60542 Federal Register / Vol. 62, No. 217 / Monday, November 10, 1997 / Notices

1 15 U.S.C. 78s(b)(1).

2Amendment No. 1 provided a statutory basis for

the proposed rule change. See Letter from Mark A.

Koerner, Attorney, Exchange, to Michael L. Loftus,

Attorney, Division of Market Regulation,

Commission, dated October 27, 1997.

3 15 U.S.C. 78f(b).

4 15 U.S.C. 78f(b)(5).

5 15 U.S.C. 78s(b)(3)(A).

6 17 CFR 240.19b–4(e). 7 17 CFR 200.30–3(a)(12).

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–39289; File No. SR–CBOE–

97–52]

Self-Regulatory Organizations; Notice

of Filing and Immediate Effectiveness

of Proposed Rule Change and

Amendment No. 1 Thereto by the

Chicago Board Options Exchange,

Incorporated Relating to the Addition

of Martin Luther King, Jr. Day as an

Exchange Holiday

October 31, 1997.

Pursuant to Section 19(b)(1) 1 of the

Securities Exchange Act of 1934

(‘‘Act’’), notice is hereby given that on

October 2, 1997, the Chicago Board

Options Exchange, Incorporated

(‘‘CBOE’’ or ‘‘Exchange’’) filed with the

Securities and Exchange Commission

(‘‘Commission’’) the proposed rule

change as described in Items I, II, and

III below, which Items have been

prepared by the Exchange. On October

31, 1997, the Exchange filed with the

Commission Amendment No. 1 to the

proposed rule change.2 The Commission

is publishing this notice to solicit

comments on the proposed rule change

from interested persons.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

The Exchange seeks to amend

Interpretation .03 under Exchange Rule

6.1 to include Martin Luther King, Jr.

Day among the Exchange Holidays on

which it is closed for business.

The text of the proposed rule change

is available at the Office of the

Secretary, the Exchange and at the

Commission.

II. Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

In its filing with the Commission, the

Exchange included statements

concerning the purpose of and basis for

the proposed rule change and discussed

any comments it received on the

proposed rule change. The text of these

statements may be examined at the

places specified in Item IV below. The

Exchange has prepared summaries, set

forth in sections A, B, and C below, of

the most significant aspects of such

statements.

A. Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

1. Purpose

The Exchange proposes to amend

Interpretation .03 under Rule 6.1 to

include Martin Luther King, Jr. Day

among the Exchange holidays on which

the Exchange is closed for business. The

Exchange will observe the annual

holiday on the third Monday in January.

2. Statutory Basis

The Exchange represents that the

proposed rule change is consistent with

Section 6(b) 3 of the Act, in general, and

furthers the objectives of Section

6(b)(5) 4 of the Act, in particular, in that

it is designed to perfect the mechanism

of a free and open market, and to protect

investors and the public interest.

B. Self-Regulatory Organization’s

Statement on Burden on Competition

The Exchange does not believe that

the proposed rule change will impose

any inappropriate burden on

competition.

C. Self-Regulatory Organization’s

Statement on Comments on the

Proposed Rule Change Received from

Members, Participants, or Others

The Exchange did not solicit or

receive written comments with respect

to the proposed rule change.

The foregoing rule change is

concerned solely with the

administration of the Exchange and,

therefore, has become effective pursuant

to Section 19(b)(3)(A) 5 of the Act and

subparagraph (e) of Rule 19b–4 6

thereunder. At any time within 60 days

of the filing of the proposed rule change,

the Commission may summarily

abroagate such rule change if it appears

to the Commission that such action is

necessary or appropriate in the public

interest, for the protection of investors,

or otherwise in furtherance of the

purposes of the Act.

