[Federal Register Volume 70, Number 179 (Friday, September 16, 2005)]
[Notices]
[Pages 54782-54788]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-5034]



[[Page 54782]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52403; File No. SR-NASD-2003-104]


Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Order Approving Proposed Rule Change and Amendment Nos. 
1, 2, 3, 4, 5 and 6 Thereto Relating to Proposed Uniform Definition of 
``Branch Office'' Under NASD Rule 3010(g)(2)

September 9, 2005.

I. Introduction

    On July 2, 2003, the National Association of Securities Dealers, 
Inc. (``NASD'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to revise the definition of 
``branch office'' set forth in NASD Rule 3010(g)(2) and to adopt NASD 
IM-3010-1 to provide guidelines on factors to be considered by a member 
firm in conducting internal inspections of offices. On October 21, 
2003, NASD amended the proposed rule change.\3\ On December 8, 2003, 
NASD amended the proposed rule change.\4\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letter from Kosha K. Dalal, Assistant General Counsel, 
NASD, to Katherine A. England, Assistant Director, Division of 
Market Regulation (``Division''), Commission, dated October 21, 2003 
(``Amendment No. 1'').
    \4\ See letter from Kosha K. Dalal, Assistant General Counsel, 
NASD, to Katherine A. England, Assistant Director, Division, 
Commission, dated December 8, 2003 (``Amendment No. 2'').
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    The proposed rule change, as amended by Amendments Nos. 1 and 2, 
was published for comment in the Federal Register on December 16, 
2003.\5\ The Commission received 847 comment letters on the proposal, 
as amended.\6\ On June 29, 2004, NASD submitted a response to the 
comment letters.\7\ On September 20, 2004, NASD amended the proposed 
rule change (``Amendment No. 3'').\8\ On March 21, 2005, NASD amended 
the proposed rule change (``Amendment No. 4'').\9\ On June 1, 2005, 
NASD amended the proposed rule change (``Amendment No. 5'').\10\ On 
August 23, 2005, NASD amended the proposed rule change (``Amendment No. 
6'').\11\ This order approves the proposed rule change, as amended.
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    \5\ See Securities Exchange Act Release No. 48897 (December 9, 
2003), 68 FR 70059.
    \6\ See letters from Stephen A. Batman, CEO, 1st Global Capital 
Corp., dated January 5, 2004 (``1st Global Letter''); Mario 
DiTrapani, President, Association of Registration Management, dated 
January 6, 2004 (``ARM Letter''); Carl B. Wilkerson, Chief Counsel, 
Securities & Litigation, American Council of Life Insurers, dated 
December 23, 2003 (``ACLI Letter''); Carl B. Wilkerson, Vice 
President & Chief Counsel, Securities & Litigation, American Council 
of Life Insurers, dated October 5, 2004 (``ACLI Letter 2''); Charles 
Barley, dated January 21, 2004 (``Barley Letter''); Mike Becher, 
dated January 21, 2004 (``Becher Letter''); Rod Bieber, dated 
January 21, 2004 (``Bieber Letter''); Sherri Branson, Agent, State 
Farm Insurance Companies, dated January 26, 2004 (``Branson 
Letter''); John R. Claborn, John R. Claborn & Associates, dated 
January 21, 2004 (``Claborn Letter''); Charles Ehlert, Rural 
Insurance Companies, received February 12, 2004 (``Ehlert Letter''); 
Lawrence J. Fowler, Jr., CLU, LUTCF, Nationwide, dated February 2, 
2004 (``Fowler Letter''); Michael Garcia, dated January 20, 2004 
(``Garcia Letter''); Bob Geis, CLU, Registered Representative, AXA 
Network, dated January 28, 2004 (``Geis Letter''); Arthur K. Gruber, 
CLU, Registered Representative, AXA Advisors, LLC, dated January 23, 
2004 (``Gruber Letter''); Richard A. Gurdjian, dated January 20, 200 
(``Gurdjian Letter''); Clark Hall, dated January 21, 2004 (``Hall 
Letter''); Joan M. Halstead, CLU, REBC, ChCF, Chartered Financial 
Consultant, Halstead Financial Associates, dated January 21, 2004 
(``Halstead Letter''); Karen R. Hammond, ChFC, The Hammond Agency, 
Inc., dated January 21, 2004 (``Hammond Letter''); Jeffrey K. 
Hoelzel, MTL Equity Products, Inc., dated January 28, 2004 
(``Hoelzel Letter''); Raymond Howen, Rural Insurance Companies, 
received February 11, 2004 (``Howen Letter''); Edwin P. Morrow, CLU, 
ChFC, CFP, RFC, President and CEO, International Association of 
Registered Financial Consultants, Inc., dated January 21, 2004 
(``IARFC Letter''); Gene Imke, dated January 30, 2004 (``Imke 
Letter''); Thomas R. Moriarty, President, InterSecurities, Inc., 
dated January 6, 2004 (``InterSecurities Letter''); Jim Jacobsen, 
State Farm, received February 9, 2004 (``Jacobsen Letter''); Michael 
Lisle, Mutual of Omaha Insurance Company, dated January 21, 2004 
(``Lisle Letter''); Carl Lundgren, received March 30, 2004 
(``Lundgren Letter''); Peter J. Mersberger, Mersberger Financial 
Group, Inc., dated January 27, 2004 (``Mersberger Letter''); Leonard 
M. Bakal, Vice President and Compliance Director, Metropolitan Life 
Insurance Company, dated January 14, 2004 (``MetLife Letter''); Gary 
A. Sanders, National Association of Insurance and Financial 
Advisors, dated January 29, 2004 (``NAIFA Letter''); Ralph A. 
