NASD Issues Proposal Regarding Marketing Activities of Unregistered Persons, December 1998

Washington, DC, December 23, 1998 - The Securities and Exchange Commission recently solicited comment on proposed amendments to NASD Rule 1060, which exempts certain persons from NASD registration, and a proposed new Interpretative Material that would impose supervisory requirements on member firms that employ or use unregistered persons for certain limited marketing activities. Comments are due to the SEC by Friday, January 8, 1999.

The NASD's proposal would amend Rule 1060 by adding a new category of persons associated with a member firm that would be exempt from NASD registration. Proposed Rule 1060(a)(5) would exempt persons associated with a member whose investment banking or securities business is limited to certain marketing activities through the telephone or other electronic communications media. Such permissive activities would include (1) extending invitations to firm-sponsored events at which any substantive presentations and account or order solicitations will be conducted by appropriately registered personnel, (2) inquiring whether the prospective or existing customer wishes to discuss investments with a registered person, and (3) inquiring whether such person wishes to receive investment literature from the firm.

As part of these activities, the proposed amendments also would permit the unregistered associated person to mention the products and services generally available from the firm, provided, however, that such person does not (1) discuss the attributes or merits of any particular investment products or services or class of products or services, (2) pre-qualify prospective customers as to financial status and investment history and objectives, or (3) solicit new accounts or orders.

The NASD's proposal also would create a new Interpretative Material, IM-3010, which would impose supervisory requirements for firms that employ or use unregistered associated persons (referred to as "unregistered marketers") in accordance with the proposed amendments to Rule 1060. Specifically, IM-3010 would require that a firm's supervisory system ensure that:

background investigations are performed on each unregistered marketer,
each unregistered marketer receives proper instruction and training by the firm or a person designated by the firm,
one or more principals are designated as responsible for implementing and overseeing the firm's supervisory system regarding the employment or use of unregistered marketers,
each unregistered marketer acknowledge in writing or by electronic means to certain statements prior to contacting customers on the firm's behalf,
each unregistered marketer receives compensation on an hourly or salary basis only,
unregistered marketer's calls are periodically monitored by registered persons to ensure compliance with the limitations described in Rule 1060, and,
the firm prepare and retain written records demonstrating compliance with the provisions of IM-3010.