SERIES 55: THROUGH A GLASS DARKLY

by Bill Singer, Esq.

NASDR has clarified that a person will not be required to become a Series 55 trader solely because he or she is making decisions to invest the firm’s capital in specific NASDAQ or over-the-counter securities; however, such registration will be required if that person participates in the execution or processing of trades.

Background

Effective April 1, 1998, NASD Rule 1032(f) required that a representative must 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 order to register as a Limited Representative—Equity Trader, representatives must be registered as General Securities Representatives (Series 7) or as Limited Representatives—Corporate Securities (Series 62) and must pass the Series 55 Examination. Rule 1032(f) contains an exemption for representatives whose principal trading activities involve executing orders on behalf of affiliated investment companies registered with the SEC under the Investment Company Act of 1940.  For the history of this Rule and a detailed explanation of its application, visit  http://www.singerfru.com/SIC/2000/Q2/series55rvd.html

Given the awkward manner in which the Series 55 registration requirement wasimplemented (four revised effective dates!), it is no small wonder that member firms and equity traders are still somewhat confused as to the scope of the rule's coverage.  Recently, in response to evidence of its membership's bewilderment, National Association of Securities Dealers Regulation (NASDR)  issued Notice to Members 00-46 wherein the SRO conceded that it was compelled to "reconsider its prior position" concerning the scope of the registration requirement.  Specifically, NASDR revised its initial pronouncement thatany associated person who makes trading decisions that place a firm's capital at risk needed to be registered as a Series 55. NTM 00-46 clarified that a person will not be deemed to be engaged in proprietary trading for 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. This conclusion, however, assumes that this person will not participate in the execution or processing of trades, and that someone qualified under Series 55 will perform these tasks.

FACT PATTERN:    A fully disclosed broker/dealer is investing its capital in NASDAQ and/or over-the-counter equity securities. The president of the broker/dealer occasionally selects a particular investment, including quantity and price (if limit order). The trades are submitted to a clearing firm for execution.

Alternative 1: If the president of the fully-disclosed BD plays no role in the execution or processing of the trade, would the president be subject to the Series 55 registration requirement?

A.        No. The president is not involved in the execution or processing of trades. If anyone at the firm is involved in the execution or processing of the trades, that person would need to be registered under Series 55.

  Alternative 2:If the president of the fully-disclosed BD is involved in negotiating the terms of the transaction with the contra-side of the transaction, would the president be subject to the Series 55 registration requirement?

A.       Yes. The president is engaged in proprietary trading, and needs to be registered under Series 55. The president is establishing the terms of the trade with the contra-side of the transaction.   

Alternative 3: If the president of the fully-disclosed BD is the immediate supervisor of a trader who negotiates the terms of the transactions in NASDAQ and/or over-the-counter equity securities ( the president plays no role in the execution or processing of the trades),  would the president be subject to the Series 55 registration requirement?

A.        Yes. The president would need to register under Series 55. Rule 1032(f) applies to persons who directly supervise equity traders.  

FACT PATTERN:  A broker/dealer is registered with the SEC as an investment adviser. Investment management professionals at the firm produce portfolio management advice that is used by the firm’s investment advisory clients, and by the firm in its own proprietary trading. Whenever an investment management professional determines that a security should be purchased or sold for the firm’s proprietary account, he or she communicates with a trader employed by the firm. The investment management professional does not communicate any information to the traders other than to occasionally identify particular investments, including quantity and price (if limit order).  The traders are required to be Series 55 registered. Would the investment management professionals be subject to the equity trader registration requirement?

A.        No. The investment management professionals are not involved in the execution or processing of trades.

FACT PATTERN: A person processes proprietary trades for a firm by calling or electronically communicating with a contra-side to the transaction. Is this person engaged in proprietary trading, and therefore required to register as a Series 55 representative?

A.        Yes. NASD Rule 1032(f) covers proprietary traders who effect any transaction in equity, preferred, or convertible debt securities in the Nasdaq or over-the-counter markets.

FACT PATTERN:  Under a payment-for-order-flow relationship, Firm A routes all its proprietary and agency orders to Firm B for execution. Is Firm A involved in the execution or processing of trades?

A.        No. Firm A is not involved in the execution or processing of trades, and its personnel will not be required to be registered under Series 55. The result would be the same if Firm A routes orders to multiple firms for execution. Further, the payment-for-order-flow arrangement is not a fact that is taken into consideration in this situation.