[Federal Register: September 16, 2005 (Volume 70, Number 179)]
[Notices]
[Page 54782-54788]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr16se05-167]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-52403; File No. SR-NASD-2003-104]
Self-Regulatory Organizations; National Association of Securities
Dealers, Inc.; Order Approving Proposed Rule Change and Amendment Nos.
1, 2, 3, 4, 5 and 6 Thereto Relating to Proposed Uniform Definition of
``Branch Office'' Under NASD Rule 3010(g)(2)
September 9, 2005.
I. Introduction
On July 2, 2003, the National Association of Securities Dealers,
Inc. (``NASD'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to revise the definition of
``branch office'' set forth in NASD Rule 3010(g)(2) and to adopt NASD
IM-3010-1 to provide guidelines on factors to be considered by a member
firm in conducting internal inspections of offices. On October 21,
2003, NASD amended the proposed rule change.\3\ On December 8, 2003,
NASD amended the proposed rule change.\4\
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See letter from Kosha K. Dalal, Assistant General Counsel,
NASD, to Katherine A. England, Assistant Director, Division of
Market Regulation (``Division''), Commission, dated October 21, 2003
(``Amendment No. 1'').
\4\ See letter from Kosha K. Dalal, Assistant General Counsel,
NASD, to Katherine A. England, Assistant Director, Division,
Commission, dated December 8, 2003 (``Amendment No. 2'').
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The proposed rule change, as amended by Amendments Nos. 1 and 2,
was published for comment in the Federal Register on December 16,
2003.\5\ The Commission received 847 comment letters on the proposal,
as amended.\6\ On June 29, 2004, NASD submitted a response to the
comment letters.\7\ On September 20, 2004, NASD amended the proposed
rule change (``Amendment No. 3'').\8\ On March 21, 2005, NASD amended
the proposed rule change (``Amendment No. 4'').\9\ On June 1, 2005,
NASD amended the proposed rule change (``Amendment No. 5'').\10\ On
August 23, 2005, NASD amended the proposed rule change (``Amendment No.
6'').\11\ This order approves the proposed rule change, as amended.
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\5\ See Securities Exchange Act Release No. 48897 (December 9,
2003), 68 FR 70059.
\6\ See letters from Stephen A. Batman, CEO, 1st Global Capital
Corp., dated January 5, 2004 (``1st Global Letter''); Mario
DiTrapani, President, Association of Registration Management, dated
January 6, 2004 (``ARM Letter''); Carl B. Wilkerson, Chief Counsel,
Securities & Litigation, American Council of Life Insurers, dated
December 23, 2003 (``ACLI Letter''); Carl B. Wilkerson, Vice
President & Chief Counsel, Securities & Litigation, American Council
of Life Insurers, dated October 5, 2004 (``ACLI Letter 2''); Charles
Barley, dated January 21, 2004 (``Barley Letter''); Mike Becher,
dated January 21, 2004 (``Becher Letter''); Rod Bieber, dated
January 21, 2004 (``Bieber Letter''); Sherri Branson, Agent, State
Farm Insurance Companies, dated January 26, 2004 (``Branson
Letter''); John R. Claborn, John R. Claborn & Associates, dated
January 21, 2004 (``Claborn Letter''); Charles Ehlert, Rural
Insurance Companies, received February 12, 2004 (``Ehlert Letter'');
Lawrence J. Fowler, Jr., CLU, LUTCF, Nationwide, dated February 2,
2004 (``Fowler Letter''); Michael Garcia, dated January 20, 2004
(``Garcia Letter''); Bob Geis, CLU, Registered Representative, AXA
Network, dated January 28, 2004 (``Geis Letter''); Arthur K. Gruber,
CLU, Registered Representative, AXA Advisors, LLC, dated January 23,
2004 (``Gruber Letter''); Richard A. Gurdjian, dated January 20, 200
(``Gurdjian Letter''); Clark Hall, dated January 21, 2004 (``Hall
Letter''); Joan M. Halstead, CLU, REBC, ChCF, Chartered Financial
Consultant, Halstead Financial Associates, dated January 21, 2004
(``Halstead Letter''); Karen R. Hammond, ChFC, The Hammond Agency,
Inc., dated January 21, 2004 (``Hammond Letter''); Jeffrey K.
Hoelzel, MTL Equity Products, Inc., dated January 28, 2004
(``Hoelzel Letter''); Raymond Howen, Rural Insurance Companies,
received February 11, 2004 (``Howen Letter''); Edwin P. Morrow, CLU,
ChFC, CFP, RFC, President and CEO, International Association of
Registered Financial Consultants, Inc., dated January 21, 2004
(``IARFC Letter''); Gene Imke, dated January 30, 2004 (``Imke
Letter''); Thomas R. Moriarty, President, InterSecurities, Inc.,
dated January 6, 2004 (``InterSecurities Letter''); Jim Jacobsen,
State Farm, received February 9, 2004 (``Jacobsen Letter''); Michael
Lisle, Mutual of Omaha Insurance Company, dated January 21, 2004
(``Lisle Letter''); Carl Lundgren, received March 30, 2004
(``Lundgren Letter''); Peter J. Mersberger, Mersberger Financial
Group, Inc., dated January 27, 2004 (``Mersberger Letter''); Leonard
M. Bakal, Vice President and Compliance Director, Metropolitan Life
Insurance Company, dated January 14, 2004 (``MetLife Letter''); Gary
A. Sanders, National Association of Insurance and Financial
Advisors, dated January 29, 2004 (``NAIFA Letter''); Ralph A.
