February 13, 2001
Mr. George W. Mann, Jr.
Senior Vice President and General Counsel
Boston Stock Exchange
100 Franklin Street
Boston, MA 02110
Dear Mr. Mann:
I am writing in response to our phone conversations and your letter dated November 7, 2000. You have asked for guidance regarding whether certain Boston Stock Exchange ("BSE") specialists need to register with the National Association of Securities Dealers, Inc. ("NASD" or "Association") as equity traders.
Specifically, you have asked whether BSE specialists, who execute trades in New York Stock Exchange ("NYSE") listed securities, through electronic communication networks ("ECN"), need to register with the NASD as equity traders. You have explained that any such activity currently occurring on the floor of the BSE is de minimis. Further, you have asked whether BSE specialists, who execute trades of Nasdaq securities through the Nasdaq/National Market System/Unlisted Trading Privileges Plan (the "UTP Plan") need to register as equity traders. You have explained that currently the BSE is a limited participant of the UTP Plan. There is a prospect that the BSE will become a full member of the UTP Plan in the near future. In this event, BSE specialists will be able to trade Nasdaq securities through terminals located on the BSE's floor.
You have explained that the BSE does not require its specialists to pass the Series 7 and Series 55 examinations. This holds true for specialists working at firms that the BSE regulates as the Designated Examination Authority, as well as other firms. It also holds true whether or not the specialist is registered with the NASD, and whether or not the specialist is employed by an NASD member firm. The BSE has not required the Series 7 and Series 55 exams based on the historical understanding that stock exchanges are primarily responsible for the specialists' trading activities that occur on their floors.
You have noted that the BSE has developed a comprehensive exam designed to ensure that specialists working on the floor of the BSE are qualified. You have advised us that the BSE plans to modify this exam to cover trading through the UTP Plan. Further, you have stated that the BSE assumes primary responsibility for trades executed by specialists on the floor of the BSE. The BSE would regulate trading through ECNs and the UTP Plan by its BSE specialists, just as it does with all other trading currently taking place on the BSE floor. Lastly, you have stated that the BSE would fully support intermarket investigations consistent with the Intermarket Surveillance Group agreement. On April 1, 1998, the NASD amended it rules to include new Rule 1032(f). This Rule requires representatives who engage in proprietary trading or the execution of transactions on an agency basis in equity, preferred or convertible debt securities effected otherwise than on a securities exchange to register with the Association as equity traders. Rule 1032(f) also applies to persons directly supervising those who are engaged in such proprietary activities or execution of agency transactions. To register as equity traders, representatives must be registered as general securities representatives (Series 7) or limited representatives—corporate securities (Series 62), and must pass the Series 55 exam.
As noted above, NASD Rule 1032(f) only requires equity trader registration for representatives effecting transactions otherwise than on a securities exchange. Further, NASD Rule 1060 exempts from registration requirements individuals whose investment banking or securities functions are related solely and exclusively to effecting transactions on the floor of a national securities exchange and who are registered as floor members with such exchange. The staff of NASD Regulation's Office of General Counsel believes that for purposes of Rules 1032(f) and 1060, BSE specialists effecting transactions in NYSE securities through ECNs, or Nasdaq securities through the UTP Plan, from terminals located on the floor of the BSE, are effecting transactions on the floor of the BSE.
Accordingly, such conduct will not trigger the Association's registration requirements.
I hope this letter is responsive to your inquiry. Please note that the opinions expressed in this letter are staff opinions only and have not been reviewed or endorsed by the Board of Directors of NASD Regulation. This letter responds only to the issues you have raised based on the facts as you have described them, and does not necessarily address any other rule or interpretation of the NASD or all the possible regulatory and legal issues involved.
Very truly yours,
Eric J. Moss
Assistant General Counsel
Frederick F. McDonald, Jr.