Interpretive Letter to Mr. Alan E. Sorcher, Securities Industry Association & Ms. Sarah A. Miller, ABA Securities Association
Mr. Alan E. Sorcher
Vice President and Associate General Counsel
Securities Industry Association
1401 Eye Street, NW, 10th Floor
Washington, DC 20005-2225
Ms. Sarah A. Miller
Director of the Center for Securities, Trust and Investments
ABA Securities Association
American Bankers Association
1120 Connecticut Avenue, NW
Washington, DC 20036
Dear Mr. Sorcher and Ms. Miller:
This responds to your letter dated June 22, 2004 ("June 2004 Letter"), in which you request that we extend certain staff positions pertaining to the implementation of Title II of the Gramm-Leach-Bliley Act of 1999 ("GLBA").
In our previous letter, dated October 27, 2000 ("October 2000 Letter"), NASD staff agreed, during the phase-in period, to toll for those bank employees moving into affiliated broker-dealers, the two-year grace period during which an individual is not required to retake a qualification examination. The purpose of this position was to assist in a fair and orderly transition of persons from bank to broker-dealer and to avoid penalizing individuals whose employer-banks were using the full statutory phase-in period to identify and/or establish the appropriate broker-dealer into which their securities activities would be moved. NASD staff recognized the unique circumstances presented by GLBA's repeal of the general exclusion for banks from broker-dealer registration. However, at that time, the GLBA phase-in period was from November 12, 1999 (the date GLBA was enacted) and May 12, 2001 (the date the brokerage provisions of Title II were specified to take effect). Thus, the October 2000 Letter contemplated a tolling period of no more than 18 months.
In your June 2004 Letter, you ask that we extend the tolling period until January 1, 2006. In view of the exceptionally long period between the enactment of GLBA and its intended effective date of January 1, 2006, NASD staff no longer believes that it is appropriate to toll the two-year grace period. In general, persons who may have left the employment of an NASD member firm as long as 9 years ago, should not presumptively be permitted to re-enter the securities business with a member firm without passing the necessary qualification examinations. Many new securities rules and regulations have been developed in the intervening period, and our goal of investor protection is better served by having such persons demonstrate their qualifications by re-taking and passing the necessary qualification examinations. Thus, NASD staff declines to extend the grace period during which an individual is not required to retake a qualification examination.1 As in all cases, however, a person may seek an examination waiver separately in accordance with Rule 1070(e).
In our October 2000 Letter, NASD staff also stated that Rule 1031 provides the necessary flexibility to permit bank-affiliated member firms to sponsor and complete registration for unregistered bank employees in anticipation of moving such employees into a registered broker-dealer. The letter also stated that so long as bank employees continue to be supervised by the banks and do not engage in any securities activity for or on behalf of the member firm of which they become an associated person, then, in view of the unique circumstances of GLBA, the member would not be required to separately supervise such person under Rules 3010, 3030, 3040, or 3050. The October 2000 Letter set as May 12, 2001, the date upon which this position would expire.
NASD staff continues to believe that Rule 1031 permits a broker-dealer to sponsor an individual for registration in anticipation of having such person engage in the investment banking or securities business on behalf of such member. Rule 1031(a) states "[a]ll persons engaged or to be engaged in the investment banking or securities business of a member who are to function as representatives must be registered as such with NASD." (emphasis added). Rule 1031(a) adds that "[a] member shall not make application for the registration of any person as representative where there is no intent to employ such person in the member's investment banking or securities business." Thus, Rule 1031 generally permits early registration of unregistered bank employees where there is an intent by the member for such person to function as a representative. However, as noted in your June 2004 Letter and our October 2000 Letter, once a member commences the registration process for a bank employee, such person becomes an associated person of the member and the member must then supervise such person in accordance with NASD rules.
As stated in our October 2000 Letter, in view of the unique circumstances in which large numbers of bank employees will be seeking to register with a broker-dealer to comply with provisions of GLBA, NASD staff continues to reiterate its view that so long as bank employees continue to be supervised by the bank and do not engage in any securities activity for or on behalf of the member firm of which they are an associated person, a member will not be required to separately supervise such associated persons under Rules 3010, 3030, 3040 or 3050. Members should be aware that beginning the earlier of January 1, 2006, or as soon as any bank employee engages in any securities activity for or on behalf of a member, such member will be required to supervise such person in accordance with Rules 3010, 3030, 3040 and 3050.
Please note that the opinions expressed in this letter are staff opinions and have not been reviewed or endorsed by the NASD Board. 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 address any other NASD rule or interpretation or all the possible regulatory and legal issues involved.
Gary L. Goldsholle
Associate Vice President and
Associate General Counsel
1 However, in view of our prior, informal discussions on this matter, we will extend the tolling of the grace period until November 12, 2004, the date on which the brokerage provisions of Title II of GLBA were scheduled to take effect. Persons seeking to avail themselves of this extended grace period must register with a NASD member firm by that date and follow the procedures set forth in the October 2000 Letter. Persons also should be aware that as stated in the October 2000 Letter, the tolling applies only with respect to those qualification examinations that an individual has passed and with respect to those activities in which an individual was engaged while with a bank. As stated in the October 2000 Letter, NASD’s Qualifications and Exams Department has primary responsibility for determining the sufficiency of an examination waiver request, including whether the applicant has demonstrated that an individual has engaged in the necessary activity while at a bank.