Lambiase, NASAA President and Director, Connecticut Division of
Securities, North American Securities Administrators Association,
Inc., dated January 6, 2004 (``NASAA Letter''); David Niederbaumer,
CLU, ChFC, Financial Associate, and Matt Niederbaumer, Financial
Associate, Thrivent Financial for Lutherans, dated January 30, 2004
(``Niederbaumer Letter''); Kathy Northrop, dated January 20, 2004
(``Northrop Letter''); Michael Leahy, President, NYLIFE Securities
Inc., dated January 29, 2004 (``NYLIFE Letter''); Gerald J. O'Bee,
CLU, ChFC, CLTC, CSA, Insurance and Financial Services, MassMutual
Financial Group, dated January 26, 2004 (``O'Bee Letter''); Walter
Olshanski, dated January 21, 2004 (``Olshanski Letter''); Minoo
Spellerberg, Compliance Director, Princor Financial Services
Corporation, dated February 6, 2004 (``Princor Letter''); Minnie
Whitmire, Registrations Supervisor, Raymond James & Associates,
Inc., dated January 12, 2004 (``Raymond James Letter''); George
Nelson Ridings, ChFC CLU, dated January 27, 2004 (``Ridings
Letter''); Walter Scott, dated January 21, 2004 (``Scott Letter'');
John Polanin, Jr., Chairman, Self-Regulation and Supervisory
Practices Committee, Securities Industry Association, dated January
9, 2004 (``SIA Letter''); Christopher Shaw, Vice President & Acting
Chief Compliance Officer, Transamerica Financial Advisors, Inc.,
dated January 6, 2004 (``TFA Letter''); John Gilner, Vice President;
Henry H. Hopkins, Vice President; and Sarah McCafferty, Vice
President, T. Rowe Price Investment Services, Inc., dated January 5,
2004 (``T. Rowe Price Letter''); Paul B. Uhlenhop, Lawrence, Kamin,
Saunders & Uhlenhop, L.L.C., dated December 31, 2003 (``Uhlenhop
Letter''); Roy D. Vega, Vega Insurance & Financial Services, dated
January 21, 2004 (``Vega Letter''); Al Villasenor, Unisure Insurance
Services Inc. and Villasenor Insurance Associates, dated January 28,
2004 (``Villasenor Letter''); and Connie Walenta, dated January 21,
2004 (``Walenta Letter''). In addition, the Commission received 756
comment letters from individuals or entities using ``Letter Type A''
and 45 comment letters from individuals or entities using ``Letter
Type B,'' both of which expressed concerns over the effect the
proposed rule change would have on broker-dealers affiliated with
life insurance companies. Letter Types A and B are posted on the
Commission's Internet Web site (http://www.sec.gov/rules/proposed.shtml
).
\7\ See letter from Barbara Z. Sweeney, Senior Vice President
and Corporate Secretary, NASD, to Katherine A. England, Assistant
Director, Division, Commission, dated June 29, 2004 (``NASD Response
Letter'').
\8\ See letter from Patrice Gliniecki, Senior Vice President and
Deputy General Counsel, NASD, to Katherine A. England, Assistant
Director, Division, Commission, dated September 20, 2004. In
Amendment No. 3, NASD revised the language of NASD Rule 3010(g)(2)
to reflect changes made by File No. SR-NASD-2002-162, approved in
Securities Exchange Act Release No. 49883 (June 17, 2004), 69 FR
35092 (June 23, 2004). This was a technical amendment and is not
subject to notice and comment.
\9\ In Amendment No. 4, NASD: (i) amended the proposed
definition of ``branch office'' set forth in NASD Rule 3010(g)(2)(A)
to exclude a member's main office to conform to the definition
proposed by the NYSE in File No. SR-NYSE-2002-34 (NASD rules do not
define ``main office''). The NASD made this change to its rule so
that the rule would be consistent with the NYSE rule and to avoid
confusion for dual members; (ii) added new subparagraph (2)(C) to
NASD Rule 3010(g) to clarify the rules and regulations applicable to
a member's main office; and (iii) designated proposed new text to
Rule 3010(g)(2) as being subparagraph (D). However, Amendment No. 6
deletes the exclusion of a member's main office from the definition
and proposed subparagraph 2(C) to NASD Rule 3010(g) described in
items (i) and (ii) above, respectively. See note 11, infra. NASD
also responded to ACLI Letter II in Amendment No. 4 (``NASD Response
Letter 2''). This was a technical amendment and is not subject to
notice and comment.
\10\ In Amendment No. 5, NASD made minor changes correcting the
grammar, markings, and a cross-reference in the text of the proposed
rule change. This was a technical amendment and is not subject to
notice and comment.
\11\ In Amendment No. 6, NASD deleted (i) the proposed exclusion
from registration as a branch office for main offices of a member
and (ii) proposed subparagraph 2(C) to Rule 3010(g), added in
Amendment No. 4, in order to maintain a uniform proposed definition
of branch office with the NYSE's proposal. NASD also clarified the
effective date of the proposed rule change and made minor technical
changes to the rule text. In addition, NASD responded to comments
relating to remote traders in Amendment No. 6 (``NASD Response
Letter 3''). This was a technical amendment and is not subject to
notice and comment.
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II. Description of Proposed Rule Change
NASD currently defines a branch office as any location identified
by any means to the public or customers as a location at which the
member conducts an investment banking or securities
[[Page 54783]]
business. The current definition contains the following exclusions: (1)
A location identified in a telephone directory, on a business card, or
letterhead; (2) a location referred to in a member advertisement; (3) a
location identified in a member's sales literature; and (4) any
location where a person conducts business on behalf of the member only
occasionally; provided, in each case, that the phone number and address
of the branch office or Office of Supervisory Jurisdiction (``OSJ'')
that supervises the location is also identified.\12\ NASD currently
designates locations from which associated persons work as either
branch offices or unregistered locations. This designation primarily
affects the supervisory responsibilities of, and the fees paid by,
members.