IV. Solicitation of Comments

Intersted 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

Section, 450 Fifth Street, N.W.,

Washington, D.C. 20549. Copies of such

filing will also be available for

inspection and copying at the principal

office of the Exchange. All submissions

should refer to the File No. SR–CBOE–

97–52 and should be submitted by

December 1, 1997.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.7

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 97–29602 Filed 11–7–97; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–39294; File No. SR–NASD–

95–63]

Self-Regulatory Organizations; Order

Approving Proposed Rule Change by

the National Association of Securities

Dealers, Inc. and Notice of Filing and

Order Granting Accelerated Approval

of Amendment No. 5 to Proposed Rule

Change Governing Broker-Dealers

Operating on the Premises of Financial

Institutions

November 4, 1997.

On December 28, 1995, the National

Association of Securities Dealers, Inc.

(‘‘NASD’’) filed with the Securities and

Exchange Commission (‘‘SEC’’ or

‘‘Commission’’) the original proposed

rule change relating to broker-dealers

operating on the premises of financial

institutions. The NASD subsequently

filed Amendment Nos. 1, 2, 3 and 4 to

the filing. The Commission published

the proposed rule and amendments for

comment in the Federal Register. The

Commission received 11 comment

letters in response to the publication of

Amendment No. 4 of the proposed rule

change. In response to comments on

Amendment No. 4, on July 17, 1997, the

NASD filed Amendment No. 5 to the
Federal Register / Vol. 62, No. 217 / Monday, November 10, 1997 / Notices 60543

1NASD Notice to Members 94–94.

proposed rule change. For the reasons

discussed below, the Commission is

approving the proposed Amendment

No. 5 on an accelerated basis.

I. The Rule

Below is the approved text of the rule

change incorporating the amendments

submitted by the NASD:

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.

(2) ‘‘Networking arrangement’’ and

‘‘brokerage affiliate arrangement’’ shall

mean a contractual or other 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

that controls, is controlled by, or is

under common control with, a member

as defined in Rule 2720.

(4) ‘‘Broker-Dealer services’’ shall

mean the investment banking or

securities business as defined in

paragraph (o) of Article I of the ByLaws.

(c) Standards for Member Conduct

No member shall conduct brokerdealer 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 practical, the member’s

broker-dealer services shall be

conducted in a physical location

distinct from the area in which the

financial institution’s retail deposits are

taken. In all situations, members shall

identify the members’ 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 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

respect the books and records and other

relevant information maintained by the

member with respect to its broker-dealer

services.

(3) Customer Disclosure and Written

Acknowledgment

At or prior to the time that a customer

account is opened by a 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’’);

(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) Make reasonable efforts to obtain

from each customer during the account

opening process a written

acknowledgment of receipt of the

disclosures required by paragraph

(c)(3)(A).

(4) Communications with the Public

(A) All member confirmations and

account statements must indicate

clearly that the broker-dealer services

are provided by the member. (B) Advertisement and sales literature

that announce the location of a financial

institution 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; 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.

(C) The following shorter, logo format

disclosures may be used by members in

advertisements and sales literature,

including material published, or

designed for use in radio or television

broadcasts, Automated Teller Machine

(‘‘ATM’’) screens, billboards, signs,

posters, and 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

(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 billboardtype signs that are electronic, time,

and temperature signs and ticker tape

signs, but excluding messages

contained in such media as 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. Description of the Proposal

A. Procedural History of the Filing

The NASD initially published this

bank broker-dealer rule for member

comment in an NASD Notice to

Members.1 The NASD substantially

revised its proposed rule in response to

the 284 comment letters that it received

about the proposed rule. The NASD

filed the proposed rule with the

Commission on December 28, 1995, and

subsequently submitted Amendment

Nos. 1, 2 and 3 to the filing of January

24, January 29, and March 7, 1996,
60544 Federal Register / Vol. 62, No. 217 / Monday, November 10, 1997 / Notices

2See Letters from Elliot R. Curzon, Associate

General Counsel, NASD, to Mark P. Barracca,

Branch Chief, Division of Market Regulation, SEC

(January 24, 1996 and march 7, 1996), and Letter

from Suzanne E. Rothwell, Associate General

Counsel, NASD, to Mark P. Barracca, Branch Chief,

Division of market Regulation, SEC (January 29,

1996).

3Securities Exchange Act Release No. 36980

(March 15, 1996), 61 FR 11913.

