[Federal Register Volume 62, Number 217 (Monday, November 10, 1997)]
[Notices]
[Pages 60542-60547]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-29600]


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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

[[Page 60543]]

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 By-
Laws.
(c) Standards for Member Conduct
    No member shall conduct broker-dealer 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:

<bullet> Not FDIC Insured
<bullet> No Bank Guarantee
<bullet> 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:

<bullet> Radio broadcasts of 30 seconds or less;
<bullet> Electronic signs, including billboard-type 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
<bullet> 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,

[[Page 60544]]

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.
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    \1\ NASD Notice to Members 94-94.
    \2\ See 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).
    \3\ Securities Exchange Act Release No. 36980 (March 15, 1996), 
61 FR 11913.
    \4\ See, 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).
    \5\ See, 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).
    \6\ Securities Exchange Act Release No. 38506 (April 14, 1997), 
62 FR 19378.
    \7\ See 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.
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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 broker-dealer'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 broker-dealer 
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.
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    \8\ See, 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).
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    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 anti-
competitive, 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

[[Page 60545]]

information that would apply to all members.\9\
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    \9\ See NASD Notice to Members 97-12.
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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.
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    \10\ Interpretation of the Interagency Statement (September 12, 
1995).
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    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\
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    \11\ For 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).
    \12\ See Rule 2350(c)(4), supra.
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4. Compensation of Registered/Unregistered Persons
    The original rule proposal stated that members may not provide cash 
or non-cash 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\
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    \13\ See e.g., ABA Letter, supra note 5.
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    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\
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    \14\ See NASD Notice to Members 97-11.
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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\
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    \15\ See Rule 2350(c)(5), supra.
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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.
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    \16\ Supra note 7.
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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\
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    \17\ See 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'').
    \18\ See 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'').
    \19\ See NASD Notice to Members 97-26.
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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

[[Page 60546]]

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 non-retail 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.''
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    \20\ See 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.
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    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.
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    \21\ See Letter from Sarah A. Miller, Senior Government 
Relations Counsel, American Bankers Association, to Jonathan Katz, 
Secretary, SEC (May 12, 1997) (``1997 ABA Letter'').
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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.
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    \22\ The 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).
    \23\ See 1997 ABA Letter, supra note 21, and 1997 ICI Letter, 
supra note 17.
    \24\ See 1997 CUSO Letter, supra note 18.
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    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.
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    \25\ Id.
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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.
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    \26\ See Letter from Kimberly Crichton, General Counsel and Vice 
President, Citicorp Investment Services, to Jonathan Katz, 
Secretary, SEC (May 12, 1997).
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    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\
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    \27\ See 1997 Key Investments Letter, supra note 17.
    \28\ See NASD Rule 2210.
    \29\ See Letter from Bill Sones, President, Independent Bankers 
Association of America, to Jonathan Katz, Secretary, SEC (May 12, 
1997).
    \30\ But see NASD Notice to Members 97-37 (requesting comment on 
proposed definition of correspondence for rules regarding 
communications with the public).
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    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

[[Page 60547]]

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.
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    \31\ See 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).
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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.
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    \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).
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    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.

    \34\ 15 U.S.C. 78s(b)(2).
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    By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-29600 Filed 11-7-97; 8:45 am]
BILLING CODE 8010-01-M