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\12\ An office that is designated a ``branch office'' under NASD
rules must pay an annual registration fee and have a branch manager
on site. A branch office is further classified as an OSJ if any one
of the following enumerated activities occurs at the location: order
execution, maintenance of customer funds and securities, final
approval of new accounts and advertisements, review of customer
orders, and supervision of associated persons at other branch
offices. An office that is designated an OSJ must have a registered
principal on-site and be inspected on an annual basis. NASD Rule
3010(c) provides that each branch office shall be inspected
according to a cycle set forth in the firm's written supervisory and
inspection procedures.
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There is currently no uniform approach among regulators for
classifying locations from which registered representatives regularly
conduct the business of effecting transactions in securities. The
Commission, the New York Stock Exchange, Inc. (``NYSE''), NASD and
state securities regulators all define the term ``branch office''
differently and, as a result, a member must comply with multiple
definitions in each jurisdiction in which it conducts a securities
business. This requires tracking numerous definitions, filing multiple
forms to register and/or renew registration of such locations, meeting
various deadlines, and continually monitoring each jurisdiction for
changes in rules or procedures. Moreover, NASD member firms must
register branch offices with the Commission, NASD, and particular
state(s) by completing Schedule E to Form BD (``Schedule E''), which
NASD staff and state regulators believe does not adequately fulfill
their regulatory needs. In addition, according to NASD, members have
found Schedule E to be a burdensome and time-consuming method by which
to register branch offices.
As a result, NASD has been working with the North American
Securities Administrators Association (``NASAA''), and the NYSE to
reduce the inconsistencies that exist among the various ways in which
locations are defined in order to increase the utility of the Central
Registration Depository (``CRD[supreg]'') as a central branch office
registration system for NASD, other self-regulatory organizations
(``SROs''), and states. The parties reached a core proposed uniform
definition, which largely tracks the Commission's definition of
``office'' in Rules 17a-3 and 17a-4 under the Act (the ``Books and
Records Rules'').\13\ NASD filed the instant proposed rule change and
the NYSE filed a proposed rule change containing a substantially
similar definition of branch office, but containing an additional
limitation on the primary residence exception as discussed below.\14\
In addition, NASD has proposed new Form BR in a separate filing, which
would permit registration of branch offices through the CRD[supreg]
system.\15\
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\13\ 17 CFR 240.17a-3 and 17 CFR 240.17a-4.
\14\ See Securities Exchange Act Release No. 46888 (November 22,
2002), 67 FR 72257 (December 4, 2002) (SR-NYSE-2002-34). The
Commission is simultaneously approving the NYSE's proposed rule
change. See Securities Exchange Act Release No. 52402 (September 9,
2005).
\15\ See Securities Exchange Act Release No. 51742 (May 25,
2005), 70 FR 32386 (June 2, 2005) (SR-NASD-2005-030). See also
Correction, 70 FR 48802 (August 19, 2005) (including language
inadvertently omitted from the first sentence of footnote 3).
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The instant proposal would define a ``branch office'' as any
location where one or more associated persons of a member regularly
conducts the business of effecting any transactions in, or inducing or
attempting to induce the purchase or sale of any security, or any
location held out as such.\16\ The proposed rule change would exclude
from registration as a branch office: (1) A location that operates as a
back office; (2) a representative's primary residence, provided it is
not held out to the public and certain other conditions are satisfied;
(3) a location, other than the primary residence, that is used for less
than 30 business days annually for securities business, is not held out
to the public as an office, and satisfies certain of the conditions set
forth in the primary residence exception; (4) a location of convenience
used occasionally and by appointment; (5) a location used primarily for
non-securities business and from which less than 25 securities
transactions are effected annually; (6) the floor of an exchange; and
(7) a temporary location used as part of a business continuity plan.
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\16\ Amendment No. 6 deleted the exclusion ``other than the main
office'' from the definition of branch office as initially proposed.
The NASD states that this change would supercede any earlier
statements made concerning the registration requirements applicable
to members' main offices under NASD rules. The NASD notes that IM-
1000-4 addresses the need for members to keep their membership
applications current, as well as to properly designate and register
offices of supervisory jurisdiction and branch offices. NASD intends
to propose future amendments to IM-1000-4, assuming the SEC's
approval of this proposed rule change and the proposed new Form BR.
See Amendment No. 6, supra note 11.
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In developing the proposed definition, NASD sought to provide
reasonable exceptions from branch office registration to take into
account technological innovations and current business practices
without compromising the need for investor protection. NASD believes
the proposed exceptions from branch office registration are practically
based while still containing important safeguards and limitations to
protect investors. Further, the primary residence exception contains
significant safeguards, including that: (1) Only one associated person
or associated persons who are members of the same immediate family and
reside at the location may conduct business at such location; (2) the
location cannot be held out to the public and the associated person may
not meet with customers at the location; (3) neither customer funds nor
securities may be handled at that location; (4) the associated person
must be assigned to a designated branch office, and the branch office
must be reflected on all business cards, stationery, advertisements,
and other communications to the public; (5) the associated person's
correspondence and communications with the public must be subject to
the firm's supervision;\17\ (6) electronic communications must be made
through the firm's system; (7) all orders must be entered through the
designated branch office or an electronic system established by the
member and reviewable at such location; (8) written supervisory
procedures pertaining to supervision of sales activities conducted at
the residence must be maintained by the member; and (9) the member must
maintain a list of the residence locations. These limitations closely
track the limitations on the use of a private residence in the Books
and Records Rules.\18\
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\17\ The Commission notes that all correspondence and
communications with the public by an associated person is subject to
the firm's supervision.