4See, e.g., Letter from Dr. Janice C. Shields,

Coordinator, Consumer Finance Project, center for

Study of Responsive Law, to Jonathan Katz,

Secretary, SEC (May 15, 1996); Letter from Dee

Riddell Harris, President, North American

Securities Administrators Association, Inc., to

Jonathan Katz, Secretary, SEC (May 21, 1996).

5See, e.g., Letter from Maureen Ryan, Senior

Counsel, Barnett Banks, Inc., to Jonathan Katz,

Secretary, SEC (May 20, 1996); Letter from Sarah

Miller, Senior Government Relations Counsel,

American Bankers Association to Jonathan Katz,

Secretary, SEC (May 21, 1996) (‘‘ABA Letter’’);

Letter from Steven J. Freiberg, Chairman & CEO,

Citicorp Investment Services to Jonathan Katz,

Secretary, SEC (May 20, 1996).

6Securities Exchange Act Release No. 38506

(April 14, 1997), 62 FR 19378.

7See Letter from May Revell, Assistant General

Counsel, NASD Regulation, to Belinda Blaine,

Associate Director, SEC (July 17, 1997). The

changes made in Amendment No. 5 to the proposed

rule change are discussed in detail in Section II.C

of this approval order, infra.

8See, e.g., Letter from Sandra L. Caruba, Counsel,

First National Bank of Chicago, to Jonathan Katz,

Secretary, SEC (May 20, 1996); Letter from David

A. Hebner, Vice President and Assistant General

Counsel, First Union Corporation, to Jonathan Katz,

Secretary, SEC (May 20, 1996); Letter from Steven

Alan Bennett, Senior Vice President and General

Counsel, Banc One Corporation, to Jonathan Katz,

Secretary, SEC (May 21, 1996); Letter from Robert

M. Kurucza, General Counsel, Bank Securities

Association, to Jonathan Katz, Secretary, SEC (May

21, 1996).

respectively.2 The Commission

published the proposed rule and

amendments for comment in the

Federal Register on March 22, 1996,3

and received 98 comments on the

proposed rule amendments. While

about one-third of the commenters

supported the proposal,4 most suggested

modifications to the proposed rule.5

More than half of the commenters

opposed some or all of the provisions of

the proposed rule. In response to these

comments, on March 25, 1997, the

NASD filed substantial amendments to

the proposed rule in the form of

Amendment No. 4, and the Commission

published notice of the amendments in

the Federal Register on April 21, 1997.6

In response to the 11 public comments

received on Amendment No. 4, on July

17, 1997, the NASD submitted

Amendment No. 5 to the proposal,

which contains further amendments to

the rule.7 In addition to approving the

proposed rule change, as amended, the

Commission is granting accelerated

approval to Amendment No. 5.

B. Overview of Amendment No. 4

Amendment No. 4 proposed by the

NASD included the following

substantial revisions to the proposed

rule originally filed with the

Commission:

1. Setting

The original proposed rule specified

certain requirements regarding the

setting of the conduct of a brokerdealer’s services, including physical

separation, that were designed to reduce

customer confusion about the

differences between deposit taking and

securities activities. The great majority

of the commenters that addressed this

provision of the original proposal

criticized it. They argued that the

language in the originally proposed rule

did not take into account that there may

be certain business settings where the

member may be unable to comply with

the rule and may, therefore, be

prevented from conducting business in

such a location. These commenters also

indicated that the rule as originally

proposed conflicts with the Interagency

Statement on Retail Sales of Nondeposit

Investment Products (‘‘Interagency

Statement’’) issued by the banking

regulators on February 15, 1994. These

commenters requested clarification that

this provision would not prohibit a

member from conducting a brokerage

business in a one-person branch, as long

as adequate safeguards are adopted,

including adequate disclosure and signs

announcing the type of business being

conducted.

In response to these comments, the

setting provision has been revised to

make the rule more consistent with the

standards of the Interagency Statement.

