WASHINGTON -- The National Association of Securities Dealers has assured House lawmakers that dealers in government securities are committed to sales practice rules that protect investors, including state and local governments.
Richard Ketchum, the association's chief operating officer, conveyed the assurance in a Nov. 4 letter sent to Rep. Edward Markey, D-Mass. chairman of the House Energy and Commerce telecommunications and finance subcommittee.
"We have worked with the Congress for several years to insure that customers of government securities transactions secure the regulatory protections of the NASD rules of fair practice that have applied to other securities transactions for years," wrote Ketchum. "We continue to be strongly committed to that principle."
In a letter sent last month to the association, Markey voiced concern that sales practice rules proposed last summer by the dealers would generally relieve them of the obligation to make suitable recommendations to institutional investors. Similar concerns have been raised by the Government Finance Officers Association.
The deadline for submitting comments to the NASD was Nov. 1. The dealers group must next forward its recommendations to the Securities and Exchange Commission, which in turn must go through another comment period and consult with the Treasury Department before taking final action.
The issue of deciding when dealers meet their suitability obligations to institutional customers is a tricky one, because some serve sophisticated state and local customers who are adept and knowledgeable about the Treasury market. Other municipal governments rely heavily on a single dealer for advice.
Ketchum said the dealers had a variety of views about their obligations under the suitability rules. But he told Markey that a dealer would be absolved of the suitability rules in dealing with institutional customers only if all of the following conditions are met.
The customer must:
* Have resources and procedures sufficient to make an independent investment decision.
* Have one or more experienced professionals charged with recommending investments on behalf of the institution.
* Invest through more than one dealer, taking into account numerous alternative investment recommendations before making a decision,
* Use the services of one or more investment advisers or bank trust departments with duties based on an appropriate investment strategy.
* Use alternative market information, such as a quotation service or research materials from independent SOurces.
Markey also suggested that the way the rules were written, dealers would be able to escape their suitability obligations if a customer did not indicate that the dealer's recommendation was a "primary consideration" in making an investment choice.
However, the dealers group said that language on that pan of the proposed rule was "unclear and somewhat confusing."
When a dealer decides that the customer is not relying on the dealer for advice, such a finding must be "on a transaction-by-transaction basis taking into consideration all relevant circumstances, With the burden of proof falling upon the member," said Ketchum.
"Thus, our examiners would start from a point of there being reliance unless proyen otherwise by the member." he said.
Ketchum also revealed that the association had begun discussions with the New York Stock Exchange and the Municipal Securities Rulemaking Board to avoid having different suitability rules among the various regulators. The possibility of conflicting rules was raised by Markey in his Oct. 7 letter to the dealers.