\18\ 17 CFR 240.17a-4(l).
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As noted above, the NYSE's initial proposed definition contained an
additional limitation on the primary residence exception, which would
have limited to 50 the number of business days an associated person
would be permitted to work from his primary
[[Page 54784]]
residence without requiring registration as a branch office.\19\ NASD
concluded that the 50-business day limitation on the use of a primary
residence would not be practical for small firms and independent
dealers, and would not provide any added regulatory benefit, and
therefore did not include this limitation in the instant proposal. The
NYSE subsequently proposed to remove this limitation from its proposed
rule change.\20\
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\19\ See SR-NYSE-2002-34, supra note 14.
\20\ See Amendment No. 2 to SR-NYSE-2002-34.
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NASD's proposed definition also would exempt from branch office
registration a temporary location, other than a primary residence, that
is used for securities business less than 30-business days in any
calendar year. The limitations on the use of a primary residence
described above also would apply to use of a temporary location for
conducting securities business.\21\ For purposes of calculating the
number of days for this exception, the proposed rule provides that a
``business day'' would not include any partial business day, provided
that the associated person spends at least four hours on such business
day at his or her designated branch office during normal business
hours.
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\21\ For purposes of satisfying condition (a) to the temporary
location exception, an associated person would be deemed to
``reside'' at such temporary location.
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The proposed definition would exempt ``offices of convenience''
from branch office registration, provided that associated persons meet
customers only occasionally and exclusively by appointment, and that
the location not be held out to the public as a branch office. When
such office of convenience is located on bank premises, however,
signage necessary to comply with applicable Federal and State laws,
rules and regulations, and applicable rules and regulations of NASD,
other self-regulatory organizations, and securities or banking
regulators would be permitted in order to avoid confusing customers who
might otherwise believe that traditional low-risk investments, such as
deposits, are being offered by associated persons at such offices on
bank premises. In addition, other than meeting customers at these
offices of convenience, all other functions of the associated person
would be conducted and supervised through the designated branch office.
The proposed rule also exempts from branch office registration any
location that is primarily used to engage in non-securities activities
(e.g., insurance) and from which the associated person effects no more
than 25 securities transactions in any one calendar year, provided that
advertisements or sales literature identifying such location also set
forth the location from which the associated person is directly
supervised. In addition, such securities activities would be conducted
through and supervised by the associated person's designated branch
office.
However, notwithstanding the exclusions in NASD Rule 3010(g)(2)(A),
any location that is responsible for supervising the activities of
persons associated with the member at one or more non-branch locations
of the member would be considered to be a branch office.\22\
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\22\ See NASD Rule 3010(g)(2)(B). This rule text was added to
reflect changes made by File No. SR-NASD-2002-162. This language
conforms to similar language proposed by the NYSE in SR-NYSE-2002-
34. See supra notes 8 and 14.
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The proposed rule change also sets forth proposed NASD IM-3010-1,
which emphasizes the existing requirement that members establish
reasonable supervisory procedures and conduct reviews of locations
taking into consideration, among other things, the firm's size,
organizational structure, scope of business activities, number and
location of offices, the nature and complexity of products and services
offered, the volume of business done, the number of associated persons
assigned to a location, whether a location has a principal on-site,
whether the office is a non-branch location, and the disciplinary
history of the registered person. The proposed interpretive material
notes that members would be required to be especially diligent in
establishing procedures and conducting reasonable reviews with respect
to non-branch locations.
NASD indicated in Amendment No. 6 that it expects to deploy branch
office functionality in CRD[supreg] in the Fall of 2005 and that it
expects to make the proposed rule change effective the first quarter of
2006.
III. Comment Summary
As noted above, the Commission received 847 comment letters with
respect to the proposed rule change.\23\ NASD filed a response letter
to address concerns raised by the commenters,\24\ and subsequently
filed a second response letter to address comments made in ACLI Letter
2 \25\ and a third response letter to address comments relating to
remote traders.\26\
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\23\ See supra note 6.
\24\ See supra note 7.
\25\ See supra note 9.
\26\ See supra note 11.
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Several of the commenters applauded NASD for its efforts in
creating a uniform definition of branch office,\27\ agreeing that a
uniform definition would have benefits for broker-dealers.\28\ One
commenter stated that ``regulatory coordination and cooperation
produces effective and efficient regulation that serves the best
interests of investors, regulators and member firms alike'' and
supported NASD's proposed definition as ``a practical definition that
takes into account technological innovations and current business
practices without compromising the need for investor protection.'' \29\
Several commenters expressed support for the facilitation and
streamlining of branch office registration with CRD[supreg],\30\
stating that it would provide an ``efficient and centralized method for
members and associated persons to register branch offices'' as required
by SROs and states.\31\
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\27\ See ARM Letter, InterSecurities Letter, Princor Letter, and
TFA Letter, supra note 6.
\28\ See Princor Letter, supra note 6. The Princor Letter went
on to discuss changes it believed would be necessary to achieve this
goal.
\29\ See SIA Letter, supra note 6.
\30\ See ARM Letter, NASAA Letter, and SIA Letter, supra note 6.
\31\ See ARM Letter, supra note 6.
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Commenters responding to the Commission's specific request for
comment on NASD's primary residence exception and the divergent
proposals by NASD and the NYSE with respect to the NYSE's proposed
annual 50-business day limitation on engaging in securities activities
from a primary residence, expressed unanimous support for NASD's
approach.\32\ Commenters expressed the opinion that the rationale for
branch office registration should be determined by the types of
activities performed at that location, rather than the number of days
spent there.\33\
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\32\ See ARM Letter, InterSecurities Letter, MetLife Letter,
Princor Letter, SIA Letter, T. Rowe Price Letter, and TFA Letter,
supra note 6.
