SERIES 55: IS THE FOURTH TIME THE CHARM?

by Bill Singer, Esq.

In February 1998 the NASD published Notice to Members 98-17 ("NTM 98-17"), which announced that effective April 1, 1998, the Limited Representative Equity Trader Exam ("Series 55") would be required for certain traders. NTM 98-17 explained the operation of a two-year grace period for then current traders pursuant to the filing of a formal application by May 1, 1998. In July 1998 the NASD published Notice to Members 98-60 ("NTM 98-60"), which acknowledged that the earlier NTM 98-17 May 1 application date had already been extended to May 15, 1998, and further stated in relevant part:

To be eligible for this extended qualification period, equity traders had to submit applications to NASD Regulation before May 1, 1998. The NASD now has amended its Registration Rules to extend the filing period to August 31, 1998, for persons who were functioning as equity traders before May 1, 1998, and who missed that cut-off date for filing their applications for the Series 55 Examination.

HOT OFF THE PRESS!!!

On April 27, 2000, Rule 1032(f) was amended to extend the two-year grace periodfrom May 1, 2000to October 1, 2000. For more details read NASD Notice to Members 00-27.

As first approved by the SEC on January 2, 1998, and as subsequently amended, NASD Membership and Registration Rule 1032(f)"Limited Representative - Equity Trader" states:

(1) Each person associated with a member who is included within the definition of a representative as defined in Rule 1031 must register with the Association as a Limited Representative - Equity Trader if, with respect to transactions in equity, preferred or convertible debt securities effected otherwise than on a securities exchange, such person is engaged in proprietary trading, the execution of transactions on an agency basis, or the direct supervision of such activities, other than any person associated with a member whose trading activities are conducted principally on behalf of an investment company that is registered with the Commission pursuant to the Investment Company Act of 1940 and that controls, is controlled by or is under common control, with the member.

(2) Before registration as a Limited Representative - Equity Trader as defined in subparagraph (1) hereof may become effective, an applicant must:

(A)   be registered pursuant to Rule 1032, either as a General Securities Representative or a Limited Representative - Corporate Securities; and

(B)   pass an appropriate Qualification Examination for Limited Representative - Equity Trader. Any person who was performing any of the activities described in paragraph (f)(1) above on or prior to May 1, 1998 and who has filed an application to take this examination by August 31, 1998, must pass the examination by October 1, 2000. Any person who is eligible for this extended qualification period and who fails this examination during the twenty-four (24) month time period commencing on May 1, 1998 and ending on October 1, 2000 must wait thirty (30) days from the date of failure to take the examination again. Any person, other than a person who is eligible for the extended qualification period, who files an application to take this qualification examination after May 1, 1998, must pass this examination before conducting such activities as described in paragraph (f)(1) above. In no event may a person who is eligible for the extended qualification period function as an Equity Trader beyond the 24-month period without having successfully passed the appropriate qualification examination.

Consequently, three very clear requirements emerge:

If an individual is engaged in proprietary trading, the execution of transactions on an agency basis, or the direct supervision of such activities, he or she must pass the Series 55 exam.

Any person who was performing any of the activities described above on or prior to May 1, 1998 and who has filed an application to take the Series 55 examination by August 31, 1998, must pass the examination by October 1, 2000 (failed exams during the 24 month period require a 30 day wait before re-testing).

In no event may a person who is eligible for the extended qualification period function as an Equity Trader beyond the 24-month period without having successfully passed the appropriate qualification examination.

NOT THE TIME TO ROLL THE DICE

Consequently, compliance and supervisory staff must ensure that all individuals who filed applications for extensions of exam dates by August 31, 1998, have passed the Series 55 byOctober 1, 2000. If they have not passed by that date, they must not be permitted to engage in proprietary trading, nor the execution of agency transactions, nor directly supervise either activity.

For safety's sake firms might consider removing such non-qualified individuals from the trading desk or trading department until such time as they do qualify. This is not an issue about being reasonable or even about compassion for individuals who have failed an exam. Permitting unregistered persons to act in registered capacities may result in regulatory sanctions on the firm, its supervisory personnel, and management.

NASD Regulation recently announced its first disciplinary action for violations of the NASD’s Series 55 registration, when it censured and fined a member firm $25,000 for failure to properly qualify and register 14 individuals. This member employed proprietary traders at its main trading floor and provided services to day-trading customers who effect trades from branch offices and other remote locations around the country. Without admitting or denying the charges, the member consented to the entry of findings that 14 employees who acted as equity traders between May 1, 1998, and January 31, 1999, failed to comply with the Series 55 registration rule. During that period, those 14 traders effected approximately 3,700 trades in 250 NASDAQ securities. The member also consented to findings that it lacked adequate oversight to ensure proper registration of its traders, and, as part of the settlement,  agreed to implement new compliance procedures to prevent future violations.

Given that the member in the above cited case was charged with violations arising from traders who had not filed an application by August 31, 1998 to take the Series 55 examination, one should anticipate that the NASD will seek to impose far more stringent sanctions on members failing to comply with that same requirement after nearly 1 1/2 years of warning. Similarly, industry compliance professionals fully expect that upcoming NASD examinations of member firms will likely request personnel rosters, seek to fully identify all trading personnel, and quite possibly attempt to develop cases concerning the activities and conduct of unqualified traders. Worse, this type of examination may result in the imposition of sanctions upon compliance officers and senior management for failure to supervise.