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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-34941; International Series Release No. 744; File No.

SR-NASD-94-51]

Self-Regulatory Organizations; Notice of Filing of Proposed Rule

Change by National Association of Securities Dealers, Inc. Relating to

Amendments to Parts VI and X of Schedule C of the NASD By-Laws Relating

to Foreign Finders and Foreign Associates

November 4, 1994.

Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934

(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on

September 27, 1994, the National Association of Securities Dealers,

Inc. (``NASD'' or ``Association'') filed with the Securities and

Exchange Commission (``SEC'' or ``Commission'') the proposed rule

change as described in Items I, II, and III below, which Items have

been prepared by the NASD. 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 NASD is proposing to amend Parts VI and X of Schedule C of the

NASD By-Laws relating to foreign finders and foreign associates. Below

is the text of the proposed rule change. Proposed new language is

italicized and proposed deletions are bracketed.

PART VI

PERSONS EXEMPT FROM REGISTRATION

* * * * *

(2) Member firms, and persons associated with a member, may pay to

nonregistered foreign persons transaction-related compensation based

upon the business of customers they direct to member firms if the

following conditions are met:

(a) the member firm has assured itself that the nonregistered

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, and has further assured itself that the compensation

arrangement does not violate applicable foreign law;

(b) the finders are foreign nationals (not U.S. citizens) or

foreign entities domiciled abroad;

(c) the customers are foreign nationals (not U.S. citizens) or

foreign entities domiciled abroad transacting business in either

foreign or U.S. securities;

(d) customers receive a descriptive document, similar to that

required by Rule 206(4)-3(b) of the Investment Advisers Act of 1940,

that discloses what compensation is being paid to finders;

(e) customers provide written acknowledgement to the member firm of

the existence of the compensation arrangement and that such

acknowledgement is retained and made available for inspection by the

Association;

(f) records reflecting payments to finder are maintained on the

member firm's books and actual agreements between the member firm and

persons compensated are available for inspection by the Association;

and

(g) the confirmation of each transaction indicates that a referral

or finder's fee is being paid pursuant to an agreement.

PART X

FOREIGN ASSOCIATES

All persons associated with a member who are designated as Foreign

Associates shall [not] be required to be registered [and] but shall be

exempt from the requirement to pass a Qualification Examination.

* * * * *

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 NASD 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 NASD 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

At its January 1994 meeting, the NASD Board of Governors approved

the issuance of a Notice to Members soliciting comments on amendments

to the foreign associate provisions in Part X of Schedule C to the NASD

By-Laws. These proposed amendments would substantially conform NASD

requirements for ``foreign finders'' to certain interpretations under

New York Stock Exchange (NYSE) Rule 345 recently approved by the

Commission in SEC Rel. No. 34-32431; File No. SR-NYSE-92-33. These

amendments would permit the payment of transaction-related compensation

to non-registered foreign finders who are not subject to the

jurisdiction of U.S. securities laws, subject to certain disclosure and

recordkeeping requirements by the U.S. broker-dealer.

The proposed amendment to Part VI of Schedule C of the NASD By-Laws

is limited in application only to compensation arrangements that

involve foreign (i.e., non-U.S. citizens) finders who are domiciled

abroad and customers who are not U.S. citizens or U.S. institutions

that are also domiciled abroad. Additionally, as one of the conditions

under the proposed interpretation, customers must acknowledge receipt

of information, in the form of a descriptive document, regarding the

compensation arrangement. If all the specified conditions of the

proposed interpretation are met, members may pay transaction-related

compensation to nonregistered foreign finders based on the business of

non-U.S. customers that the finders refer to the member. The proposed

amendment would also require member firms to verify that these foreign

finders are not subject to a disqualification as defined in Article II,

Section 4 of the NASD By-Laws.

While the foreign finders' sole involvement would be the initial

referral to a member or a member organization, compensation could be

made on an ongoing basis and tied to such variables as the level of

business generated or assets under control. All accounts referred by

such foreign finders would be carried on the books of the member.