Amendment No. 4 clarifies that the rule

will impose the same standards on

broker-dealers as are generally imposed

on financial institutions by the

Interagency Statement, and require only

that broker-dealer services should be

provided in a physically distinct

location wherever practical. Under the

Amendment No. 4, broker-dealers will

not be prohibited from conducting

business in the event that a physical

separation is not practical. The location,

however, must be identified in a manner

that clearly distinguishes the brokerdealer 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.

2. Confidential Financial Information

and Compensation of Unregistered

Persons

The original proposal stated that an

NASD member shall not use

confidential financial information

regarding its customers unless a

customer granted to the financial

institution prior approval for such use.

Most of the commenters who addressed

this provision objected to the proposed

restriction on the use of confidential

financial information, and 7requested

that the provision either be deleted or

substantially revised.8 These

commenters argued that, to the extent

there are special concerns when a bank

provides confidential financial

information about its customers to a

broker-dealer, these concerns are

properly the subject of federal and state

banking and privacy laws. They further

argued that the NASD lacks jurisdiction

to regulate a financial institution’s use

of customer information.

The commenters also argued that a

member should be able to use such

confidential financial information,

provided proper disclosure is made and

consent for such use has been obtained

in accordance with applicable state law,

which, according to commenters, does

not require written consent.

Alternatively, these commenters argued

that a member should be able to rely on

a representation by the financial

institution that customer consent was

obtained. In addition, the commenters

stated that complying with this

provision represented an unwarranted

operational burden not justified by the

NASD’s stated objective of avoiding

customer confusion. Finally, some

commenters maintained that their

customers expect and welcome this

sharing of information to enable the

financial institution to present them

with an array of investment alternatives.

As with other portions of the

originally proposed rule, commenters

stated that this provision was

unreasonably discriminatory and anticompetitive, 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. These commenters stated

that a more equitable approach would

be for the NASD to adopt rules that

regulate the use of confidential

information by all members—not just

those members that operate on the

premises of financial institutions.

In response to these concerns, the

provision has been deleted, and the

NASD Board has issued a Notice to

Members soliciting comment on a

proposed rule governing the use and

release of confidential financial
Federal Register / Vol. 62, No. 217 / Monday, November 10, 1997 / Notices 60545

9See NASD Notice to Members 97–12.

10 Interpretation of the Interagency Statement

(September 12, 1995).

11For example, pursuant to NASD Rule 2210, any

joint account statement must clearly identify and

distinguish securities products from non-securities

products, and should clearly identify securities

products as being offered by the member. See NASD

Rule 2210(f)(2)(C).

12See Rule 2350(c)(4), supra.

13See e.g., ABA Letter, supra note 5.

14See NASD Notice to Members 97–11.

15See Rule 2350(c)(5), supra.

16Supra note 7.

17See Letter from Barry E. Simmons, Investment

Company Institute, to Jonathan Katz, Secretary, SEC

(May 12, 1997) (‘‘1997 ICI Letter’’); and Letter from

Jack Kopnisky, President & CEO, KeyInvestments,

to Jonathan Katz, Secretary, SEC (May 9, 1997)

(‘‘1997 KeyInvestments Letter’’).

18See Letter from Kimberly Crichton, General

Counsel and Vice President, Citicorp Investment

Services, to Jonathan Katz, Secretary, SEC (May 12,

1997); and Letter from Valorie Seyfert, President,

CUSO Financial Services, L.P., to Jonathan Katz,

Secretary, SEC (May 21, 1997) (‘‘1997 CUSO

Letter’’).

19See NASD Notice to Members 97–26.

20See Letter from Robert R. Davis, Director,

Government Relations, America’s Community

Bakers, to Jonathan Katz, Secretary, SEC (May 13,

1997) (‘‘1997 ACB Letter’’); and 1997 ICI Letter,

supra note 17.

information that would apply to all

members.9

3. Communications With the Public

The original proposal set forth

requirements for all communications

with customers, including account

statements, advertisements, and sales

literature. Several of the commenters

who addressed this provision asked

whether the disclosures required by the

rule could be provided in the

abbreviated format allowed by a 1995

interpretation of the Interagency

Statement (‘‘1995 Interpretation’’).10

Several commenters also stated that the

requirements of the provision are

duplicative of the requirements in

existing NASD rules.

