Interpretive Letter to Richard Bennett, Signal Securities, Inc.
January 19, 2001
Mr. Richard Bennett
Signal Securities, Inc.
700 Throckmorton St.
Fort Worth, TX 76102
Re: Series 55 Registration Requirement
Dear Mr. Bennett:
I am writing in response to our phone conversations, and your email messages dated July 25 and December 28, 2000, and January 16, 2001. You have asked for guidance as to whether individuals who enter orders into the Signal Securities, Inc. order routing system need to register as equity traders. You also have asked for guidance as to whether the firm's Director of Computer Services needs to register as an equity trader.
Signal Securities clears its transactions on a fully-disclosed basis. Signal Securities' registered representatives and clients call the firm's order entry personnel to place orders into the firm's routing system. The routing system sends all orders to Signal Securities' clearing firm. The clearing firm then routes orders for execution in the following manner: orders for listed securities are sent to Firm A; orders for equities in which the clearing firm makes a market are sent to its trading desk; and all other orders are sent to either Firms B or C. Signal Securities' order entry personnel only direct the clearing firm to send orders to particular locations for execution when instructed by the client placing the trade, and the Trading Services Manager approves the override. The Trading Services Manager is registered under Series 24 and Series 55. The other employees entering trade data are registered under Series 7.
The Trading Services Manager reports to the Director of Computer Services for administrative purposes. The Director of Computer Services is responsible for the firm's back office functions. He is a Vice President and registered under Series 24. The Director of Computer Services is not involved in the processing or execution of trades. He plays no role in directing the clearing firm to execute transactions in any particular location or on any particular or specified terms.
On April 1, 1998, NASD Regulation implemented amendments to NASD Registration Rules, creating Rule 1032(f). This new rule establishes the qualification requirements for representatives who trade equity securities in The Nasdaq Stock Market and/or over-the-counter markets. Rule 1032(f) established the Series 55 registration category and qualification examination for equity traders. The Rule requires a representative to register as a "Limited Representative—Equity Trader" if the representative is engaged in proprietary trading or in the execution of transactions on an agency basis in equity, preferred, or convertible debt securities. The Rule also applies to persons who directly supervise those who are engaged in such activities.
In the Regulatory & Compliance Alert (Fall 1999) , NASD Regulation explains that a person who processes agency transactions by communicating orders to the member's clearing firm, which then calls or electronically communicates with the contra-side of the transaction, is not required to register under Series 55. The person is not involved in the execution of transactions. Rather, he or she is acting as an order processor. Based on the facts that you have described, the staff of NASD Regulation's Office of General Counsel (the "staff") believes that the level of participation of Signal Securities' order entry personnel (other than the Trading Services Manager, who is registered as an equity trader) in the execution of the trades will not trigger the equity trader registration requirements for these individuals.
Further, the staff believes that the mere fact that the Trading Services Manager reports to the Director of Computer Services will not cause the Director of Computer Services to be subject to the equity trader registration requirements. Although Notice to Members 00-46 includes an illustration describing a supervisor who needs to be Series 55 registered, this example is not meant to suggest that all persons to whom equity traders report need to be Series 55 registered. Based on the facts that you have described, it does not appear that the level of participation of the Director of Computer Services in the operation of the firm's trading activities is sufficient to require that he register as an equity trader.
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
Bernerd Young, District Director