NASD Release on Unregistered Persons and Client Contact

NTM 00-50 Drops 1998 Proposal, Re-affirms NTM 88-50

By John M. Baker, Esq.


The NASD posted a Notice to Members concerning marketing activities and supervision of unregistered persons. NASD Notice to Members 00-50 (August 2000).

The Notice withdraws a pending rule proposal and provides guidance on the activities of unregistered persons. For a number of years, the NASD has taken the position that unregistered persons may contact prospective customers only to extend invitations to firm-sponsored events, to inquire whether the customer wishes to discuss investments with a registered person, and to inquire whether the customer wishes to receive investment literature. NASD Notice to Members 88-50.

In 1998, the NASD developed a proposal that codified the restrictions of Notice 88-50 and established comprehensive supervisory responsibilities of members towards such persons, and a notice of the proposed amendment to NASD Rule 1060 and new IM-3010 was published in the Federal Register. Release No. 34-40784, 63 Fed. Reg. 70173 (Dec. 11, 1998).

Banks and bank-affiliated firms objected to the restrictions as applied to bank employees, and section 201 of the Gramm-Leach-Bliley Act (amending section 3(a)(4)(B)(i) of the 1934 Act) provides that unregistered bank employees involved with third party brokerage arrangements may describe in general terms the types of investment vehicles available from the bank and the broker or dealer under the arrangement; the conference report stated explicitly that the proposed NASD rule revisions are in conflict with this provision. H. Rept. No. 106-434, at 164 (1999).

In light of the provisions of the Gramm-Leach-Bliley Act, the NASD has withdrawn the proposal and has decided not to pursue adoption of a rule at this time. Instead, Notice 00-50 reiterates the guidance in Notice 88-50.

The Notice also clarifies the existing guidelines to indicate that unregistered persons may describe in general terms the types of investment vehicles available from the member, but may not discuss the attributes or merits of any particular investment vehicle or service or class of vehicles or services.

In addition, the payment of performance bonuses or other forms of incentive compensation, such as through participation in a profit-sharing plan, are permitted so long as such bonuses or incentives are not tied to transactions, commission activity, or referrals generated by the unregistered person.

Notice 00-50 and other 2000 Notices are available in PDF or text format from http://www.nasdr.com/2610_2000.asp


Copyright 2000, John M. Baker, Esq., Stradley, Ronon, Stevens & Young, LLP, 1220 19th Street, N.W., Suite 700, Washington, DC 20036 – (202) 822-9611- Fax (202) 822-0140 This article was originally posted to the FundLaw List, http://www.egroups.com/group/fundlaw. To subscribe to FundLaw, send a blank e-mail to fundlaw-subscribe@egroups.com


Nothing herein is intended as legal or financial advice. The law is different in different jurisdictions, and the facts of a particular matter can change the application of the law. Please consult an attorney or your financial advisor before acting upon the information contained in this article.


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