[Federal Register Volume 66, Number 103 (Tuesday, May 29, 2001)]
[Notices]
[Pages 29196-29198]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-13329]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-44332; File No. SR-NASD-00-77]
Self-Regulatory Organizations; Order Approving Proposed Rule
Change by the National Association of Securities Dealers, Inc. Relating
to Registration Requirements for Limited Principals-Financial and
Operations and Limited Principals-Introducing Broker/Dealer Financial
and Operations
May 21, 2001.
I. Introduction
On December 20, 2000, the National Association of Securities
Dealers, Inc. (``NASD''), through its subsidiary, NASD Regulation, Inc.
(``NASD Regulation'') filed with the Securities and Exchange Commission
(``Commission'' or ``SEC'') a proposed rule change pursuant to section
19(b)(1) of the Securities Exchange Act of 1934 (``Exchange Act'') \1\
and Rule 19b-4 thereunder.\2\ The proposal amends NASD Rule 1022(b),
``Limited Principal--Financial and Operations'' (``FINOP''), NASD Rule
1022(c), ``Limited Principal--Introduction Broker/Dealer Financial and
Operations'' (``Introducing FINOP''), and NASD Rule 9610, ``Procedures
for Exemptions.'' Notice of the proposed rule change was published for
comment in the Federal Register on February 9, 2001.\3\ The Commission
received one comment letter regarding the proposal.\4\ This order
approves the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1)
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 43928 (February 5,
2001), 66 FR 9737.
\4\ See letter to the Secretary, SEC, from the Ad Hoc Committee
for Small Firm Financial and Operational Responsibility (``Ad Hoc
Committee''), dated March 2, 2001 (``Ad Hoc Committee Letter'').
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[[Page 29197]]
II. Description of the Proposed Rule Change
NASD Rules 1022(b) and 1022(c) set forth registration requirements
for FINOPs and Introducing FINOPs. NASD Regulation proposes to amend
NASD Rules 1022(b) and 1022(c) to clarify their applicability to NASD
members by making citations in them consistent with Rule 15c3-1 under
the Exchange Act.\5\ Specifically, the proposed amendments to NASD Rule
1022(b) clarify that every broker or dealer operating pursuant to
Exchange Act Rule 15c3-1(a)(1)(ii) or (a)(2)(i) \6\ (both of which
subject brokers or dealers to a minimum net capital requirement of
$250,000), or Exchange Act Rule 15c3-1(a)(8) \7\ (which subjects
municipal securities brokers' brokers to a minimum $150,000 net capital
requirement) must have a FINOP. The proposed amendments to NASD Rule
1022(c) clarify that all other brokers or dealers subject to Exchange
Act Rule 15c3-1 must have at least one associated person registered as
an Introducing FINOP.
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\5\ 17 CFR 240.15c3-1.
\6\ 17 CFR 240.15c3-1(a)(1)(ii) and (a)(2)(i).
\7\ 17 CFR 240.15c3-1(a)(8).
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FINOPs must pass the Series 27 Principal Examination and
Introducing FINOPs must pass the Series 28 Principal Examination. NASD
Rule 1022(c) currently provides that a person qualified as a Series 27
FINOP is not required to take the Series 28 Examination if he or she is
employed as an Introducing FINOP. NASD Regulation proposes to make a
technical correction to NASD Rule 1022(c)(3) by adding a reference to
paragraph (b)(2) of NASD Rule 1022, which defines the term ``Limited
Principal--Financial and Operations.''
NASD Regulation also proposed to eliminate the ability of members
subject to Exchange Act Rule 15c3-1 to request exemptions from the
requirement to have a FINOP by amending NASD Rule 1022(b) and by
striking NASD Rule 1022 from the list of rules in NASD Rule 9610(a)
from which members may seek exemptive relief. Although firms subject to
Exchange Act Rule 15c3-1 will be required to have a FINOP, they may
continue to seek exam waivers for qualified individuals pursuant to
paragraph (e) of NASD Rule 1070, ``Qualification Examination and Waiver
of Requirements.''
