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[Federal Register Volume 60, Number 33 (Friday, February 17, 1995)]
[Notices]
[Pages 9417-9418]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-4045]

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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35361 International Series Release No. 784; File No. 
SR-NASD-94-51]

Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Order Approving Proposed Rule Change Relating to 
Amendments to Parts VI and X of Schedule C of the NASD By-Laws Relating 
to Foreign Finders and Foreign Associates

February 13, 1995.
    On September 27, 1994, the National Association of Securities 
Dealers, Inc. (``NASD'' or ``Association'') filed with the Securities 
and Exchange Commission (``SEC'' or ``Commission'') a proposed rule 
change pursuant to Section 19(b)(1) of the Securities Exchange Act of 
1934 (``Act'')\1\ and Rule 19b-4 thereunder.\2\ The rule change amends 
Parts VI and X of Schedule C of [[Page 9418]] the NASD By-Laws\3\ 
relating to foreign finders and foreign associates.

    \1\15 U.S.C. Section 78s(b)(1).
    \2\17 CFR 240.19b-4.
    \3\MASD Manual, Schedules to the By-Laws, Schedule C, Parts VI 
and X, (CCH) Paras.  1787, 1791.
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    Under the rule as amended, member firms and persons associated with 
a member will be permitted to pay transaction-related compensation to 
non-registered foreign persons based upon the business of customers 
such persons direct to member firms. The following conditions must be 
met in order for the ``foreign finder'' exemption to apply: (1) the 
member firm must assure itself that the non-registered foreign person 
who will receive the compensation (the finder) is not required to 
register in the U.S. as a broker/dealer nor is subject to a 
disqualification as defined in Article II, Section 4 of the NASD By-
Laws;\4\ (2) the member firm must further assure itself that the 
compensation arrangement does not violate applicable foreign law; (3) 
the finder must be a foreign national or a foreign entity domiciled 
abroad; (4) the customers directed to the member firm by the finder 
must be foreign nationals or foreign entities domiciled abroad 
transacting business in either foreign or U.S. securities; (5) the 
customers must receive a descriptive document that discloses the 
compensation being paid to the finder; (6) the customers must provide 
written acknowledgement of the existence of the compensation 
arrangement to the member firm and such acknowledgement must be 
retained and available for inspection by the Association; (7) records 
reflecting payments to the finder must be maintained on the member 
firm's books and the actual agreement between the member firm and the 
finder must be available for inspection by the Association; and (8) the 
confirmation of each transaction must indicate that a finder's fee is 
being paid pursuant to a compensation arrangement.

    \4\NASD Manual, By Laws, Article II, Sec. 4, (CCH) para. 1124.
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    The amendment also will change the requirements with respect to 
foreign associates. Those persons designated as foreign associates 
pursuant to Part X of Schedule C of the NASD By-Laws\5\ now will be 
subject to U-4 registration but still will not be required to pass a 
qualification examination.

    \5\Supra, note 3.
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    Notice of the proposed rule change, together with its terms of 
substance was provided by issuance of a Commission release\6\ and by 
publication in the Federal Register.\7\ No comments were received in 
response to the notice. This order approves the proposed rule change.

    \6\Securities Exchange Act Release No. 34941 (November 4, 1994).
    \7\59 FR 56102 (November 10, 1994).
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    As the NASD indicated in its rule filing, the scope of permissible 
business activities and the associated regulatory requirements differ 
between foreign finders and foreign associates. The NASD clarified 
these differences in a letter to the Commission.\8\ The NASD states 
that, ``[t]he foreign associate will be registered with the NASD and 
will be deemed an associated person or employee of the member. The 
foreign associate would therefore be allowed to act in any registered 
capacity on behalf of the member [consistent with its designation as a 
foreign associate]. This could include acting as a trader or being the 
registered person responsible for servicing the accounts of [a] foreign 
national. The foreign finder would not be considered an associated 
person of the member and [its] activities would, therefore, be limited 
to those discussed in the rule filing.\9\ Under the rule as amended, 
the sole involvement of a foreign finder in the business of a member 
firm will be the initial referral of non-U.S. customers to the firm.

    \8\Letter from Craig L. Landauer, Associate General Counsel, 
NASD, to Mark P. Barracca, Branch Chief, SEC, (Feb. 8, 1995).
    \9\Id.
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    The Commission has determined to approve the NASD's proposal. The 
Commission finds that the rule change is consistent with the 
requirements of the Act and the rules and regulations promulgated 
thereunder applicable to the NASD, including the requirements of 
Section 15A(b)(6) of the Act.\10\ Section 15A(b)(6) requires, in part 
that the rules of a national securities association be designated to 
prevent fraudulent and manipulative acts and practices; to promote just 
and equitable principles of trade; to remove impediments to and perfect 
the mechanism of a free and open market and a national market system, 
and, in general, to protect investors and the public interest.

    \10\15 U.S.C. Section 78o-3(b)(6).
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    The Commission finds that the amendments to Parts VI and X of 
Schedule C to the NASD By-Laws\11\ are consistent with the foregoing 
statutory provision. The addition of Part VI, Section 2 will allow 
member firms to use foreign finders to expand overseas business 
opportunities while requiring the maintenance of necessary safeguards 
for investor protection. Further, the changes to Part X of Schedule C 
will improve regulatory oversight of member firms and their foreign 
associates. Although foreign associates will continue to be free of the 
requirement of taking a qualification examination, the amendment will 
require foreign associates to be subject to U-4 registration.

    \11\Supra, note 3.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change, SR-NASD-94-51 be, and hereby is, 
approved.

    For the Commission, by the Division of Market Regulation 
pursuant to delegated authority.\12\

    \12\17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-4045 Filed 2-16-95; 8:45 am]
BILLING CODE 8010-01-M
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