In response to these comments, this

provision has been revised to make the

rule more consistent with the

Interagency Statement and the 1995

Interpretation. In addition, those

provisions of the originally proposed

rule that are duplicative of requirements

in existing NASD advertising rules have

been deleted.11 Moreover, several new

provisions have been added to clarify

the circumstances under which

abbreviated risk disclosures may be

used and when such disclosures are not

required.12

4. Compensation of Registered/

Unregistered Persons

The original rule proposal stated that

members may not provide cash or noncash compensation to financial

institutions in connection with referring

customers of the financial institution to

the member. A related provision

required that networking and brokerage

affiliate agreements between a member

and a financial institution stipulate that

the payment of transaction-related cash

or non-cash compensation to

unregistered financial institution

employees for referrals is prohibited.

Commenters who addressed these

provisions argued that they were

unclear and should be revised. Among

other things, they suggested that the

NASD clarify that its prohibition on

payment of referral fees does not

prevent bank management from paying

referral fees to bank employees.13

Commenters also were concerned

with NASD statements in the original

rule filing that a member may not do

indirectly what it is prohibited from

doing directly, by compensating

employees of a financial institution for

referrals through payments that were

directed in the first instance to a

financial institution. Commenters were

particularly concerned that this

provision be clarified to ensure that the

NASD was not attempting to regulate a

financial institution’s compensation

practices with respect to its own

employees—practices that are subject to

regulation by the banking agencies.

Finally, some commenters stated that

this provision was unreasonably

discriminatory and anti-competitive

because it would prohibit payment of

referral fees by bank broker-dealers, and

not prohibit such payments by all

member firms. In response to these

criticisms, these provisions have been

deleted, and the NASD has solicited

comment on a proposed rule governing

compensation of unregistered persons

that would apply to all members.14

5. Termination for Cause

As originally filed, the proposed rule

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 deleted from the paragraph of

the bank broker-dealer rule pertaining to

matters that must be addressed by

networking and brokerage affiliate

agreements, and is now a separate

affirmative requirement.15

C. Overview of Amendment No. 5

In response to the comment letters

submitted on Amendment No. 4, the

NASD submitted Amendment No. 5 16

to the proposed rule change. The major

issues raised by the commenters, and

the changes in Amendment No. 5 in

response to those comments, are

discussed below.

1. Summary of Comments

Some of the commenters to

Amendment No. 4 continued to

question the need for the rule. Most

commenters, however, believed that the

NASD had appropriately amended the

rule in response to the issues raised by

the 98 commenters on the original

proposal. These commenters applauded

the NASD for revising the original

proposal to eliminate the provisions that

they considered objectionable and for

making the requirements of the rule

more consistent with the guidelines in

the Interagency Statement. The

commenters also suggested several

additional revisions that they believed

would result in a clearer, less

ambiguous rule that would be even

more in accord with the standards in the

Interagency Statement.

2. Applicability

The rules applies to broker-dealer

services conducted by members ‘‘on the

premises’’ of a financial institution. Two

commenters suggested that the scope of

the rule be limited to face-to-face

communications with customers on

bank premises and that the rule not

apply where broker-dealer services are

provided by means of

telecommunication.17 The rule,

however, is not limited in this way

because the potential for confusion

exists whenever brokerage services are

conducted either in person, over the

telephone, or through other electronic

medium, by a broker-dealer that has a

physical presence on the premises of a

financial institution. In addition, two

commenters suggested that the

disclosure requirements of the rule

should be applied to all NASD members

that offer both insured products and

uninsured securities products.18 The

Commission notes that the NASD has

issued a Notice to Members soliciting

comment on such a rule.19

3. Definition of ‘‘Broker-Dealer

Services’’

Two commenters requested that the

definition of ‘‘broker-dealer services’’ be

clarified to indicate that the rule does

not apply to fiduciary activities or to

mutual fund distributors and

underwriters.20 The rule has not been

revised to reflect these comments. While

the rule most often would be applied to

broker-dealer services provided to retail

customers, the rule would also apply to

brokerage services provided to fiduciary

accounts, if such services are provided
60546 Federal Register / Vol. 62, No. 217 / Monday, November 10, 1997 / Notices

21See Letter from Sarah A. Miller, Senior

Government Relations Counsel, American Bankers

Association, to Jonathan Katz, Secretary, SEC (May

12, 1997) (‘‘1997 ABA Letter’’).

