SERIES 55: WHO'S COVERED? 

NASD Rule 1032(f) requires a person to register as Limited Representative- Equity Trader if the representative is engaged in proprietary trading or the execution of transactions on an agency basis in equity, preferred, or convertible debt securities. The rule also applies to individuals who directly supervise those engaged in such activities. 

Proprietary Trading – Are you a participant? 

A person will not deemed to be engaged in proprietary trading for registration requirements 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.[1]  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. 

Alternative 1:

            Executive Vice President makes investment decisions for the firm’s proprietary account (including quantity and price), but does not participate in the execution or processing of the transactions. Whenever the Executive Vice President determines that a security should be purchased or sold for the firm’s proprietary account, she communicates with a trader employed by the firm.  The traders are registered under Series 55.  Would Executive Vice President be subject to the Series 55 registration requirement? 

            No.  The Executive Vice President is not involved in the execution or processing of trades.  Mere decision-making that is not coupled with execution or trade procession does not necessarily require Series 55 registration.  An important factor here is thatthere are other individuals at the firm executing the trades.

Alternative 2:

            President of fully-disclosed broker-dealer 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? 

            Yes.  In this example the President has gone beyond mere decision-making and is negotiating terms of the trade. Consequently, the president is engaged in proprietary trading, and needs to be registered under the Series 55.  

Agency Trading – Are you a Participant? 

Individuals will not be required to register under the Limited Representative – Equity Trader rule if that person is not involved in the execution of transactions on an agency basis.[2] 

Alternative 1:

            A person processes agency transactions by communicating all orders to another firm, which then calls or electronically communicates with the contra-side of the transaction.  Is this person subject to the Series 55 registration requirement? 

            No.  The person under scrutiny is transmitting orders for execution to another firm, which, in turn, executes with the contra-side.  The person at issue does not communicate with the contra-side and is not involved in the execution of transactions.  These facts seem to suggest that someone is simply acting as an order processor. 

Alternative 2:

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

            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. 

Alternative 3:

            A broker-dealer is registered with the NASD. The Member acts as a discretionary investment manager for a variety of investment partnerships and other collective investment vehicles. Whenever a portfolio manager or analyst determines that a security should be purchased or sold for the account of an investment advisory client, the portfolio manager or analyst communicates with an employee of the Member – a “trading professional.” The trading professional is responsible for executing the trade and for reporting it to a clearing broker for clearance. Would investment manager professionals be subject to the equity trader registration requirement? 

            No.  Portfolio managers and analysts are not engaged in conduct that requires equity trader registration.  The individuals are not involved in the execution or processing of trades. 

Supervisory Activities – Are You a Participant? 

The requirements under Rule 1032(f) also apply to persons who directly supervise those who are engaged in such activities. 

Alternative 1:

            Broker-Dealer’s head trader (“Employee B”) supervises all traders of the firm.  Employee B reports directly to Employee A, but Employee A has no supervisory role in the broker-dealer's trading activities.  Would Employee A be subject to the equity trader registration requirement? 

            No.  The mere fact that Employee B reports to Employee A will not cause Employee A to be subject to the equity trader registration requirement. Employee A is not involved in the direct supervision of the execution and processing of trades. 

Alternative 2: 

            A fully-disclosed broker-dealer is investing its capital in Nasdaq and over-the-counter equity securities.  The president of the broker-dealer is the immediate supervisor of a trader who negotiates the terms of the transactions in Nasdaq and over-the-counter equity securities. The president plays no role in the execution or processing of trades. Would the president be subject to the equity trader registration requirement? 

            Yes.  The president is involved in the direct supervision of persons involved with executing and processing equity securities and thus comes under the Rule 1032(f) and would need to register under Series 55.

Clearly the factor that triggers Rule 1032(f) most dramatically is the action by the individual in question – is she engaged in proprietary trading or in the execution of transactions on an agency basis in equity, preferred, or convertible debt securities or directly supervise these activities?