On August 29, 2003, the Securities and Exchange Commission (SEC) approved the adoption of Rule 2370 of the National Association of Securities Dealers (“NASD”), which prohibited registered persons from borrowing money from or lending money to a ...

Office of Financial Regulation

RULE NO.: RULE TITLE:

69W-600.013 Prohibited Business Practices for Dealers and Their Associated Persons

PURPOSE AND EFFECT: On August 29, 2003, the Securities and Exchange Commission (SEC) approved the adoption of Rule 2370 of the National Association of Securities Dealers (“NASD”), which prohibited registered persons from borrowing money from or lending money to a customer unless certain criteria were met. The NASD subsequently adopted amendments to NASD Rule 2370, which were approved by the SEC on February 18, 2004. Rule 69W-600.013, F.A.C., is being amended to allow registered persons to borrow from or lend to customers under certain conditions. These rule amendments are based on NASD Rule 2370. Rule 69W-600.13 is also being amended to reflect that a violation of Regulation SHO, as adopted by the SEC under the Securities and Exchange Act of 1934, is a prohibited business practice. The rule is also being amended to update references to applicable SEC and self-regulatory rules adopted by reference.

SUMMARY: Rules governing lending arrangements of funds between registered persons of dealers and customers have been promulgated at the national level by the NASD. The rule proposed by the Office is based on the amended NASD Rule 2370, which has been approved by the Securities and Exchange Commission. This rule amendment exempts some lending arrangements involving a registered person of a broker dealer and a customer from being a prohibited business practice. The rule is also being amended to reflect that a violation of Regulation SHO, as adopted by the SEC under the Securities and Exchange Act of 1934, is a prohibited business practice.

SUMMARY OF STATEMENT OF ESTIMATED REGULATORY COSTS: No statement of estimated regulatory cost has been prepared. Any person who wishes to provide information regarding the statement of estimated regulatory costs, or to provide a proposal for a lower cost regulatory alternative, must do so in writing within 21 days of this notice.

SPECIFIC AUTHORITY: 517.03(1) FS., 517.081 FS., 517.1217 FS.

LAW IMPLEMENTED 517.12(1) FS., 517.081 FS., 517.1217 FS., 517.161(1) FS.

IF REQUESTED WITHIN 21 DAYS OF THE DATE OF THIS NOTICE, A HEARING WILL BE SCHEDULED AND ANNOUNCED IN THE FAW.

THE PERSON TO BE CONTACTED REGARDING THE PROPOSED RULE IS: Bridget D. Dervish, Area Financial Manager, Bureau of Securities Regulation, Room 664, Fletcher Building, 200 East Gaines Street, Tallahassee, Florida 32399-0374 [phone]

THE FULL TEXT OF THE PROPOSED RULE IS:

 

69W-600.013 Prohibited Business Practices for Dealers and Their Associated Persons.

(1) The following are deemed demonstrations of unworthiness by a dealer under Section 517.161(1)(h), F.S., without limiting that term to the practices specified herein:

(a) Causing any unreasonable delay in the delivery of securities purchased by any of its customers, or in the payment upon request of free credit balances reflecting complete transactions of any of its customers;

(b) Inducing trading in a customer’s account which is excessive in size or frequency in view of the financial resources and character of the account;

(c) Recommending to a customer the purchase, sale or exchange of any security without reasonable grounds to believe that the recommendation is suitable for the customer on the basis of information furnished by the customer after reasonable inquiry concerning the customer’s investment objectives, financial situation and needs, and any other information known by the dealer;

(d) Executing a transaction on behalf of a customer without authority to do so;

(e) Exercising any discretionary power in effecting a transaction for a customer’s account without first obtaining written discretionary authority from the customer, unless the discretionary power relates solely to the time and/or price for the execution of orders;

(f) Extending, arranging for, or participating in arranging for credit to a customer in violation of the provisions of Regulation T (12 CFR 220.1-220.131 220.12, inclusive) promulgated by the Federal Reserve Board, as such provisions existed on February 1, 2006 July 1, 2003;

(g) Executing any transaction in a margin account without obtaining from its customer a written margin agreement prior to settlement date for the initial transaction in the account;

(h) Failing to segregate customers’ free securities or securities in safekeeping;

(i) Hypothecating a customer’s securities in violation of SEC Rule 8c-1 (17 CFR 240.8c-1), as such rule existed on February 1, 2006 July 1, 2003;

(j) Charging its customer an unreasonable commission or service charge in any transaction executed as agent for the customer;

(k) Entering into a transaction for its own account with a customer with an unreasonable mark-up or mark-down;

(l) Entering into a transaction with or for a customer at a price not reasonably related to the current market price;

(m) Failing to execute a customer’s order;

(n) Executing orders for the purchase by a customer of securities not registered under Section 517.081 or 517.082, F.S., unless the securities are exempted under Section 517.051, F.S., or the transaction is exempted under Section 517.061, F.S.;

(o) Representing itself as a financial or investment planner, consultant, or advisor, when the representation does not fairly describe the nature of the services offered, the qualifications of the person offering the services, and the method of compensation for the services;

(p) With respect to any customer, transaction or business in this state, violating:

1. Any by-law, schedule thereto, rule, or appendix thereto, of the National Association of Securities Dealers (“NASD”), interpreted in accordance with the guidelines, policies, and interpretations of the NASD or SEC, including: the Conduct Rules; the Marketplace Rules; and the Uniform Practice Code, as published in the NASD Manual as of February 1, 2006 July 1998 and any amendments as existed on July 1, 2003;