22The Commission notes that requiring

disclosure at or prior to the time of the opening of

an account is consistent with other SEC rules. See

e.g., Exchange Act Rule 11Ac1–3, 17 CFR

240.11Ac1–3 (regarding payment for order flow).

23See 1997 ABA Letter, supra note 21, and 1997

ICI Letter, supra note 17.

24See 1997 CUSO Letter, supra note 18.

25 Id.

26See Letter from Kimberly Crichton, General

Counsel and Vice President, Citicorp Investment

Services, to Jonathan Katz, Secretary, SEC (May 12,

1997).

27See 1997 Key Investments Letter, supra note

17.

28See NASD Rule 2210.

29See Letter from Bill Sones, President,

Independent Bankers Association of America, to

Jonathan Katz, Secretary, SEC (May 12, 1997).

30But see NASD Notice to Members 97–37

(requesting comment on proposed definition of

correspondence for rules regarding communications

with the public).

31See 1997 ACB Letter, supra note 20. See also

Letter from Nicholas J. Ketcha, Jr., Director,

Division of Supervision, FDIC, to Belinda Blaine,

Associate Director, Division of Market Regulation,

SEC, (August 29, 1997).

on the premises of a financial institution

where retail deposits are taken.

Furthermore, the Interagency Statement

does not exclude fiduciary activities

from the scope of the guidelines; it

merely states that the guidelines

‘‘generally do not apply to the sale of

nondeposit investment products to nonretail customers, such as sales to

fiduciary accounts administered by an

institution’’ (emphasis added). The 1995

Interpretation also clarifies that issue. It

states: ‘‘[F]or fiduciary accounts where

the customer directs investments, * * *

the disclosures prescribed by the

Interagency Statement should be

provided.’’

In addition, the NASD rule would

apply by its terms to mutual fund

distributors and underwriters if they are

engaged in brokerage activities on the

premises of a financial institution. For

these reasons, the rule has not been

revised to respond to this comment.

4. Setting

As discussed above, the revised rule

requires that, wherever practical,

broker-dealer services must be

conducted in a physical location

distinct from the area where retail

deposits are taken. One commenter

suggested amending the rule to require

that broker-dealer services be separated

from the area of the financial institution

where retail deposits are routinely taken

to make clear that brokerage services

must be offered away from the teller

line.21 Because of concern that this

proposal could lead to confusion, the

rule has not been changed in response

to this comment. However, the NASD

intends to clarify in a Notice to

Members announcing the approval of

the rule that brokerage services should

be separated from the teller line, the

area of the bank where retail deposits

are routinely taken. The NASD also

intends to clarify that the rule is not

meant to preclude certificates of deposit

from being offered in the brokerage area

if that particular product, rather than an

uninsured investment product, is best

suited to the customer’s investment

needs. The rule therefore would not

preclude a bank customer from

purchasing an array of investment

products, including certificates of

deposit, so long as the brokerage area is

appropriately separated from the other

areas of the financial institution with

appropriate signs indicating the type of

business being conducted and other

lines of demarcation, and the customer

is given the appropriate disclosures.

5. Customer Disclosure and Written

Acknowledgment

The rule requires NASD members to

make certain disclosures at or prior to

the time that a customer account is

opened by the member.22 One provision

requires disclosure that securities

products are not insured. Three

commenters addressed this requirement

in response to Amendment No. 4. Two

suggested deleting the phrase ‘‘or other

deposit insurance’’ to ensure

consistency with the Interagency

Statement.23 The third suggested simply

stating that securities products are not

federally insured.24 In response to these

comments, the phrase ‘‘or other deposit

insurance’’ has been deleted from the

rule.

