[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