\33\ See ARM Letter and SIA Letter, supra note 6.
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A substantial majority of the commenters, including those who
submitted Letter Types A and B, expressed general concerns about the
effect the proposed rule change would have upon limited purpose broker-
dealers affiliated with life insurance companies. Many of these
commenters expressed the view that the proposed rule change would have
a disproportionate impact on limited purpose broker-dealers, as
compared to full-service broker-dealers who conduct their activities
from offices that meet NASD's current definition of branch office.\34\
These commenters pointed out
[[Page 54785]]
that broker-dealers affiliated with insurance companies perform a much
narrower range of services and that the companies with which they are
affiliated have structured their operations based on the current
definition and would be presented with significant new economic and
administrative costs in order to comply with the proposed
definition.\35\ The commenters stated that over 50 percent of NASD's
registered representatives work for broker-dealers affiliated with life
insurers,\36\ and that the proposal therefore would have a significant
financial impact on the life insurance industry.\37\ One commenter
represented that the new definition would cause its number of branch
offices to increase from 42 to 1,100,\38\ while another said that it
would expect approximately 3,400 additional branch offices,\39\ in each
case resulting in a sharp increase in overall expenses due to increased
paperwork and registration fees. One commenter pointed out that this
sharp increase in the number of branch offices would necessitate
amendment of its NASD membership agreement.\40\ Commenters submitting
Letter Type B stated that the proposal would place an ``unfair burden
on broker-dealers conducting business through many smaller,
geographically dispersed non-branch offices.'' \41\
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\34\ See ACLI Letter, ACLI Letter 2, Branson Letter, Ehlert
Letter, Fowler Letter, Garcia Letter, Gurdjian Letter, Halstead
Letter, Hoelzel Letter, Howen Letter, IARFC Letter, Imke Letter,
Jacobsen Letter, Lisle Letter, Northrop Letter, NYLife Letter,
Ridings Letter, and Letter Type A, supra note 6.
\35\ See, e.g., Letter Type A, supra note 6.
\36\ See ACLI Letter 2, NAIFA Letter, NYLIFE Letter, and Letter
Type B, supra note 6.
\37\ See NAIFA Letter, NYLIFE Letter, Princor Letter, and Letter
Type B, supra note 6.
\38\ See Princor Letter, supra note 6.
\39\ See NYLIFE Letter, supra note 6.
\40\ Id.
\41\ See Letter Type B, supra note 6.
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NASD responded to these concerns, saying that it recognizes that
certain firms may be required to register previously unregistered
locations under the proposed definition and that, while this ``may
increase a firm's registration costs, NASD believes that a firm's
administrative and supervision costs for all locations should not
increase as a result of this proposal.'' \42\ Quite the contrary, NASD
stated that ``the development of a centralized branch office
registration system through CRD[supreg] will alleviate current
registration burdens, thus making branch office registration and
renewal a more efficient process.'' \43\
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\42\ See NASD Response Letter, supra note 7.
\43\ Id.
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Two commenters stated that NASD has made no attempt to evaluate or
quantify the economic burden the proposal would pose,\44\ and stated
their belief that NASD should be required to address specifically the
economic impact of the proposed rule change on insurance affiliated
broker-dealers and individual broker-dealers in geographically
dispersed locations and determine how many new branches would be
created by the proposed change.\45\ These commenters stated that the
new definition would impose unreasonable and unnecessary burdens on
competition, and that the proposed rule change does not meet the
statutory safeguards for competition set forth in Sections 23(a) \46\
and 15A(b)(6) and (9) \47\ of the Act.\48\ Commenters predicted that
the proposed definition would cause enormous structural and economic
upheaval.\49\
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\44\ See ACLI Letter, ACLI Letter 2, and NYLIFE Letter, supra
note 6.
\45\ See NYLIFE Letter, supra note 6.
\46\ 15 U.S.C. 78w(a).
\47\ 15 U.S.C. 78o-3(b)(6) and (9).
\48\ See ACLI Letter, ACLI Letter 2, and NYLIFE Letter, supra
note 6.
\49\ See ACLI Letter 2 and NAIFA Letter, supra note 6.
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NASD disagreed with these commenters' assertions that the proposal
is anticompetitive and will unnecessarily add to their costs of doing
business. NASD stated that the supervision requirements of NASD Rule
3010 have always applied to all offices, regardless of whether such
locations are registered, and that NASD Rule 3100 requires all members
to comply with the Commission's Books and Records Rules. NASD stated
that the proposed branch office definition does not amend either of
these rules.\50\ In NASD Response Letter 2, the NASD stated that ``the
annual registration fee for branch offices is reasonable and fair, and
does not unfairly discriminate against any particular segment of our
membership.'' \51\ NASD continued, stating that it ``believes that this
fee should not create an undue economic burden for an active business
location,'' and affirmed its statement in the Notice that the proposal
``does not create an impact on competition that is not necessary or
appropriate in furtherance of the purposes of the Act.'' \52\
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\50\ See NASD Response Letter, supra note 7.
\51\ See NASD Response Letter 2, supra note 9.
\52\ The current annual registration fee for each branch office
is $75. Id.