Another commenter suggested that, in

addition to the disclosures required by

the current version of the rule,

disclosure should be made that products

sold by a dual employee are offered by

a person who accepts deposits and sells

nondeposit investment products.25 In

order to keep the NASD rule consistent

with the Interagency Statement, and

because the current disclosures are

designed to adequately apprise investors

of the risks of securities products, this

change has not been made.

6. Communications With the Public

Paragraph (c)(4)(B) permits shorter,

logo format disclosures in visual media.

One commenter suggested that the rule

should also allow these abbreviated

disclosures in radio advertisements.26

Because the definition of

‘‘advertisement’’ in NASD Rule 2210

(Communications with the Public),

includes material designed for use in

radio, the rule language has been

revised to be consistent with Rule 2210.

The rule also allows the required

disclosures to be omitted in specified

advertisements and sales literature,

provided the omission will not cause

the advertisement or sales literature to

be misleading. One commenter

suggested deleting any reference to the

‘‘misleading’’ nature of such

omissions.27 This language has been

retained to appropriately reflect the

general prohibitions on misleading

advertising in NASD rules.28 Another

commenter requested that the rule allow

omission of the required disclosures in

letters that introduce the broker-dealer

to bank customers and do not contain an

offer or a solicitation.29 This suggested

change has not been made. Generally, a

personalized letter to an individual

customer is not included in either the

definition of advertisements or sales

literature in NASD Rule 2210. The letter

would be considered ‘‘correspondence’’

subject to the requirements of NASD

Rule 3010 (Supervision).30

Paragraphs (c)(4)(B), (C), and (D) have

been revised to make other clarifying

changes, many of which merely make

the rule language in Paragraph (c)(4)

more consistent with language in NASD

Rule 2210. For example, the phrase

‘‘promotional and sales material’’ has

been replaced with the phrase ‘‘sales

literature’’ in Paragraph (c)(4)(A),

consistent with Rule 2210. Also,

Paragraph (c)(4)(C) has been revised to

clarify that logo disclosures may be used

in all advertisements and sales

literature. Finally, in order to ensure

consistency with the standards in the

Interagency Statement, Paragraph

(c)(4)(D) has been revised to add

language to the rule that mirrors

language in the 1995 Interpretation.

These minor revisions clarify the

meaning of the rule and make the rule

consistent with the Interagency

Statement.

7. Notification of Termination

The rule requires members to

promptly notify the financial institution

if an associated person of the member

who also is employed by the financial

institution (a dual employee) is

terminated for cause by the member.

Two commenters suggested that such

notification should also be provided in

situations where an associated person

who is employed only by the member

and not directly by the financial

institution is terminated.31 This change

has not been made because the purpose
Federal Register / Vol. 62, No. 217 / Monday, November 10, 1997 / Notices 60547

32 15 U.S.C. 78o–3(b)(6).

33 In approving the proposal, the Commission has

considered the proposal’s impact on efficiency,

competition, and capital formation. 15 U.S.C. 78c(f). 34 15 U.S.C. 78s(b)(2).

of the provision is to permit banks and

broker-dealers to maintain open

communications about dual employees,

and it is unclear what purpose would be

served by the revision.

III. Solicitation of Comments

Interested persons are invited to

submit written data, views, and

arguments concerning Amendment No.

5. 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 file number

SR–NASD–95–63 and should be

submitted by December 1, 1997.

