Interpretive Letter to Stephen M. Vine, Esq., Akin, Gump, Strauss, Hauer & Feld, L.L.P.
July 19, 2000
Stephen M. Vine, Esq.
Akin, Gump, Strauss, Hauer & Feld, L.L.P.
590 Madison Avenue
New York, NY 10022
Re: Equity Trader Registration, Rule 1032(f)
Dear Mr. Vine:
This letter is in response to your request for guidance with respect to whether certain employees of your client, a National Association of Securities Dealers, Inc. ("NASD") member firm (the "Member"), are equity traders for the purpose of the Series 55 Registration requirement. Specifically, you ask for guidance as to whether the Chief Executive Officer ("CEO") and certain portfolio managers and analysts associated with the Member are equity traders.
In your letter of February 7, 2000, you state that the Member acts as discretionary investment manager for a variety of investment partnerships and other collective investment vehicles, as well as for several separate institutional accounts, some of which trade over-the-counter equity securities. The Member also conducts direct investment of its proprietary capital in various asset classes, including over-the-counter securities.
Your letter describes the functions performed by the CEO and the portfolio managers and analysts. You state that whenever a portfolio manger or analyst determines that a security should be purchased or sold for the account of an investment advisory client or for the Member’s proprietary account, the portfolio manager or analyst communicates with an employee of the Member that you refer to as a "trading professional." The trading professional, not the portfolio manger or analyst, is responsible for executing the trade and for reporting it to a clearing broker for clearance. Your letter further states that the CEO occasionally formulates investment decisions for the Member’s proprietary account. Like the portfolio mangers and analysts, the CEO communicates any such investment decision to a trading professional.
On April 1, 1998, NASD Regulation, Inc. ("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 person who directly supervise those who are engaged in such activities.
In Notice to Members 00-46, NASD Regulation states that a person will not be deemed to be engaged in proprietary trading for the purposes of the equity trader registration requirement based solely on the fact that he or she is making decisions to invest the firm’s capital in specific Nasdaq or over-the-counter securities. The Notice explains that this conclusion assumes that the person will not participate in the execution or processing of trades, and that someone qualified under Series 55 will perform these tasks.
It is the position of this office that the CEO, portfolio managers and analysts described in your letter are not engaged in conduct that requires equity trader registration.1 This position is based on our understanding that these individuals are not involved in the execution or processing of trades. If these individuals communicate any information in connection with the decision to purchase or sell securities to the firm’s traders other than to identify the particular investment, including quantity and price (if limit order), they may become subject to the equity trader registration requirements. Further, this conclusion is based on our belief that the CEO does not directly supervise the firm’s equity traders.
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 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.
Very truly yours,
Eric J. Moss
Assistant General Counsel
|David A. Leibowitz, District Director
NASD Regulation, District 10
1See Notice to Members 00-46 (Questions 1 & 4).