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Two commenters noted that whether a location is registered as a
branch office has no impact on a firm's responsibility to supervise its
registered representatives since broker-dealers are required to visit
both registered and non-registered offices on a periodic basis,\53\ and
others likewise stated that the current system is more than
adequate.\54\ A number of commenters opined that the proposed rule
change constitutes a new fee that is a revenue raiser, and is not
intended to provide any additional oversight or support for
consumers.\55\ In response to this point, NASD noted that if there are
as many new branch offices as commenters suggest, NASD will be facing a
significant increase in the number of previously unregistered locations
subject to the more rigorous examination protocol of branch offices,
requiring NASD to devote additional staff time and resources. In
addition, NASD is incurring costs related to the development of the new
CRD[supreg] branch office registration system and will continue to
incur costs associated with the maintenance and operation of the new
system. Based on these factors, NASD stated that it ``believes that
NASD's annual branch office registration fee is reasonable and fair.''
\56\
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\53\ See MetLife Letter and Princor Letter, supra note 6.
\54\ See Bieber Letter and NYLIFE Letter, supra note 6.
\55\ See Bieber Letter and Letter Type B, supra note 6.
\56\ Id.
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Many commenters, including those submitting comments on Letter Type
A, stated that the high administrative burden of the proposed rule
change would have a harmful impact on consumers because limited purpose
broker-dealers would find it not economically feasible to continue
offering variable products and mutual funds to their clients.\57\ The
commenters said that this could ``only have a harmful impact on
consumers since their access to these products, which often constitute
an important part of [their] clients' overall financial planning, will
likely be reduced or eliminated.'' \58\ NASD responded, stating that
``there are certain fundamental costs associated with regulating any
branch office, regardless of the size or activity,'' and that it
believes that assessing the same fee on each branch office results in
an equitable allocation of a reasonable fee among its members.\59\
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\57\ See Branson Letter, Claborn Letter, Fowler Letter, Garcia
Letter, Gruber Letter, Gurdjian Letter, Halstead Letter, Hoelzel
Letter, IARFC Letter, Imke Letter, Jacobsen Letter, Lisle Letter,
Mersberger Letter, NAIFA Letter, Olshanski Letter, Ridings Letter,
Vega Letter, Villasenor Letter, Walenta Letter, and Letter Type A,
supra note 6.
\58\ See, e.g., Letter Type A, supra note 6.
\59\ See NASD Response Letter, supra note 7.
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Many commenters also commented on specific aspects of the proposed
[[Page 54786]]
definition. Several commenters stated that the conditions for the
primary residence exception are too restrictive.\60\ Several commenters
objected to the requirement that customer funds not be handled at the
primary residence, saying that it was too restrictive \61\ and that the
term ``handled'' was not sufficiently defined.\62\ One commenter
suggested modifying the proposal to include a time limitation or other
qualifying parameter for defining the term ``handled.'' \63\ Two
commenters objected to the requirement that electronic communications
be made through the member firm's system, saying that the requirement
is too restrictive and assumes that all firms have and permit e-
mail.\64\ These commenters stated that it should be sufficient that the
associated person is subject to the firm's supervision.\65\ Four
commenters objected to the requirement that the associated person not
meet with customers at the primary residence location,\66\ and
suggested that the proposal be modified to require that the associated
person not ``regularly'' meet with customers at that location.\67\
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\60\ See InterSecurities Letter, Jacobsen Letter, NYLIFE Letter,
Princor Letter, TFA Letter, and Letter Type A, supra note 6.
\61\ See InterSecurities Letter, MetLife Letter, NYLIFE Letter,
Princor Letter, and TFA Letter, supra note 6.
\62\ See InterSecurities Letter and TFA Letter, supra note 6.
\63\ See MetLife Letter, supra note 6.
\64\ See InterSecurities Letter and TFA Letter, supra note 6.
\65\ Id.
\66\ See ARM Letter, MetLife Letter, Princor Letter, and SIA
Letter, supra note 6.
\67\ See ARM Letter, MetLife Letter, and SIA Letter, supra note
6.
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NASD responded to these comments, stating that it ``believes
strongly that the limitations on the use of a primary residence are
important safeguards intended to protect investors.'' NASD said that
activities outside the scope of the conditions set forth in the
proposed definition should be subject to the monitoring and examination
by regulators. NASD continued, stating ``[m]oreover, to the extent any
particular scenario raises questions as to the meaning of any of these
limitations, NASD believes such issues can be addressed, as
appropriate, through its interpretive process without requiring
amendment to the proposed rule.'' \68\
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\68\ See NASD Response Letter, supra note 7.
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One commenter pointed out that the definition would deem remote
electronic traders to be conducting a securities business and therefore
be required to register as a branch office if they were not able to
meet the terms of the primary residence exclusion.\69\ In response,
NASD reiterated that ``to the extent any particular scenario raises
questions regarding the application of the rule, NASD will address such
issues with members through its interpretative process on a case-by-
case basis or through future rulemaking, as appropriate,'' rather than
granting them a general exemption from branch office registration.\70\
Another commenter noted that certain state rules require on-site
registered principals be present in state branches, saying that NASD
should coordinate with the state requirements.\71\
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\69\ See Uhlenhop Letter, supra note 6.
\70\ See NASD Response Letter 3, supra note 11.
\71\ See 1st Global Letter, supra note 6.
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Several commenters objected to the provision that would exclude a
location used primarily for non-securities business from the definition
of branch office, provided that less than 25 securities transactions
are effected there annually, saying that the numerical limitation seems
arbitrarily chosen without a quantifiable foundation and objecting to
the lack of an explanation for how the limitation was determined.\72\
Commenters stated that the language was not sufficiently clear and
queried how to define ``effected,'' and stated that the proposed rule
change lacks clarity as to whether firms must maintain records to
demonstrate the availability of the exception.\73\ Commenters stated
that the proposed definition would place an undue burden on firms to
track the number of transactions effected from a particular
location.\74\
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\72\ See ACLI Letter 2, InterSecurities Letter, Princor Letter,
and TFA Letter, supra note 6.
