[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