Interpretive Letter to Franklin I. Ogele, Esq., Singer Zamansky LLP
March 17, 1998
VIA FACSIMILE & FIRST CLASS MAIL
Franklin I. Ogele, Esq.
Singer Zamansky LLP
40 Exchange Place
New York, NY 10005
Re: On-Site Trading, Inc. ("On-Site")
Dear Mr. Ogele:
I am responding to your request for guidance with respect to On-Site's proposal to establish Order Entry and Account Access Centers (the "Centers") and whether such Centers would be considered branch locations of On-Site.
National Association of Securities Dealers ("NASD") Rule 3010(g) defines "branch office" and includes several exemptions from branch office registration requirements for non-branch business locations that meet certain conditions under the Rule. The Rule defines "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 business."
A location could be exempt from registration as a branch office if it is identified to the public only in a listing in a telephone book, on business cards, or on stationery that also includes the address and telephone number of the branch office or office of supervisory jurisdiction ("OSJ") responsible for supervising the non-branch location. In addition, a member's advertisement will not require branch registration if the advertisement includes a local telephone number and/or a local post office box so long as the advertisement also identifies the location and telephone number of the appropriate supervising branch office or OSJ. The advertisement may not, however, include the address of the nonbranch location. Finally, a member's sales literature may include the local address of a nonbranch business location as long as the location and telephone number of the appropriate supervisory branch office or OSJ of the member is identified.
According to Notice to Members 92-18, which announced Securities and Exchange Commission approval of amendments to the definition of "branch office" in Rule 3010, and clarified the exemptions from branch office registration available for non-branch business locations that meet certain conditions under the Rule:
Any office location that (i) performs any function of an OSJ, (ii) publicly displays signage, (iii) operates from public areas of buildings, such as bank branches, even when such locations are temporarily staffed, or (iv) advertises an address in any public media would still be required to register as a branch office. Such locations hold themselves out to the public as being places where the member conducts a securities business and, thus, come within the definition of a branch office. The NASD will not, however, regard a listing in a lobby directory or a sign on an interior corridor door as holding the location out to the public in such a way as to require branch office registration unless other indicia of the location's status as a branch office are present.
On-Site is a registered broker/dealer and a member of the NASD. On-Site proposes to establish Order Entry and Account Access Centers ("Centers"). Each Center will be a facility where existing customers of On-Site can sit at a computer terminal for the limited purposes of (1) reviewing on-line, publicly available materials concerning financial and business information such as market quotations, economic indicators, and annual and quarterly reports on listed and Nasdaq companies; (2) making independent investment decisions to buy or sell securities for their own accounts; (3) accessing their accounts; (4) entering orders through TradeCast, an order entry and execution system; and (5) requesting that a registered person enter orders into Instinet, an order display, routing, and execution system, on their behalf.
The Centers will be located in non-public areas, i.e., inside an office building. There will be no publicly displayed signage except that signage will be displayed on the lobby directory or door in the internal corridors of a building where a Center is located. On-Site does not know yet exactly how many Centers it will open or the geographic dispersal of the Centers. However, On-Site believes it may open up to 20 Centers within the next 12 months and the Centers could be located anywhere within the United States.
The Centers will be identified to the public as a location where customers can access their accounts and enter orders in a telephone directory listing, on business cards of the personnel designated to each Center, on On-Site's letterhead, and in On-Site's advertisements and sales literature, which also will identify the address and telephone number of the branch office or OSJ of On-Site responsible for supervising each Center. The street address of each Center will not be identified in the telephone directory listing, on business cards or letterhead, or in advertisements or sales literature.
The Centers will have dedicated computer lines linked to On-Site's main office for order entry and account access by On-Site's customers. Customer orders will be transmitted electronically to On-Site's main office or to a designated On-Site Office of Supervisory Jurisdiction ("OSJ") for execution through TradeCast or Instinet. The TradeCast and Instinet orders will be reviewed by an On-Site registered General Securities Principal or a registered representative at the main office or OSJ prior to execution. A customer will not be charged any user fee other than commissions and/or ticket charges that are customary in the securities industry. The Centers will neither receive nor hold any customer funds, securities, or customer account records, including account opening forms, customer statements, or trade blotters, except that each Center will retain copies of computer print-outs evidencing order entry by a customer.
Each Center will be staffed during normal business hours by no more than two registered representatives or administrative personnel or a combination of both whose duties will include (1) opening the Center for business, (2) ensuring that the financial and business information and dedicated computer lines are in good order, and (3) taking orders from customers and entering them on the Instinet computer keyboard for transmission to On-Site's main office or OSJ for execution (only registered representatives will perform this function). The personnel will not make any solicitations, recommendations, suggestions, or comments with respect to securities investments or trading activities.
Based on an analysis of the facts, in which you indicate that the On-Site Centers will not perform any function of an OSJ and you state that the Centers will not: publicly display signage, operate from public areas, or advertise in any public media, it is the opinion of the staff that On-Site will not be required to register the Centers as branch offices. This interpretive position does not alter On-Site's obligations under Rule 3010 to supervise the activities of registered representatives and associated persons working at these Centers in order to achieve compliance with NASD rules and federal securities laws and to review the activities of each of its offices, including the Centers. In connection with these responsibilities, we believe that adequate supervision would require On-Site to: (1) keep a record at On-Site's home office and make available to us upon request the locations of all of the Centers and (2) visit the Centers regularly to determine that they are operating consistent with the limitations you describe in your letters to the NASD dated July 15, 1997, September 17, 1997, and February 27, 1998.
This position is based on all the representations contained in your letters and in particular on our understanding that: (1) the Centers will not be held out to the public as locations at which On-Site conducts business, other than through the means identified in your letters; (2) the registered representatives and associated persons located at these offices perform only those administrative, clerical, and Instinet order entry functions identified in your letters; (3) no customer orders will be executed at the Centers, and each order will require specific approval by a registered person at On-Site's main office or an OSJ prior to execution; and (4) no recommendations, suggestions, or comments with respect to securities investments or trading activities will be made by personnel at the Centers or via On-Site's computer system.
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, Inc. This letter responds only to the issues you have raised based on the facts as you have described them in your letter, and does not necessarily address any other rule or interpretation of the NASD or all the possible regulatory and legal issues involved.
NASD Regulation currently is reviewing the impact of technological change on the definition of branch office in Rule 3010. As a result of this review, the rules governing branch office registration may change. If the rules are changed, On-Site should be advised that the interpretive position set forth in this letter may no longer be valid.
Very truly yours,
Mary N. Revell