\73\ See, e.g., NYLIFE Letter, supra note 6.
\74\ See InterSecurities Letter, NYLIFE Letter, and TFA Letter,
supra note 6.
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NASD stated that it believes that the 25-transaction limit is
reasonable and necessary to promote investor protection, and that a
location that engages in a significant number of securities
transactions annually should be subject to examination by regulators to
ensure that the activities at such location are in compliance with
applicable rules and regulations.\75\ NASD stated that, with respect to
the term ``effects,'' the meaning is fact specific, and NASD ``will
address these interpretive issues with members on a case-by-case basis,
as appropriate.'' \76\
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\75\ See NASD Response Letter, supra note 7.
\76\ Id.
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Two commenters pointed out that no effective date was provided,\77\
while others stated that the proposed branch office definition should
not be bifurcated from the proposed Form BR.\78\ NASD expects to make
the proposed rule change effective the first quarter of 2006, following
the implementation of proposed Form BR and the accompanying deployment
of branch office functionality in CRD[reg], which it believes will
occur in the Fall of 2005.\79\
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\77\ See InterSecurities Letter and TFA Letter, supra note 6.
\78\ See ACLI Letter 2, NYLIFE Letter, and TFA Letter, supra
note 6.
\79\ See Amendment No. 6, supra note 11.
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A number of commenters suggested amendments to the proposal. Many
of the commenters concerned about the impact the new definition would
have on limited purpose broker-dealers affiliated with insurance
companies requested that the filing fee be waived for current non-
branch offices that become branch offices under the new definition.\80\
Three commenters suggested that NASD provide a permanent exclusion from
the branch office definition for non-branch locations distributing
variable contracts.\81\ In response to these comments, NASD stated
that, while it recognizes that ``life insurance broker-dealers operate
with a different business model than many large, wirehouse, full-
service firms, NASD believes there is no basis for recognizing a
separate category of broker-dealers in connection with the registration
of branch offices.'' \82\
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\80\ See Branson Letter, Claborn Letter, Fowler Letter, Garcia
Letter, Gruber Letter, Gurdjian Letter, Halstead Letter, Hoelzel
Letter, IARFC Letter, Imke Letter, Jacobsen Letter, Lisle Letter,
Mersberger Letter, NAIFA Letter, Olshanski Letter, Ridings Letter,
and Letter Type A, supra note 6.
\81\ See ACLI Letter 2, Ehlert Letter, and Howen Letter, supra
note 6.
\82\ See NASD Response Letter, supra note 7.
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Many of these commenters also requested an increase in the number
of transactions that may be effected from a location used primarily for
non-securities business before that location is considered a branch
office.\83\ One of these commenters suggested that a gross dealer
concession should be used as a threshold for registration because it
would allow for easy tracking by the broker-dealer and satisfactory
criteria for regulators in registered offices over a certain size.\84\
As discussed above, NASD responded to these comments stating that it
believes that the 25-transaction limit is reasonable and
[[Page 54787]]
necessary to promote investor protection.\85\
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\83\ See Branson Letter, Fowler Letter, Garcia Letter, Gruber
Letter, Gurdjian Letter, Halstead Letter, Hoelzel Letter, IARFC
Letter, Imke Letter, Jacobsen Letter, Lisle Letter, Mersberger
Letter, NAIFA Letter, Olshanski Letter, Princor Letter, Ridings
Letter, and Letter Type A, supra note 6.
\84\ See 1st Global Letter and Princor Letter, supra note 6.
\85\ See NASD Response Letter, supra note 7.
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Many of the commenters urged the Commission to reject the proposed
rule change \86\ and many suggested that NASD maintain the current
branch office registration.\87\ One of these commenters stated that
NASD's current branch office definition provides the necessary
safeguards to protect investors,\88\ while another queried why NASD's
current definition was not selected as the uniform definition.\89\
Another commenter stated that the recent amendments to Rule 17a-4
provide sufficient regulatory oversight.\90\ NASD responded that the
new branch office registration system will allow NASD and other
regulators to associate every registered representative with a specific
branch office, a feature that is unavailable under the current system,
and that this will provide an ``essential tool for regulators when
conducting examinations, reviewing customer complains, or taking
enforcement actions.'' NASD also stated that the uniform definition
would allow for the development of a centralized branch office
registration system through CRD[reg] (that will allow regulators to
quickly and efficiently access this information and keep it
current.\91\ NASD continued, stating that it ``strongly believes that
the Proposal serves a legitimate regulatory purpose and that the impact
on competition to certain member firms as a result of the Proposal is
both necessary and appropriate in furtherance of these legitimate
regulatory purposes.'' \92\
---------------------------------------------------------------------------
\86\ See Branson Letter, Claborn Letter, Ehlert Letter, Fowler
Letter, Garcia Letter, Geis Letter, Gruber Letter, Gurdjian Letter,
Halstead Letter, Hoelzel Letter, Howen Letter, IARFC Letter, Imke
Letter, Jacobsen Letter, Lisle Letter, Mersberger Letter, NAIFA
Letter, Northrop Letter, O'Bee Letter, Olshanski Letter, Ridings
Letter, Scott Letter, Letter Type A and Letter Type B, supra note 6.
\87\ See ACLI Letter 2, Branson Letter, Claborn Letter, Fowler
Letter, Garcia Letter, Geis Letter, Gruber Letter, Gurdjian Letter,
Halstead Letter, Hoelzel Letter, IARFC Letter, Imke Letter, Jacobsen
Letter, Lisle Letter, Mersberger Letter, NAIFA Letter, Northrop
Letter, Olshanski Letter, Princor Letter, Ridings Letter, Letter
Type A and Walenta Letter, supra note 6.
