Institute Files Comment Letter on NASDR Proposal Regarding Unregistered Persons' Communications with the Public

Washington, DC, October 31, 1997 - The Institute has filed a comment letter with NASD Regulation, Inc. on an NASD proposal (Interpretive Material 1031 or "IM 1031") which would prohibit unregistered persons from communicating on behalf of a member with members of the public to solicit the purchase of securities or related services or to identify prospective customers.

The letter expresses concern that as drafted, proposed IM 1031 (which is intended to address abusive cold-calling practices) could be read to prohibit certain legitimate activities involving unregistered persons. It notes that in the mutual fund context, it is common for unregistered persons to engage in a variety of non-selling activities. The letter lists several examples of such activities and states that although they do not involve outbound marketing efforts and have not been the subject of abuse, proposed IM 1031 could be construed to prohibit them unless they are conducted by registered persons. The letter states that this obviously unintended result would significantly disrupt the fund industry and does not seem consistent with the purpose of IM 1031.

The letter also points out that proposed IM 1031 appears to be inconsistent with SEC staff no-action positions permitting "networking" arrangements, the payment of "finder's fees" in certain circumstances, payments by broker-dealers to on-line service providers and affinity arrangements between a broker-dealer and another entity. Similarly, it is potentially inconsistent with the federal banking regulators' Interagency Statement on Retail Sales of Nondeposit Investment Products. Finally, its relationship with proposed NASD Conduct Rule 2460 (governing payment of referral fees to unregistered third parties) is unclear. The comment letter recommends that NASDR either withdraw proposed IM 1031 or revise it substantially to address the issues it raises and repropose it for comment.