Lambiase, NASAA President and Director, Connecticut Division of 
Securities, North American Securities Administrators Association, 
Inc., dated January 6, 2004 (``NASAA Letter''); David Niederbaumer, 
CLU, ChFC, Financial Associate, and Matt Niederbaumer, Financial 
Associate, Thrivent Financial for Lutherans, dated January 30, 2004 
(``Niederbaumer Letter''); Kathy Northrop, dated January 20, 2004 
(``Northrop Letter''); Michael Leahy, President, NYLIFE Securities 
Inc., dated January 29, 2004 (``NYLIFE Letter''); Gerald J. O'Bee, 
CLU, ChFC, CLTC, CSA, Insurance and Financial Services, MassMutual 
Financial Group, dated January 26, 2004 (``O'Bee Letter''); Walter 
Olshanski, dated January 21, 2004 (``Olshanski Letter''); Minoo 
Spellerberg, Compliance Director, Princor Financial Services 
Corporation, dated February 6, 2004 (``Princor Letter''); Minnie 
Whitmire, Registrations Supervisor, Raymond James & Associates, 
Inc., dated January 12, 2004 (``Raymond James Letter''); George 
Nelson Ridings, ChFC CLU, dated January 27, 2004 (``Ridings 
Letter''); Walter Scott, dated January 21, 2004 (``Scott Letter''); 
John Polanin, Jr., Chairman, Self-Regulation and Supervisory 
Practices Committee, Securities Industry Association, dated January 
9, 2004 (``SIA Letter''); Christopher Shaw, Vice President & Acting 
Chief Compliance Officer, Transamerica Financial Advisors, Inc., 
dated January 6, 2004 (``TFA Letter''); John Gilner, Vice President; 
Henry H. Hopkins, Vice President; and Sarah McCafferty, Vice 
President, T. Rowe Price Investment Services, Inc., dated January 5, 
2004 (``T. Rowe Price Letter''); Paul B. Uhlenhop, Lawrence, Kamin, 
Saunders & Uhlenhop, L.L.C., dated December 31, 2003 (``Uhlenhop 
Letter''); Roy D. Vega, Vega Insurance & Financial Services, dated 
January 21, 2004 (``Vega Letter''); Al Villasenor, Unisure Insurance 
Services Inc. and Villasenor Insurance Associates, dated January 28, 
2004 (``Villasenor Letter''); and Connie Walenta, dated January 21, 
2004 (``Walenta Letter''). In addition, the Commission received 756 
comment letters from individuals or entities using ``Letter Type A'' 
and 45 comment letters from individuals or entities using ``Letter 
Type B,'' both of which expressed concerns over the effect the 
proposed rule change would have on broker-dealers affiliated with 
life insurance companies. Letter Types A and B are posted on the 
Commission's Internet Web site (http://www.sec.gov/rules/proposed.shtml).
    \7\ See letter from Barbara Z. Sweeney, Senior Vice President 
and Corporate Secretary, NASD, to Katherine A. England, Assistant 
Director, Division, Commission, dated June 29, 2004 (``NASD Response 
Letter'').
    \8\ See letter from Patrice Gliniecki, Senior Vice President and 
Deputy General Counsel, NASD, to Katherine A. England, Assistant 
Director, Division, Commission, dated September 20, 2004. In 
Amendment No. 3, NASD revised the language of NASD Rule 3010(g)(2) 
to reflect changes made by File No. SR-NASD-2002-162, approved in 
Securities Exchange Act Release No. 49883 (June 17, 2004), 69 FR 
35092 (June 23, 2004). This was a technical amendment and is not 
subject to notice and comment.
    \9\ In Amendment No. 4, NASD: (i) amended the proposed 
definition of ``branch office'' set forth in NASD Rule 3010(g)(2)(A) 
to exclude a member's main office to conform to the definition 
proposed by the NYSE in File No. SR-NYSE-2002-34 (NASD rules do not 
define ``main office''). The NASD made this change to its rule so 
that the rule would be consistent with the NYSE rule and to avoid 
confusion for dual members; (ii) added new subparagraph (2)(C) to 
NASD Rule 3010(g) to clarify the rules and regulations applicable to 
a member's main office; and (iii) designated proposed new text to 
Rule 3010(g)(2) as being subparagraph (D). However, Amendment No. 6 
deletes the exclusion of a member's main office from the definition 
and proposed subparagraph 2(C) to NASD Rule 3010(g) described in 
items (i) and (ii) above, respectively. See note 11, infra. NASD 
also responded to ACLI Letter II in Amendment No. 4 (``NASD Response 
Letter 2''). This was a technical amendment and is not subject to 
notice and comment.
    \10\ In Amendment No. 5, NASD made minor changes correcting the 
grammar, markings, and a cross-reference in the text of the proposed 
rule change. This was a technical amendment and is not subject to 
notice and comment.
    \11\ In Amendment No. 6, NASD deleted (i) the proposed exclusion 
from registration as a branch office for main offices of a member 
and (ii) proposed subparagraph 2(C) to Rule 3010(g), added in 
Amendment No. 4, in order to maintain a uniform proposed definition 
of branch office with the NYSE's proposal. NASD also clarified the 
effective date of the proposed rule change and made minor technical 
changes to the rule text. In addition, NASD responded to comments 
relating to remote traders in Amendment No. 6 (``NASD Response 
Letter 3''). This was a technical amendment and is not subject to 
notice and comment.
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II. Description of Proposed Rule Change