The proposed changes to NASD Rules 1022(b) and 1022(c) also makes
clear that the requirements to have a FINOP or Introducing FINOP
applies only to firms that are subject to Exchange Act Rule 15c3-1.
Members that are exempt from or otherwise not subject to Exchange Act
Rule 15c3-1 will no longer be subject to NASD Rules 1022(b) and
1022(c), and will not need to seek exemptive relief from them.
The proposed changes will not affect individuals who currently are
grandfather for the Series 27 or Series 28 Examinations because they
are considered to possess the license for which they were
grandfathered.\8\ In addition, firms that currently are the subject of
a FINOP waiver will not be subject to the proposed rule changes.\9\
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\8\ Only individuals who qualified as ``Financial Principals''
before the establishment of the Series 27 examination were
grandfathered as FINOPs and were not required to take either of the
examinations.
\9\ Telephone conversation between Shirley Weiss, Attorney, NASD
Regulation, and Andrew Shipe, Attorney, Division of Market
Regulation, SEC, on January 11, 2001.
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Finally, NASD Regulation proposes to amend NASD Rule 9610(a) to
clarify that the NASD Rule 9600 ``Procedures for Exemptions'' series
merely sets forth procedures for seeking exemptive relief and that the
type of relief that may be requested, and the authority to grant it, is
found in the rules listed in NASD Rule 9610(a).
III. Summary of Comments
The Commission received one comment letter regarding the proposed
rule change.\10\ NASD Regulation responded to this commenter in a
letter dated April 9, 2001.\11\
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\10\ See Ad Hoc Committee Letter, supra, note 4. According to
the Ad Hoc Committee Letter, the Ad Hoc Committee, whose members
perform financial and operational services for NASD members, was
formed solely to respond to the NASD's proposal. The organization
comprising the Ad Hoc Committee are: Buchanan Associates, Cogent
Management, Inc., Integrated Management Solutions, JRS Financial
Services, LLC, Hagan and Burns, CPAs, and MGL Consulting
Corporation.
\11\ See Letter to England, Assistant Director, Division of
Market Regulation, SEC, from Shirley Weiss, Associated General
Counsel, NASD Regulation (``NASD Regulation Letter'').
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The Ad Hoc Committee opposed the proposal. Specifically, the Ad Hoc
Committee asserted that certain limited function broker-dealers,
including broker-dealers that the Ad Hoc Committee identified as
``private placement and mutual fund firms'' do not required a
registered FINOP. In addition, the Ad Hoc Committee maintained that the
proposal would place new limited function broker-dealers at a
competitive disadvantage to established NASD members operating under a
FINOP waiver. The Ad Hoc Committee also suggested that some managerial
employees of limited function broker-dealers might lack expertise in
financial and operational matters, even after passing the requisite
examinations, and that the outsourcing of such functions was
appropriate for these broker-dealers.\12\
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\12\ See Ad Hoc Committee Letter, supra, note. 4.
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In its response, NASD Regulation asserted that compliance with net
capital and other financial operational rules is not dependent on the
size of a firm's business. NASD Regulation also stated that it did not
believe that new firms which will be required to employ a registered
FINOP will be at a competitive disadvantage because they will continue
to be able to employ FINOPs on a part-time or outsourced basis,
although the proposed changes will require such personnel to register
as FINOPs. Finally, in response to the Ad Hoc Committee's concerns
about the qualifications of some employees of broker-dealers to
function as FINOPs, NASD Regulation asserted that any person who passes
the Series 27 or 28 is qualified to act as a FINOP or Introducing
FINOP, respectively.\13\
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\13\ See NASD Regulation Letter, supra, note 11.
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IV. Discussion
After careful review, the Commission finds that the proposed rule
change is consistent with the Act and the rules and regulation
thereunder applicable to a national securities association.\14\ The
Commission finds that the proposal is consistent with the requirements
of Section 15A(b)(6) of the Act,\15\ which requires that the rules of a
registered national securities association be designed to prevent
fraudulent and manipulative acts and practices, to promote just and
equitable principles of trade, to foster cooperation and coordination
with persons engaged in regulating, clearing, settling, processing
information with respect to, and facilitating transactions in
securities, to remove impediments to and perfect the mechanism of a
free and open market and a national market system, and, in general, to
protect investors and the public interest.