IV. Commission Findings

The Commission finds that the rule

change is consistent with the

requirements of Section 15A(b)(6) of the

Act.32 Section 15A(b)(6) specifies that

the rules of a national securities

association be designed, among other

things, to prevent fraudulent and

manipulative acts, to promote just and

equitable principles of trade, and, in

general, to protect investors and the

public interest. The Commission

believes that the rule will provide

enforceable standards designed to

reduce potential customer confusion in

dealing with broker-dealers that conduct

business on the premises of financial

institutions. The rule also should clarify

the relationship between a broker-dealer

and a financial institution entering into

a networking arrangement.33 The rule

should help prevent confusion by

clarifying that securities purchased by

customers on the premises of a financial

institution are not insured by the FDIC

or the financial institution. The

disclosures required by the rule, and the

written acknowledgement of disclosures

obtained pursuant to the rule, are

intended to assist investors in making

investment decisions based on a better

understanding of the distinctions

between insured deposits and

uninsured securities products. Although

the rule requires only that members

‘‘make reasonable efforts’’ to obtain

written customer acknowledgment of

the required disclosures in the account

opening process, the Commission

expects members to obtain such written

acknowledgement in all but rare

circumstances (e.g. when a customer

refuses to sign the acknowledgment). It

is anticipated that, as is the case today,

many firms will provide these

disclosures in the new account opening

form which, when signed by the

customer, constitutes written

acknowledgment. The Commission

believes that in the rare circumstances

where acknowledgment is not obtained,

heightened supervisory procedures

would be necessary. Reasonable

supervisory procedures would include

procedures for the registered

representative receiving approval from

the member’s compliance department

prior to opening the account, and

documenting that the customer has

refused to sign the written

acknowledgment of such disclosure.

The Commission also agrees with the

NASD that the activities of NASD

member firms operating on the premises

of financial institutions and related

customer protection issues are not

adequately addressed by existing NASD

rules. Because the Interagency

Statement is not part of the securities

laws or rules, the basis for NASD

Regulation disciplinary action against

member firms that do not comply with

the Interagency Statement is unclear.

The proposed rule establishes a clear

standard of conduct governing the

practices of member firms operating on

the premises of financial institutions

that is enforceable by the NASD.

The Commission finds good cause for

approving Amendment No. 5 prior to

the thirtieth day after the date of the

publication of notice of filing thereof in

the Federal Register, because

Amendment No. 5 reflects and responds

to earlier comments about the proposal

and further clarifies the proposal. In

addition, accelerated approval of

Amendment No. 5 will permit the rule

to go into effect without further delay.

V. Effective Date

The NASD will announce the

approval of this rule in a Notice to

Members no later than 60 days after

publication of this Order in the Federal

Register. The effective date of this rule

will be 60 days after publication of the

NASD’s Notice to Members.

It is therefore ordered, pursuant to

Section 19(b)(2) 34 of the Act, that the

proposed rule change (SR–NASD–95–

63), as amended be, and hereby is,

approved.

By the Commission.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 97–29600 Filed 11–7–97; 8:45 am]

BILLING CODE 8010–01–M

DEPARTMENT OF STATE

[Public Notice No. 2625]

Secretary of State’s Advisory

Committee on Private International

Law; Meeting Notice

There will be a meeting on

Developments in Private International

Law of the Secretary of State’s Advisory

Committee on Private International Law

(ACPIL) on Thursday, November 20

from 1:00 p.m. to 5:00 p.m. and Friday,

November 21 from 10:00 a.m. to 4:30

p.m. at the Department of State in

Washington, D.C.

Comments and advice will be

solicited on developments in private

international law. The meeting agenda

will include a review of the work of

international organizations specializing

in this field, including the International

Institute for Unification of Private Law

(UNIDROIT), the Hague Conference on

Private International Law, the United

Nations Commission on International

Trade Law (UNCITRAL), Inter-American

Specialized Conferences on Private

International Law (CIDIP) sponsored by

the Organization of American States

(OAS), and other international

organizations, as appropriate.

Topics for discussion will include the

proposed Hague convention on

jurisdiction, recognition and

enforcement of foreign judgments; the

1997 UNCITRAL model law on crossborder insolvencies; electronic

commerce developments, including

jurisdiction, cross-border recognition,

and U.S. positions on electronic

signatures; whether the Advisory

Committee should endorse for U.S.

signature and ratification the 1996

Hague Convention on Protection of

Children; possible PIL topics at the next

O.A.S. Specialized Conference on

Private International Law (CIDIP–VI);

the proper role non-governmental

parties should play in international

bodies such as the U.N.; the Hague

Conventions on intercountry adoption

and international child abduction; the

prospects for a Hague convention on