    NASD currently defines a branch office as any location identified 
by any means to the public or customers as a location at which the 
member conducts an investment banking or securities

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business. The current definition contains the following exclusions: (1) 
A location identified in a telephone directory, on a business card, or 
letterhead; (2) a location referred to in a member advertisement; (3) a 
location identified in a member's sales literature; and (4) any 
location where a person conducts business on behalf of the member only 
occasionally; provided, in each case, that the phone number and address 
of the branch office or Office of Supervisory Jurisdiction (``OSJ'') 
that supervises the location is also identified.\12\ NASD currently 
designates locations from which associated persons work as either 
branch offices or unregistered locations. This designation primarily 
affects the supervisory responsibilities of, and the fees paid by, 
members.
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    \12\ An office that is designated a ``branch office'' under NASD 
rules must pay an annual registration fee and have a branch manager 
on site. A branch office is further classified as an OSJ if any one 
of the following enumerated activities occurs at the location: order 
execution, maintenance of customer funds and securities, final 
approval of new accounts and advertisements, review of customer 
orders, and supervision of associated persons at other branch 
offices. An office that is designated an OSJ must have a registered 
principal on-site and be inspected on an annual basis. NASD Rule 
3010(c) provides that each branch office shall be inspected 
according to a cycle set forth in the firm's written supervisory and 
inspection procedures.
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    There is currently no uniform approach among regulators for 
classifying locations from which registered representatives regularly 
conduct the business of effecting transactions in securities. The 
Commission, the New York Stock Exchange, Inc. (``NYSE''), NASD and 
state securities regulators all define the term ``branch office'' 
differently and, as a result, a member must comply with multiple 
definitions in each jurisdiction in which it conducts a securities 
business. This requires tracking numerous definitions, filing multiple 
forms to register and/or renew registration of such locations, meeting 
various deadlines, and continually monitoring each jurisdiction for 
changes in rules or procedures. Moreover, NASD member firms must 
register branch offices with the Commission, NASD, and particular 
state(s) by completing Schedule E to Form BD (``Schedule E''), which 
NASD staff and state regulators believe does not adequately fulfill 
their regulatory needs. In addition, according to NASD, members have 
found Schedule E to be a burdensome and time-consuming method by which 
to register branch offices.
    As a result, NASD has been working with the North American 
Securities Administrators Association (``NASAA''), and the NYSE to 
reduce the inconsistencies that exist among the various ways in which 
locations are defined in order to increase the utility of the Central 
Registration Depository (``CRD[supreg]'') as a central branch office 
registration system for NASD, other self-regulatory organizations 
(``SROs''), and states. The parties reached a core proposed uniform 
definition, which largely tracks the Commission's definition of 
``office'' in Rules 17a-3 and 17a-4 under the Act (the ``Books and 
Records Rules'').\13\ NASD filed the instant proposed rule change and 
the NYSE filed a proposed rule change containing a substantially 
similar definition of branch office, but containing an additional 
limitation on the primary residence exception as discussed below.\14\ 
In addition, NASD has proposed new Form BR in a separate filing, which 
would permit registration of branch offices through the CRD[supreg] 
system.\15\
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    \13\ 17 CFR 240.17a-3 and 17 CFR 240.17a-4.
    \14\ See Securities Exchange Act Release No. 46888 (November 22, 
2002), 67 FR 72257 (December 4, 2002) (SR-NYSE-2002-34). The 
Commission is simultaneously approving the NYSE's proposed rule 
change. See Securities Exchange Act Release No. 52402 (September 9, 
2005).
    \15\ See Securities Exchange Act Release No. 51742 (May 25, 