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\14\ In approving the proposal, the Commission has considered
the rule's impact on efficiency, competition, and capital formation.
15 U.S.C. 78c(f).
\15\ 15 U.S.C. 78o(b)(6).
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As discussed more fully above, NASD Regulation proposes to amend
NASD Rules 1022(b) and (c) to provide that every broker or dealer
operating pursuant to the provisions of Exchange Act Rule 15c3-
1(a)(1)(ii), (a)(2)(i), or (a)(8) \16\ must have at least one FINOP,
and that all other brokers or dealers subject to the requirements of
Exchange Act Rule 15c3-1 must have at least one Introducing FINOP.
FINOPs and Introducing FINOPS must be registered with the NASD. NASD
Regulation also
[[Page 29198]]
proposes to eliminate the ability of members subject to Exchange Act
Rule 15c3-1 to request an exemption from the requirements, and to
strike NASD Rule 1022 from the list of rules in NASD Rule 9610(a) from
which a member may seek exemptive relief. NASD members that are exempt
from or otherwise not subject to Exchange Act Rule 15c3-1 would not be
subject to the requirements of either NASD Rule 1022(b) or 1022(c) and
thus no longer required to seek exemptive relief from them.
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\16\ 17 CFR 240.15c3-1(a)(1)(ii), (a)(2)(i), and (a)(8).
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The Commission believes that the proposed changes are consistent
with the Act and the rules and regulations thereunder. Specifically,
the Commission believes that the proposal to identify the classes of
brokers or dealers that are required to designate a FINOP or an
Introducing FINOP will protect investors and the public interest by
helping to ensure that the financial and operations personnel of
broker-dealers subject to Exchange Act Rule 15c3-1 have the training
and competence needed to ensure the member's compliance with applicable
net capital, recordkeeping and other financial and operational rules.
With regard to the Ad Hoc Committee's contention that the proposal
should not apply to certain limited function broker-dealers, the
Commission agrees with NASD Regulation's assertion that compliance with
the Commission's net capital and other financial and operational rules
does not depend on the size of a broker-dealer's business.\17\ As noted
above, the Commission believes the proposal will help to ensure NASD
members' compliance with applicable net capital, recordkeeping, and
other financial and operational rules. In addition, the Commission does
not believe that the proposal will create a significant competitive
disadvantage for new limited function broker-dealers who will be
required to register a FINOP or an Introducing FINOP. In this regard,
the Commission notes that a limited function broker-dealer will be able
to employ a FINOP or an introducing FINOP on a part-time basis.
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\17\ See NASD Regulation Letter, supra, note 11.
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The Commission finds that the proposed changes to NASD Rule 9610(a)
are consistent with the Act because they clarify NASD Rule 9610(a).
Specifically, the amendments to NASD Rule 9610(a) clarify that the Rule
9600 Series merely sets forth procedures for seeking exemptive relief,
and that the type of relief that may be requested, and the authority to
grant it, is found in the rules listed in NASD Rule 9610(a). In
addition, the amendments to NASD Rule 9610(a) make NASD Rule 9610(a)
consistent with NASD Rule 1022, as amended, by deleting NASD Rule 1022
from the list of rules from which a member may seek exemptive relief.
Finally, the Commission finds that the proposal to amend NASD Rule
1022(c)(3) by adding a reference to paragraph (b)(2) of NASD Rule 1022
is consistent with the Act because it will help to clarify the
application of NASD Rule 1022(c)(3).
V. Conclusion
For the foregoing reasons, the Commission finds that the proposed
rule change is consistent with the requirements of the Act and the
rules and regulations thereunder.
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\18\ that the proposed rule change (SR-NASD-00-77) is approved.
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\18\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\19\
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\19\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-13329 Filed 5-25-01; 8:45 am]
BILLING CODE 8010-01-M