis and tied to such variables as the level of
business generated or assets under control. All accounts referred by
such foreign finders would be carried on the books of the member.
The proposed amendment will allow member organizations the
opportunity to enhance their competitive position in foreign countries
where new accounts are routinely opened on a referral basis with
ongoing compensation.
The proposed amendment to Part X of Schedule C of the By-Laws would
allow members to continue to use Part X to register Foreign Associates
with the NASD but would require members to file Form U-4 to register
such persons.
The NASD believes that the proposed rule change is consistent with
the provisions of Section 15A(b)(6) of the Act in that the proposed
changes to Parts VI and X of Schedule C of the By-Laws will impose
substantial regulatory requirements on the relationship between members
and foreign finders while at the same time allowing members to use
foreign finders to expand the members' business opportunities overseas.
(B) Self-Regulatory Organization's Statement on Burden on Competition
The NASD 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
The Association received 7 letters commenting on Notice to Members
94-6, the proposed amendments to the Interpretation. The commenters
include the Securities Industry Association (SIA), two law firms, and
four broker-dealers. Below is a summary of the more significant and/or
recurring issues raised in the letters and the NASD's position in
connection with the same.
One letter dealt with the narrow issue of whether the drafting of
the foreign associate provisions inadvertently conflicted with the
provisions of SEC Rule 15a-6. The NASD does not believe the amended
proposal conflicts with Rule 15a-6.
Of the remaining six letters, one was from the SIA and another from
counsel representing five large, full service member firms. All of
these comment letters supported the NASD's attempt to comport its
requirements to the disclosure provisions of the interpretation to NYSE
Rule 345, but opposed both the requirement to include foreign finders
under the definition of foreign associates and the provision subjecting
such persons to full U-4 registration. The commenters argued that
foreign finders are not associated persons of a member. The commenters
noted that, if NASD rules required such persons to file U-4
registration documents, the foreign finders would likely refuse to do
so and would redirect their business to foreign broker-dealers and
banks. Such a result would contradict the purpose of the NYSE
interpretation which was designed to permit U.S. broker-dealers to be
more competitive in global markets where finding arrangements are
common practice. The commenters also noted that it would be very
difficult, if not impossible, for NASD members to exert meaningful
supervision over foreign finders even if they did file U-4 registration
documents, because these individuals and firms view themselves as
independent contractors not otherwise subject to supervision of the
broker-dealer. Furthermore, the filing of such documents through a firm
may raise regulatory, tax and other issues in the country of domicile
for the foreign finders and increase the overall burden of regulation
of member firms.
The NASD Board of Governors (``Board'') found the commenters'
arguments persuasive and developed a different approach to the foreign
finder issue. In keeping with a recommendation from counsel for the
five large member firms, the Board determined to include foreign
finders under the portion of Schedule C that identifies persons exempt
from registration and to incorporate the information disclosure
requirements of the interpretation to NYSE Rule 345 into the section.
The Board also added a provision requiring firms to take reasonable
steps to assure that foreign finders are not subject to the
disqualification provisions of Article II, Section 4 of the NASD By-
Laws. The Board also decided it is important to coordinate its
activities with the NYSE to ensure consistency in the NASD's
requirements with those of the NYSE.
III. 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 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.
IV. 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 file number SR-NASD-94-51 and
should be submitted by December 1, 1994.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\1\
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\1\17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-27890 Filed 11-9-94; 8:45 am]
BILLING CODE 8010-01-M