2005), 70 FR 32386 (June 2, 2005) (SR-NASD-2005-030). See also 
Correction, 70 FR 48802 (August 19, 2005) (including language 
inadvertently omitted from the first sentence of footnote 3).
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    The instant proposal would define a ``branch office'' as any 
location where one or more associated persons of a member regularly 
conducts the business of effecting any transactions in, or inducing or 
attempting to induce the purchase or sale of any security, or any 
location held out as such.\16\ The proposed rule change would exclude 
from registration as a branch office: (1) A location that operates as a 
back office; (2) a representative's primary residence, provided it is 
not held out to the public and certain other conditions are satisfied; 
(3) a location, other than the primary residence, that is used for less 
than 30 business days annually for securities business, is not held out 
to the public as an office, and satisfies certain of the conditions set 
forth in the primary residence exception; (4) a location of convenience 
used occasionally and by appointment; (5) a location used primarily for 
non-securities business and from which less than 25 securities 
transactions are effected annually; (6) the floor of an exchange; and 
(7) a temporary location used as part of a business continuity plan.
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    \16\ Amendment No. 6 deleted the exclusion ``other than the main 
office'' from the definition of branch office as initially proposed. 
The NASD states that this change would supercede any earlier 
statements made concerning the registration requirements applicable 
to members' main offices under NASD rules. The NASD notes that IM-
1000-4 addresses the need for members to keep their membership 
applications current, as well as to properly designate and register 
offices of supervisory jurisdiction and branch offices. NASD intends 
to propose future amendments to IM-1000-4, assuming the SEC's 
approval of this proposed rule change and the proposed new Form BR. 
See Amendment No. 6, supra note 11.
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    In developing the proposed definition, NASD sought to provide 
reasonable exceptions from branch office registration to take into 
account technological innovations and current business practices 
without compromising the need for investor protection. NASD believes 
the proposed exceptions from branch office registration are practically 
based while still containing important safeguards and limitations to 
protect investors. Further, the primary residence exception contains 
significant safeguards, including that: (1) Only one associated person 
or associated persons who are members of the same immediate family and 
reside at the location may conduct business at such location; (2) the 
location cannot be held out to the public and the associated person may 
not meet with customers at the location; (3) neither customer funds nor 
securities may be handled at that location; (4) the associated person 
must be assigned to a designated branch office, and the branch office 
must be reflected on all business cards, stationery, advertisements, 
and other communications to the public; (5) the associated person's 
correspondence and communications with the public must be subject to 
the firm's supervision;\17\ (6) electronic communications must be made 
through the firm's system; (7) all orders must be entered through the 
designated branch office or an electronic system established by the 
member and reviewable at such location; (8) written supervisory 
procedures pertaining to supervision of sales activities conducted at 
the residence must be maintained by the member; and (9) the member must 
maintain a list of the residence locations. These limitations closely 
track the limitations on the use of a private residence in the Books 
and Records Rules.\18\
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    \17\ The Commission notes that all correspondence and 
communications with the public by an associated person is subject to 
the firm's supervision.
    \18\ 17 CFR 240.17a-4(l).
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    As noted above, the NYSE's initial proposed definition contained an 
additional limitation on the primary residence exception, which would 
have limited to 50 the number of business days an associated person 
would be permitted to work from his primary

