Interpretive Letter to Lena M. Stinson, Stanford Group Company
June 4, 2001
Ms. Lena M. Stinson
Executive Vice President and
Chief Operating Officer
Stanford Group Company
5050 Westheimer, 3rd Floor
Houston, TX 77056
Re: Supervision by Foreign Associates
Dear Ms. Stinson:
I am writing in response to Fred Ferrara's e-mail message on behalf of Stanford Group Company, dated March 30, 2001. In this message, Mr. Ferrara asks whether persons registered with the NASD as "Foreign Associates" may supervise other Foreign Associates, and may approve the opening of new accounts and customer correspondence. Mr. Ferrara asked that we direct our response to you.
NASD Rule 3010 requires members to establish and maintain a system to supervise the activities of each registered representative and associated person in a manner that is reasonably designed to achieve compliance with applicable securities laws and regulations, and the rules of the NASD. This Rule permits members to delegate limited supervisory tasks to registered representatives. For instance, registered representatives may function as supervisors for non-Office of Supervisory Jurisdiction ("OSJ") branch locations.
There are a number of supervisory tasks that may only be performed by a registered principal. For instance, Rule 3010 requires members to assign each OSJ at least one principal with the authority to carry out the supervisory responsibilities conducted at the OSJ. Firms must designate as OSJs any offices that conduct any of the functions listed in Rule 3010(g), which includes the final acceptance (approval) of new accounts. Members also must designate any other offices as OSJs, if such designations are necessary to enable members to fulfill their supervisory obligations. In making these determinations, members must consider several factors that are listed in the Rule. These factors include whether the activities conducted at the offices involve regular contact with public customers, the distance of the offices from OSJs, and whether the activities conducted at the offices are diverse or complex. Further, Rule 3010 requires members to establish procedures for review and endorsement by registered principals of incoming and outgoing written correspondence of registered representatives with the public relating to the investment banking or securities business of such members.
In NASD Notice to Members 95-37, the Association explains that Foreign Associates may act in any registered capacity on behalf of the member, consistent with the Foreign Associate designation.1 This Notice further states that Foreign Associates may act as traders or registered persons responsible for servicing the accounts of foreign nationals. This Notice, however, does not state that Foreign Associates may act as principals.
The staff of the Office of General Counsel, NASD Regulation (the "staff") believes that the limited supervisory functions that can be properly delegated to registered representatives may also be assigned to Foreign Associates, e.g., supervisors for non-OSJ branch offices. The staff, however, does not believe that NASD Rules permit Foreign Associates to perform the functions that require a principal registration, e.g., serving as the office supervisor for an OSJ, or approving new accounts and customer correspondence. Further, in all cases, ultimate supervisory responsibility for every registered and unregistered branch office must be assigned to one or more appropriately registered principals, not to Foreign Associates.
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
Associate General Counsel
Bernerd Young, District Director
1 Under NASD Rule 1100, persons associated with member firms who are designated as Foreign Associates must register with the NASD, but are exempt from the examination requirements. Rule 1100 limits the Foreign Associate designation to representatives who: (1) are not citizens, nationals, or residents of the United States or any of its territories or possessions; and (2) will conduct all of their securities activities in areas outside the jurisdiction of the United States; and (3) will not engage in any securities activities with or for any citizen, national, or resident of the United States.