THE TRADER'S EDGE BY JOHN K. FAHEY, ESQ.  BILL SINGER, ESQ. Vol. 1, no. 1

SERIES 55: “LIMITED” CONFUSION? 

The Securities Industry Commentator™ announces the beginning of a new column entitled The Trader’s Edge™, which will cover developments, rule changes, enforcement actions, and litigation involving registered securities traders. This first installment takes a look at the Limited Representative-Equity Trader (Series 55) requirements and how they have affected the industry landscape. 

In 1995, NASD Regulation, Inc. purportedly became concerned about a perceived escalation in the number of rule violations by traders conducting market making and principal trading functions in both the Nasdaq market and over-the-counter. Some industry pundits saw the concern as something more cynical.  One theory was that NASDR felt it needed to respond to increasing pressure from the then ongoing U.S. Department of Justice/Antitrust Division investigation of price-fixing by NASDAQ market makers and the collateral SEC investigation of the NASD's failure to supervise its membership (with a particular emphasis on the SRO's abusive handling of its SOES members).  A second theory was that NASDR was responding to pressure from main-stream market makers and national BDs to contain the expanding influence of SOES firms, day traders, and nascent ECNs.  Oh, and of course, there's the ever popular theory that the NASD's public explanation of its motivation should be accepted as correct[1].  Choose whichever theory suits you --- in fact, feel free to fashion a hybrid.

Ultimately, the incontrovertible fact remains that the NASD convinced the SEC that equity traders needed better training and qualification.  And so with the usual flair and panache that we have all become accustomed to, better training and qualification was to be accomplished by the revolutionary new and progressive approach of adding yet another rule to the NASD's prodigious catalog.  So, onJanuary 2, 1998 the SEC approved and onApril 1, 1998, NASD made effective new NASD Registration Rule 1032(f), which 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. 

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.

Thus, 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. 

Tune in next week for a look at what constitutes proprietary trading and execution of transactions on an agency basis that brings an individual within the gray matter of the Limited Representative – Equity Trader.