[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]


-----------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \1\17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-27890 Filed 11-9-94; 8:45 am]
BILLING CODE 8010-01-M