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residence without requiring registration as a branch office.\19\ NASD 
concluded that the 50-business day limitation on the use of a primary 
residence would not be practical for small firms and independent 
dealers, and would not provide any added regulatory benefit, and 
therefore did not include this limitation in the instant proposal. The 
NYSE subsequently proposed to remove this limitation from its proposed 
rule change.\20\
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    \19\ See SR-NYSE-2002-34, supra note 14.
    \20\ See Amendment No. 2 to SR-NYSE-2002-34.
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    NASD's proposed definition also would exempt from branch office 
registration a temporary location, other than a primary residence, that 
is used for securities business less than 30-business days in any 
calendar year. The limitations on the use of a primary residence 
described above also would apply to use of a temporary location for 
conducting securities business.\21\ For purposes of calculating the 
number of days for this exception, the proposed rule provides that a 
``business day'' would not include any partial business day, provided 
that the associated person spends at least four hours on such business 
day at his or her designated branch office during normal business 
hours.
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    \21\ For purposes of satisfying condition (a) to the temporary 
location exception, an associated person would be deemed to 
``reside'' at such temporary location.
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    The proposed definition would exempt ``offices of convenience'' 
from branch office registration, provided that associated persons meet 
customers only occasionally and exclusively by appointment, and that 
the location not be held out to the public as a branch office. When 
such office of convenience is located on bank premises, however, 
signage necessary to comply with applicable Federal and State laws, 
rules and regulations, and applicable rules and regulations of NASD, 
other self-regulatory organizations, and securities or banking 
regulators would be permitted in order to avoid confusing customers who 
might otherwise believe that traditional low-risk investments, such as 
deposits, are being offered by associated persons at such offices on 
bank premises. In addition, other than meeting customers at these 
offices of convenience, all other functions of the associated person 
would be conducted and supervised through the designated branch office.
    The proposed rule also exempts from branch office registration any 
location that is primarily used to engage in non-securities activities 
(e.g., insurance) and from which the associated person effects no more 
than 25 securities transactions in any one calendar year, provided that 
advertisements or sales literature identifying such location also set 
forth the location from which the associated person is directly 
supervised. In addition, such securities activities would be conducted 
through and supervised by the associated person's designated branch 
office.
    However, notwithstanding the exclusions in NASD Rule 3010(g)(2)(A), 
any location that is responsible for supervising the activities of 
persons associated with the member at one or more non-branch locations 
of the member would be considered to be a branch office.\22\
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    \22\ See NASD Rule 3010(g)(2)(B). This rule text was added to 
reflect changes made by File No. SR-NASD-2002-162. This language 
conforms to similar language proposed by the NYSE in SR-NYSE-2002-
34. See supra notes 8 and 14.
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    The proposed rule change also sets forth proposed NASD IM-3010-1, 
which emphasizes the existing requirement that members establish 
reasonable supervisory procedures and conduct reviews of locations 
taking into consideration, among other things, the firm's size, 
organizational structure, scope of business activities, number and 
location of offices, the nature and complexity of products and services 
offered, the volume of business done, the number of associated persons 
assigned to a location, whether a location has a principal on-site, 
whether the office is a non-branch location, and the disciplinary 
history of the registered person. The proposed interpretive material 
notes that members would be required to be especially diligent in 
establishing procedures and conducting reasonable reviews with respect 
to non-branch locations.
    NASD indicated in Amendment No. 6 that it expects to deploy branch 
office functionality in CRD[supreg] in the Fall of 2005 and that it 
expects to make the proposed rule change effective the first quarter of 
2006.

III. Comment Summary

    As noted above, the Commission received 847 comment letters with 
respect to the proposed rule change.\23\ NASD filed a response letter 
to address concerns raised by the commenters,\24\ and subsequently 
filed a second response letter to address comments made in ACLI Letter 
2 \25\ and a third response letter to address comments relating to 
remote traders.\26\
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    \23\ See supra note 6.
    \24\ See supra note 7.
    \25\ See supra note 9.
    \26\ See supra note 11.
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    Several of the commenters applauded NASD for its efforts in 
creating a uniform definition of branch office,\27\ agreeing that a 
uniform definition would have benefits for broker-dealers.\28\ One 
commenter stated that ``regulatory coordination and cooperation 
produces effective and efficient regulation that serves the best 
interests of investors, regulators and member firms alike'' and 
supported NASD's proposed definition as ``a practical definition that 
takes into account technological innovations and current business 
practices without compromising the need for investor protection.'' \29\ 
Several commenters expressed support for the facilitation and 
streamlining of branch office registration with CRD[supreg],\30\ 
stating that it would provide an ``efficient and centralized method for 
members and associated persons to register branch offices'' as required 
by SROs and states.\31\
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    \27\ See ARM Letter, InterSecurities Letter, Princor Letter, and 
TFA Letter, supra note 6.
    \28\ See Princor Letter, supra note 6. The Princor Letter went 
on to discuss changes it believed would be necessary to achieve this 
goal.
    \29\ See SIA Letter, supra note 6.
    \30\ See ARM Letter, NASAA Letter, and SIA Letter, supra note 6.
    \31\ See ARM Letter, supra note 6.
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    Commenters responding to the Commission's specific request for 
comment on NASD's primary residence exception and the divergent 
proposals by NASD and the NYSE with respect to the NYSE's proposed 
annual 50-business day limitation on engaging in securities activities 
from a primary residence, expressed unanimous support for NASD's 
approach.\32\ Commenters expressed the opinion that the rationale for 
branch office registration should be determined by the types of 
activities performed at that location, rather than the number of days 
spent there.\33\
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    \32\ See ARM Letter, InterSecurities Letter, MetLife Letter, 
Princor Letter, SIA Letter, T. Rowe Price Letter, and TFA Letter, 
supra note 6.
    \33\ See ARM Letter and SIA Letter, supra note 6.
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    A substantial majority of the commenters, including those who 
submitted Letter Types A and B, expressed general concerns about the 
effect the proposed rule change would have upon limited purpose broker-
dealers affiliated with life insurance companies. Many of these 
commenters expressed the view that the proposed rule change would have 
a disproportionate impact on limited purpose broker-dealers, as 
compared to full-service broker-dealers who conduct their activities 
from offices that meet NASD's current definition of branch office.\34\ 
These commenters pointed out