\88\ See Princor Letter, supra note 6.
\89\ See ACLI Letter 2, supra note 6.
\90\ See NYLIFE Letter, supra note 6.
\91\ See NASD Response Letter 2, supra note 9.
\92\ Id.
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IV. Discussion and Commission's Findings
After careful consideration of the proposed rule change, the
comment letters, and NASD's responses to the comment letters, the
Commission finds that the proposed rule change, as amended, is
consistent with the requirements of the Act and the rules and
regulations thereunder applicable to a national securities
association.\93\ The Commission believes that the proposed rule change
is consistent with Section 15A(b) of the Act,\94\ in general, and
furthers the objectives of Section 15A(b)(6),\95\ in particular, in
that it is designed to prevent fraudulent and manipulative acts and
practices, to promote just and equitable principles of trade, to foster
cooperation and coordination with persons engaged in regulating,
clearing, settling, processing information with respect to, and
facilitating transactions in securities, 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.
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\93\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. 15 U.S.C. 78c(f).
\94\ 15 U.S.C. 78o-3(b).
\95\ 15 U.S.C. 78o-3(b)(6).
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Given the continued advances in technology used to conduct and
monitor businesses and changes in the structure of broker-dealers and
in the lifestyles and work habits of the workforce, the Commission
believes it is reasonable and appropriate for NASD to reexamine how it
determines whether business locations need to be registered as branch
offices of broker-dealer members. The Commission also supports NASD,
the NYSE, and state securities regulators' joint, regulatory effort to
eliminate inconsistencies and duplication in developing a uniform
definition of ``branch office.'' The Commission believes that such
regulatory coordination and cooperation should result in an effective
and efficient regulation that will serve the entire broker-dealer
community by recognizing the many different business models and
streamlining the branch office registration process significantly. In
addition, the Commission believes the proposed definition strikes the
right balance between providing flexibility to broker-dealer firms to
accommodate the needs of their associated persons, while at the same
time setting forth parameters that should ensure that all locations,
including home offices, are appropriately supervised.
The Commission commends the NASD for reiterating the responsibility
of firms to supervise their associated persons, regardless of their
location, and is concerned by the statements of some commenters that
this proposed rule change will impose additional supervisory duties on
them. The Commission reminds all broker-dealers of their statutory duty
to supervise.\96\ Furthermore, the Commission believes the ability to
identify the personnel located at each branch office is an important
improvement to the CRD[reg] database and will provide regulators
valuable information. The Commission is cognizant of the concerns
raised by the ACLI and others in the insurance industry who are also in
the securities industry. However, the Commission is also aware that
firms with large numbers of associated persons located in smaller,
geographically dispersed offices provide additional supervisory
challenges, and will require NASD to devote additional staff time and
resources to their oversight, once these offices become subject to the
more rigorous examination protocol of branch offices.
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\96\ See Section 15(b)(4)(E) of the Act. 15 U.S.C. 78o(b)(4)(E).
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Furthermore, the Commission believes that the seven proposed
exceptions to registering as a branch office will recognize current
business, lifestyle, and surveillance practices and provide associated
persons with additional flexibility. For instance, because associated
persons may have to work from home due to illness, or to provide
childcare or eldercare for certain family members, the Commission
believes it is appropriate to except primary residences from the
definition of branch office while providing certain safeguards and
limitations to protect investors. In this regard, the Commission
supports NASD's decision to omit the proposed 50-business day
limitation on working from a primary residence from NASD's proposed
definition, and the NYSE's subsequent removal of this limitation from
its proposed definition. Moreover, the definition also would exempt
from branch office registration any temporary location, other than the
primary residence, provided it is used less than 30 business days in
any calendar year.
The Commission believes it reasonable for NASD not only to propose
conditions on the primary residence and temporary location exceptions
(e.g., that the location cannot be held out to the public as an office,
and that neither customer funds nor securities can be handled there),
but also to set forth the interpretive material in proposed NASD IM-
3010-1 to emphasize members' requirements to establish reasonable
supervisory procedures and conduct reviews of locations taking into
account the factors such as those enumerated therein.
[[Page 54788]]
In addition, under both exceptions noted above, NASD has provided
additional flexibility by defining ``business day'' to exclude any
partial day, provided the associated person spends at least four hours
on such business day at his or her designated branch office during the
hours such office is normally open for business. The Commission
believes that this should prevent associated persons from regularly
conducting business from other remote locations for the majority of a
business day, without such activity being counted towards the 30-day
limitation. The Commission expects NASD to monitor and ensure that,
where the 30-business day (other location) exemption is used by
associated persons, members maintain records adequate to demonstrate
compliance with the ``business day'' limitations.
Finally, the Commission believes it is reasonable for NASD to
implement the proposed branch office definition following the
commencement of the branch office registration system on the CRD[reg].
This should allow a smooth transition to the new branch office
registration system by, as NASD submits, providing members sufficient
time to transition to the proposed new Form BR and associated filing
protocols, before making the new definition effective.
V. Conclusion
For the foregoing reasons, the Commission finds that the proposed
rule change, as amended, is consistent with the requirements of the Act
and rules and regulations thereunder applicable to a national
securities association, and, in particular, Section 15A(b) of the
Act.\97\
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\97\ 15 U.S.C. 78o-3(b).
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It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\98\ that the proposed rule change (SR-NASD-2003-104), as amended
by Amendment Nos. 1 through 6, is hereby approved.
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\98\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\99\
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\99\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. E5-5034 Filed 9-15-05; 8:45 am]
BILLING CODE 8010-01-P