NOTE: Stipulation of Facts and Consent to Penalty (SFC), Offers of Settlement (OS) and Letters of Acceptance, Waiver, and Consent (AWC) are entered into by Respondents without admitting or denying the allegations, but consent is given to the described sanctions and to the entry of findings.

2006
UNDISCLOSED SETTLEMENTS/GUARANTEEING AGAINST LOSSES

NASD Conduct Rule 2370
NYSE Rule 352

 

NASD Conduct Rule 2370: Borrowing From or Lending to Customers 

(a) No person associated with a member in any registered capacity may borrow money from or lend money to any customer of such person unless: 

(1) the member has written procedures allowing the borrowing and lending of money between such registered persons and customers of the member; and 

(2) the lending or borrowing arrangement meets one of the following conditions: 

(A) the customer is a member of such person's immediate family; 

(B) the customer is a financial institution regularly engaged in the business of providing credit, financing, or loans, or other entity or person that regularly arranges or extends credit in the ordinary course of business; 

(C) the customer and the registered person are both registered persons of the same member firm; 

(D) the lending arrangement is based on a personal relationship with the customer, such that the loan would not have been solicited, offered, or given had the customer and the associated person not maintained a relationship outside of the broker/customer relationship; or 

(E) the lending arrangement is based on a business relationship outside of the broker-customer relationship.

(b) Procedures

(1) Members must pre-approve in writing the lending or borrowing arrangements described in subparagraphs (a)(2)(C), (D), and (E) above.

(2) With respect to the lending or borrowing arrangements described in subparagraph (a)(2)(A) above, a member's written procedures may indicate that registered persons are not required to notify the member or receive member approval either prior to or subsequent to entering into such lending or borrowing arrangements.

(3) With respect to the lending or borrowing arrangements described in subparagraph (a)(2)(B) above, a member's written procedures may indicate that registered persons are not required to notify the member or receive member approval either prior to or subsequent to entering into such lending or borrowing arrangements, provided that, the loan has been made on commercial terms that the customer generally makes available to members of the general public similarly situated as to need, purpose and creditworthiness. For purposes of this subparagraph, the member may rely on the registered person's representation that the terms of the loan meet the above-described standards.

(c) The term immediate family shall include parents, grandparents, mother-in-law or father-in-law, husband or wife, brother or sister, brother-in-law or sister-in-law, son-in law or daughter-in-law, children, grandchildren, cousin, aunt or uncle, or niece or nephew, and shall also include any other person whom the registered person supports, directly or indirectly, to a material extent.


 

NYSE Rule 352: Guarantees, Sharing in Accounts, and Loan Arrangements


Prohibitions Against Guarantees

(a) No member organization shall guarantee or in any way represent that it will guarantee any customer against loss in any account or on any transaction; and no member, allied member, registered representative or officer shall guarantee or in any way represent that either he or she, or his or her employer, will guarantee any customer against loss in any customer account or on any customer transaction. The prohibitions in this paragraph extend to the payment, in whole or in part, of a debit balance.

Prohibition Against Sharing in Profits and Losses

(b) Except as otherwise provided by this Rule, no member, member organization, allied member, officer, or any other person acting in the capacity of a registered representative shall, directly or indirectly, (i) take or receive or agree to take or receive a share in the profits, or (ii) share or agree to share in any losses, in any customer's account or of any transaction effected therein.

Joint Accounts and Order Errors

(c) Paragraph (b) of this Rule shall not preclude a member not associated with a member organization, or a member organization or, with member organization consent, a member associated with such member organization, an allied member, or other person acting in the capacity of a registered representative, from participating with a customer in a joint account and sharing in the profits or losses therein in direct proportion to financial contributions made to such account. (See Rule 93 for reporting and approval requirements concerning participation in joint accounts by members, member organizations and allied members.) Nor shall it preclude a member not associated with a member organization or a member organization from sharing or agreeing to share any losses in a customer account if it has been established that the loss was caused in whole or in part by an error resulting from the action or inaction of such member, allied member, member organization, or person associated therewith (See also Rule 134).

Certain Investment Advisory Arrangements

(d)(1) Section 205 of the Investment Advisers Act of 1940 (the "Advisers Act") and the rules thereunder set forth provisions relating to advisory compensation arrangements applicable to investment advisers registered with the Securities and Exchange Commission ( "SEC") unless exempt pursuant to Section 203(b) of the Adviser's Act. Under certain circumstances, such arrangements may provide for the adviser to receive a performance-based fee, e.g., sharing in capital gains or losses of the assets under management. Where a participatory compensation arrangement is entered into by a member organization that itself is registered with the SEC as an investment adviser, and such arrangement complies with Section 205 of the Advisers Act and the rules thereunder, the arrangement will not violate Rule 352(b) if the arrangement arises in the context of such member organization's investment advisory relationship with the customer. Member organizations may not have such participatory compensation arrangements if they are only acting as a broker for the customer.

(2) To the extent that any of the above described conditions of paragraph (d)(1) are not fully satisfied, the general Rule 352(b) prohibition will apply. All advisory compensation arrangements should be reviewed by member organizations and their counsel in light of applicable State and Federal law (e.g., ERISA).

Limitations on Borrowing From or Lending to Customers

(e) A person associated with a member organization in any registered capacity may borrow money from or lend money to a customer of such person only if the member organization has written supervisory procedures permitting the borrowing and lending of money between such registered persons and their customers; and the lending or borrowing arrangement meets one of the following conditions:

(1) the customer is a member of such registered person's immediate family; or

(2) the customer is a financial institution regularly engaged in the business of providing credit, financing, or loans, or other entity or person that regularly arranges or extends credit in the ordinary course of business; or

(3) the customer and the registered person are both registered persons of the same member organization; or

(4) the lending arrangement is based on a personal relationship with the customer, such that the loan would not have been solicited, offered, or given had the customer and the registered person not maintained a relationship outside of the broker/customer relationship; or

(5) the lending arrangement is based on a business relationship outside of the broker-customer relationship.

Loan Procedures

(f) The following loan procedures shall apply:

(1) Member organizations must pre-approve in writing the lending or borrowing arrangements described in subparagraphs (e)(3), (4), and (5) above, except that no pre-approval is required for loans totaling $100 or less between registered persons pursuant to subparagraph (e)(3).

(2) With respect to the lending or borrowing arrangements described in subparagraph (e)(1) above, a member organization's written procedures may indicate that registered persons are not required to notify the member organization or receive member organization approval either prior to or subsequent to entering into such lending or borrowing arrangements.

(3) With respect to the lending or borrowing arrangements described in subparagraph (e)(2) above, a member organization's written procedures may indicate that registered persons are not required to notify the member organization or receive approval either prior to or subsequent to entering into such lending or borrowing arrangements, provided that the loan has been made on commercial terms that the customer generally makes available to members of the general public similarly situated as to need, purpose and creditworthiness. For purposes of this subparagraph, member organization may rely on the registered person's written representation that the terms of the loan meet the above-described standards.

(g) For purposes of this Rule, the term "immediate family" shall include parents, grandparents, mother-in-law or father-in-law, husband or wife, brother or sister, brother-in-law or sister-in-law, son-in law or daughter-in-law, children, grandchildren, cousin, aunt or uncle, or niece or nephew, and shall also include any other person whom the registered person supports, directly or indirectly, to a material extent.

 

 

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