[[Page 54785]]

that broker-dealers affiliated with insurance companies perform a much 
narrower range of services and that the companies with which they are 
affiliated have structured their operations based on the current 
definition and would be presented with significant new economic and 
administrative costs in order to comply with the proposed 
definition.\35\ The commenters stated that over 50 percent of NASD's 
registered representatives work for broker-dealers affiliated with life 
insurers,\36\ and that the proposal therefore would have a significant 
financial impact on the life insurance industry.\37\ One commenter 
represented that the new definition would cause its number of branch 
offices to increase from 42 to 1,100,\38\ while another said that it 
would expect approximately 3,400 additional branch offices,\39\ in each 
case resulting in a sharp increase in overall expenses due to increased 
paperwork and registration fees. One commenter pointed out that this 
sharp increase in the number of branch offices would necessitate 
amendment of its NASD membership agreement.\40\ Commenters submitting 
Letter Type B stated that the proposal would place an ``unfair burden 
on broker-dealers conducting business through many smaller, 
geographically dispersed non-branch offices.'' \41\
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    \34\ See ACLI Letter, ACLI Letter 2, Branson Letter, Ehlert 
Letter, Fowler Letter, Garcia Letter, Gurdjian Letter, Halstead 
Letter, Hoelzel Letter, Howen Letter, IARFC Letter, Imke Letter, 
Jacobsen Letter, Lisle Letter, Northrop Letter, NYLife Letter, 
Ridings Letter, and Letter Type A, supra note 6.
    \35\ See, e.g., Letter Type A, supra note 6.
    \36\ See ACLI Letter 2, NAIFA Letter, NYLIFE Letter, and Letter 
Type B, supra note 6.
    \37\ See NAIFA Letter, NYLIFE Letter, Princor Letter, and Letter 
Type B, supra note 6.
    \38\ See Princor Letter, supra note 6.
    \39\ See NYLIFE Letter, supra note 6.
    \40\ Id.
    \41\ See Letter Type B, supra note 6.
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    NASD responded to these concerns, saying that it recognizes that 
certain firms may be required to register previously unregistered 
locations under the proposed definition and that, while this ``may 
increase a firm's registration costs, NASD believes that a firm's 
administrative and supervision costs for all locations should not 
increase as a result of this proposal.'' \42\ Quite the contrary, NASD 
stated that ``the development of a centralized branch office 
registration system through CRD[supreg] will alleviate current 
registration burdens, thus making branch office registration and 
renewal a more efficient process.'' \43\
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    \42\ See NASD Response Letter, supra note 7.
    \43\ Id.
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    Two commenters stated that NASD has made no attempt to evaluate or 
quantify the economic burden the proposal would pose,\44\ and stated 
their belief that NASD should be required to address specifically the 
economic impact of the proposed rule change on insurance affiliated 
broker-dealers and individual broker-dealers in geographically 
dispersed locations and determine how many new branches would be 
created by the proposed change.\45\ These commenters stated that the 
new definition would impose unreasonable and unnecessary burdens on 
competition, and that the proposed rule change does not meet the 
statutory safeguards for competition set forth in Sections 23(a) \46\ 
and 15A(b)(6) and (9) \47\ of the Act.\48\ Commenters predicted that 
the proposed definition would cause enormous structural and economic 
upheaval.\49\
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    \44\ See ACLI Letter, ACLI Letter 2, and NYLIFE Letter, supra 
note 6.
    \45\ See NYLIFE Letter, supra note 6.
    \46\ 15 U.S.C. 78w(a).
    \47\ 15 U.S.C. 78o-3(b)(6) and (9).
    \48\ See ACLI Letter, ACLI Letter 2, and NYLIFE Letter, supra 
note 6.
    \49\ See ACLI Letter 2 and NAIFA Letter, supra note 6.
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    NASD disagreed with these commenters' assertions that the proposal 
is anticompetitive and will unnecessarily add to their costs of doing 
business. NASD stated that the supervision requirements of NASD Rule 
3010 have always applied to all offices, regardless of whether such 
locations are registered, and that NASD Rule 3100 requires all members 
to comply with the Commission's Books and Records Rules. NASD stated 
that the proposed branch office definition does not amend either of 
these rules.\50\ In NASD Response Letter 2, the NASD stated that ``the 
annual registration fee for branch offices is reasonable and fair, and 
does not unfairly discriminate against any particular segment of our 
membership.'' \51\ NASD continued, stating that it ``believes that this 
fee should not create an undue economic burden for an active business 
location,'' and affirmed its statement in the Notice that the proposal 
``does not create an impact on competition that is not necessary or 
appropriate in furtherance of the purposes of the Act.'' \52\
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    \50\ See NASD Response Letter, supra note 7.
    \51\ See NASD Response Letter 2, supra note 9.
    \52\ The current annual registration fee for each branch office 
is $75. Id.
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    Two commenters noted that whether a location is registered as a 
branch office has no impact on a firm's responsibility to supervise its 
registered representatives since broker-dealers are required to visit 
both registered and non-registered offices on a periodic basis,\53\ and 
others likewise stated that the current system is more than 
adequate.\54\ A number of commenters opined that the proposed rule 
change constitutes a new fee that is a revenue raiser, and is not 
intended to provide any additional oversight or support for 
consumers.\55\ In response to this point, NASD noted that if there are 
as many new branch offices as commenters suggest, NASD will be facing a 
significant increase in the number of previously unregistered locations 
subject to the more rigorous examination protocol of branch offices, 
requiring NASD to devote additional staff time and resources. In 
addition, NASD is incurring costs related to the development of the new 
CRD[supreg] branch office registration system and will continue to 
incur costs associated with the maintenance and operation of the new 
system. Based on these factors, NASD stated that it ``believes that 
NASD's annual branch office registration fee is reasonable and fair.'' 
\56\
---------------------------------------------------------------------------