2. For members of the New York Stock Exchange, Rule 405, 412, or 435, or 445 of the New York Stock Exchange, as such rules existed on February 1, 2006July 1, 2003, interpreted in accordance with the guidelines, policies, and interpretations of the NYSE or SEC;

3. Sections 2, 4, 5, or 6 of the Securities Act of 1933 or SEC Rules 134 (17 CFR 230.134); 134a (17 CFR 230.134a); 135a (17CFR 230.135a); 144 (17 CFR 230.144); 144A (17 CFR 230.144A); 156 (17 CFR 230.156); 419 (17 CFR 230.419); 481 (17 CFR 230.481); or 482 (17 CFR 230.482) promulgated pursuant thereto, as such provisions existed on February 1, 2006 July 1, 2003, interpreted in accordance with the guidelines, policies, and interpretations of the NASD or SEC;

4. Section 15(b)(4)(E) of the Securities Exchange Act of 1934 (15 U.S.C.A. § 78o) or REG SHO (17 CFR 242.200 through 242.203) as it existed on February 1, 2006 July 1, 2003; or

5. Any rule of the Municipal Securities Rulemaking Board (“MSRB”) including the Definitional Rules (Rules D-1 through D-11, inclusive), and the General Rules with the exception of Rule G-35 (Rules G-1 through G-34, inclusive), promulgated pursuant to section 15B of the Securities Exchange Act of 1934, as such rules existed on February 1, 2006 July 1, 2003, interpreted in accordance with the guidelines, policies, and interpretations of the MSRB, NASD, or SEC;

6. To the extent that any of the rules described in subparagraphs 1. through 5. of this section or their interpretation by the NASD, NYSE, MSRB, or SEC, as appropriate, conflict or are inconsistent with other provisions of the Florida Securities and Investor Protection Act or rules promulgated pursuant thereto, this paragraph of this rule shall not be deemed controlling;

(q) Failing to furnish to a customer purchasing securities in an offering, not later than the date of confirmation of the transaction, either a final prospectus or a preliminary prospectus and an additional document, which together include all information set forth in the final prospectus;

(r) Introducing customer transactions on a “fully disclosed” basis to another dealer that is not registered under Chapter 517, F.S., unless the customer is a person described in Section 517.061(7), F.S.;

(s) Recommending to a customer that the customer engage the services of an investment advisor that is not registered or exempt from registration under Chapter 517, F.S., unless the customer is a person described in Section 517.061(7), F.S.;

(t) Recommending to a customer that the customer engage the services of an investment advisor in connection with which the dealer receives a fee or remuneration (other than directed business) from the investment advisor, except as permitted in Rule 69W-600.003, F.A.C.;

(u) Selling or offering for sale any security in a transaction exempt from registration pursuant to Section 517.061(17)(a)1., F.S., where the issuer of such securities has not filed with the SEC within the specified period of time all reports required by Sections 13 or 15(d) of the Securities Exchange Act of 1934, as such sections existed on February 1, 2006 July 1, 2003;

(v) Giving false or otherwise misleading customer information to any financial institution or regulatory agency.

(2) The following are deemed demonstrations of unworthiness by an associated person of a dealer under Section 517.161(1)(h), F.S., without limiting that term to the practices specified herein:

(a) Borrowing money or securities from a customer; except when persons are in compliance with NASD Rule 2370(a)(1), (a)(2)(a)-(c) only, and NASD Rule 2370(b)-(c), as such rules existed on February 1, 2006.

(b) Acting as a custodian for money, securities or an executed stock power of a customer;

(c) Effecting transactions in securities, or investments as defined by Section 517.301(2), F.S., not recorded on the regular books or records of the dealer, which the associated person represents, unless the transactions are disclosed to, and authorized in writing by, the dealer prior to execution of the transactions;

(d) Operating an account under a fictitious name, unless disclosed to the dealer, which the associated person represents;

(e) Sharing directly or indirectly in profits or losses in the account of any customer without the written authorization of the customer and the dealer, which the associated person represents;

(f) Dividing or otherwise splitting commissions, profits or other compensation in connection with the purchase or sale of securities in this state with any person not also licensed as an associated person for the same dealer, or for a dealer under direct or in indirect common control;

(g) Failing to furnish to each offeree of a SCOR registration a copy of the “Florida Guide to Small Business Investments”; and

(h) Engaging in any of the practices specified in paragraph (1)(b), (c), (d), (e), (f), (g), (m), (n), (o), (p), (q), (s), (t), (u), or (v).

Specific Authority 517.03(1) FS., 517.1217 FS. Law Implemented 517.081 FS., 517.1217 FS., 517.161(1) FS. History–New 12-5-79, Amended 9-20-82, Formerly 3E-600.13, Amended 8-1-91, 6-16-92, 1-11-93, 11-7-93, 5-5-94, 9-9-96, 10-20-97, 1-25-00, 10-30-03, and _______.

 

NAME OF PERSON ORIGINATING PROPOSED RULE: Bridget D. Dervish, Area Financial Manager, Bureau of Securities Regulation

NAME OF SUPERVISOR OR PERSON WHO APPROVED PROPOSED RULE: Financial Services Commission

DATE PROPOSED RULE APPROVED BY AGENCY HEAD: February 14, 2006

DATE NOTICE OF PROPOSED RULE DEVELOPMENT PUBLISHED IN FAW: November 23, 2005

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