The proposed amendment will allow member organizations the

opportunity to enhance their competitive position in foreign countries

where new accounts are routinely opened on a referral basis with

ongoing compensation.

The proposed amendment to Part X of Schedule C of the By-Laws would

allow members to continue to use Part X to register Foreign Associates

with the NASD but would require members to file Form U-4 to register

such persons.

The NASD believes that the proposed rule change is consistent with

the provisions of Section 15A(b)(6) of the Act in that the proposed

changes to Parts VI and X of Schedule C of the By-Laws will impose

substantial regulatory requirements on the relationship between members

and foreign finders while at the same time allowing members to use

foreign finders to expand the members' business opportunities overseas.

(B) Self-Regulatory Organization's Statement on Burden on Competition

The NASD does not believe that the proposed rule change will result

in any burden on competition that is not necessary or appropriate in

furtherance of the purposes of the Act, as amended.

(C) Self-Regulatory Organization's Statement on Comments on the

Proposed Rule Change Received From Members, Participants, or Others

The Association received 7 letters commenting on Notice to Members

94-6, the proposed amendments to the Interpretation. The commenters

include the Securities Industry Association (SIA), two law firms, and

four broker-dealers. Below is a summary of the more significant and/or

recurring issues raised in the letters and the NASD's position in

connection with the same.

One letter dealt with the narrow issue of whether the drafting of

the foreign associate provisions inadvertently conflicted with the

provisions of SEC Rule 15a-6. The NASD does not believe the amended

proposal conflicts with Rule 15a-6.

Of the remaining six letters, one was from the SIA and another from

counsel representing five large, full service member firms. All of

these comment letters supported the NASD's attempt to comport its

requirements to the disclosure provisions of the interpretation to NYSE

Rule 345, but opposed both the requirement to include foreign finders

under the definition of foreign associates and the provision subjecting

such persons to full U-4 registration. The commenters argued that

foreign finders are not associated persons of a member. The commenters

noted that, if NASD rules required such persons to file U-4

registration documents, the foreign finders would likely refuse to do

so and would redirect their business to foreign broker-dealers and

banks. Such a result would contradict the purpose of the NYSE

interpretation which was designed to permit U.S. broker-dealers to be

more competitive in global markets where finding arrangements are

common practice. The commenters also noted that it would be very

difficult, if not impossible, for NASD members to exert meaningful

supervision over foreign finders even if they did file U-4 registration

documents, because these individuals and firms view themselves as

independent contractors not otherwise subject to supervision of the

broker-dealer. Furthermore, the filing of such documents through a firm

may raise regulatory, tax and other issues in the country of domicile

for the foreign finders and increase the overall burden of regulation

of member firms.

The NASD Board of Governors (``Board'') found the commenters'

arguments persuasive and developed a different approach to the foreign

finder issue. In keeping with a recommendation from counsel for the

five large member firms, the Board determined to include foreign

finders under the portion of Schedule C that identifies persons exempt

from registration and to incorporate the information disclosure

requirements of the interpretation to NYSE Rule 345 into the section.

The Board also added a provision requiring firms to take reasonable

steps to assure that foreign finders are not subject to the

disqualification provisions of Article II, Section 4 of the NASD By-

Laws. The Board also decided it is important to coordinate its

activities with the NYSE to ensure consistency in the NASD's

requirements with those of the NYSE.

III. Date of Effectiveness of the Proposed Rule Change and Timing for

Commission Action

Within 35 days of the date of publication of this notice in the

Federal Register or within such longer period (i) as the Commission may

designate up to 90 days of such date if it finds such longer period to

be appropriate and publishes its reasons for so finding or (ii) as to

which the self-regulatory organization consents, the Commission will:

A. By order approve such proposed rule change, or

B. Institute proceedings to determine whether the proposed rule

change should be disapproved.

IV. Solicitation of Comments

Interested 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 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-94-51 and

should be submitted by December 1, 1994.

For the Commission, by the Division of Market Regulation,

pursuant to delegated authority.\1\

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\1\17 CFR 200.30-3(a)(12).

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Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 94-27890 Filed 11-9-94; 8:45 am]

BILLING CODE 8010-01-M