    \53\ See MetLife Letter and Princor Letter, supra note 6.
    \54\ See Bieber Letter and NYLIFE Letter, supra note 6.
    \55\ See Bieber Letter and Letter Type B, supra note 6.
    \56\ Id.
---------------------------------------------------------------------------

    Many commenters, including those submitting comments on Letter Type 
A, stated that the high administrative burden of the proposed rule 
change would have a harmful impact on consumers because limited purpose 
broker-dealers would find it not economically feasible to continue 
offering variable products and mutual funds to their clients.\57\ The 
commenters said that this could ``only have a harmful impact on 
consumers since their access to these products, which often constitute 
an important part of [their] clients' overall financial planning, will 
likely be reduced or eliminated.'' \58\ NASD responded, stating that 
``there are certain fundamental costs associated with regulating any 
branch office, regardless of the size or activity,'' and that it 
believes that assessing the same fee on each branch office results in 
an equitable allocation of a reasonable fee among its members.\59\
---------------------------------------------------------------------------

    \57\ See Branson Letter, Claborn Letter, Fowler Letter, Garcia 
Letter, Gruber Letter, Gurdjian Letter, Halstead Letter, Hoelzel 
Letter, IARFC Letter, Imke Letter, Jacobsen Letter, Lisle Letter, 
Mersberger Letter, NAIFA Letter, Olshanski Letter, Ridings Letter, 
Vega Letter, Villasenor Letter, Walenta Letter, and Letter Type A, 
supra note 6.
    \58\ See, e.g., Letter Type A, supra note 6.
    \59\ See NASD Response Letter, supra note 7.
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    Many commenters also commented on specific aspects of the proposed

