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Disclosure statements to be required.

NASD MARGIN DISCLOSURE PROPOSAL: The NASD’s proposal to establish specific disclosures for non-institutional customers using margin has been released for comment by the SEC. The announcement of the NASD’s September 5, 2000 rule filing appeared in the Federal Register on October 23 (65 Fed Reg. 63275) under File No. SR-NASD-00-55 and SEC Rel. No. 34-43441. The date set by the Commission for the submission of public comments is November 13, 2000.

SAC reported the NASD’s announcement of the proposal in August (SAA 00-32). On September 26, 2000 NASD submitted an Amendment to the rule change, which clarifies that liquidation procedures can include “any of the customer’s accounts held at the firm,” i.e., all securities, not just those purchased on margin.

New Rule 2341 requires a margin disclosure statement be provided to retail customers at or before the opening of a margin account, so that customers “fully understand the risks involved in trading securities on margin.” There are six specific disclosure bullets, as well as a general discussion of margin, and these points need to be conveyed to existing margin customers “with a frequency of not less than once a calendar year….” (ed: We checked in at IHS Financial’s Securities Regulatory Library to see where proposed Rule 2341 falls among the NASD Conduct Rules. NASD’s margin rule actually appears at Rule 2520, but 2521 makes clear that 2520’s margin requirements cover NASD-only members.

New Rule 2341 falls in the “Customer Account Statements” section of the Conduct Rules and applies to all NASD members. This is a good rule, because it educates customers, but Claimant’s counsel will quickly find, we think, that “custom and practice” or oral side-agreement arguments are more difficult to make in margin liquidation cases.

One question we have is what happens when the broad “disclosures” on how margin liquidations work are broader than the reservation of rights in the broker-dealer’s contract. For instance, the disclosure statement says you can be liquidated without the firm’s contacting you, but what if the magic words, “without notice,” do not appear in the contract? Firms may be well-advised to incorporate the margin disclosure statement by reference into the contract.) (SAC Ref. No. 00-44-001)

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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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