[[Page 54786]]

definition. Several commenters stated that the conditions for the 
primary residence exception are too restrictive.\60\ Several commenters 
objected to the requirement that customer funds not be handled at the 
primary residence, saying that it was too restrictive \61\ and that the 
term ``handled'' was not sufficiently defined.\62\ One commenter 
suggested modifying the proposal to include a time limitation or other 
qualifying parameter for defining the term ``handled.'' \63\ Two 
commenters objected to the requirement that electronic communications 
be made through the member firm's system, saying that the requirement 
is too restrictive and assumes that all firms have and permit e-
mail.\64\ These commenters stated that it should be sufficient that the 
associated person is subject to the firm's supervision.\65\ Four 
commenters objected to the requirement that the associated person not 
meet with customers at the primary residence location,\66\ and 
suggested that the proposal be modified to require that the associated 
person not ``regularly'' meet with customers at that location.\67\
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    \60\ See InterSecurities Letter, Jacobsen Letter, NYLIFE Letter, 
Princor Letter, TFA Letter, and Letter Type A, supra note 6.
    \61\ See InterSecurities Letter, MetLife Letter, NYLIFE Letter, 
Princor Letter, and TFA Letter, supra note 6.
    \62\ See InterSecurities Letter and TFA Letter, supra note 6.
    \63\ See MetLife Letter, supra note 6.
    \64\ See InterSecurities Letter and TFA Letter, supra note 6.
    \65\ Id.
    \66\ See ARM Letter, MetLife Letter, Princor Letter, and SIA 
Letter, supra note 6.
    \67\ See ARM Letter, MetLife Letter, and SIA Letter, supra note 
6.
---------------------------------------------------------------------------

    NASD responded to these comments, stating that it ``believes 
strongly that the limitations on the use of a primary residence are 
important safeguards intended to protect investors.'' NASD said that 
activities outside the scope of the conditions set forth in the 
proposed definition should be subject to the monitoring and examination 
by regulators. NASD continued, stating ``[m]oreover, to the extent any 
particular scenario raises questions as to the meaning of any of these 
limitations, NASD believes such issues can be addressed, as 
appropriate, through its interpretive process without requiring 
amendment to the proposed rule.'' \68\
---------------------------------------------------------------------------

    \68\ See NASD Response Letter, supra note 7.
---------------------------------------------------------------------------

    One commenter pointed out that the definition would deem remote 
electronic traders to be conducting a securities business and therefore 
be required to register as a branch office if they were not able to 
meet the terms of the primary residence exclusion.\69\ In response, 
NASD reiterated that ``to the extent any particular scenario raises 
questions regarding the application of the rule, NASD will address such 
issues with members through its interpretative process on a case-by-
case basis or through future rulemaking, as appropriate,'' rather than 
granting them a general exemption from branch office registration.\70\ 
Another commenter noted that certain state rules require on-site 
registered principals be present in state branches, saying that NASD 
should coordinate with the state requirements.\71\
---------------------------------------------------------------------------

    \69\ See Uhlenhop Letter, supra note 6.
    \70\ See NASD Response Letter 3, supra note 11.
    \71\ See 1st Global Letter, supra note 6.
---------------------------------------------------------------------------

    Several commenters objected to the provision that would exclude a 
location used primarily for non-securities business from the definition 
of branch office, provided that less than 25 securities transactions 
are effected there annually, saying that the numerical limitation seems 
arbitrarily chosen without a quantifiable foundation and objecting to 
the lack of an explanation for how the limitation was determined.\72\ 
Commenters stated that the language was not sufficiently clear and 
queried how to define ``effected,'' and stated that the proposed rule 
change lacks clarity as to whether firms must maintain records to 
demonstrate the availability of the exception.\73\ Commenters stated 
that the proposed definition would place an undue burden on firms to 
track the number of transactions effected from a particular 
location.\74\
---------------------------------------------------------------------------

    \72\ See ACLI Letter 2, InterSecurities Letter, Princor Letter, 
and TFA Letter, supra note 6.
    \73\ See, e.g., NYLIFE Letter, supra note 6.
    \74\ See InterSecurities Letter, NYLIFE Letter, and TFA Letter, 
supra note 6.
---------------------------------------------------------------------------

    NASD stated that it believes that the 25-transaction limit is 
reasonable and necessary to promote investor protection, and that a 
location that engages in a significant number of securities 
transactions annually should be subject to examination by regulators to 
ensure that the activities at such location are in compliance with 
applicable rules and regulations.\75\ NASD stated that, with respect to 
the term ``effects,'' the meaning is fact specific, and NASD ``will 
address these interpretive issues with members on a case-by-case basis, 
as appropriate.'' \76\
---------------------------------------------------------------------------

    \75\ See NASD Response Letter, supra note 7.
    \76\ Id.
---------------------------------------------------------------------------

    Two commenters pointed out that no effective date was provided,\77\ 
while others stated that the proposed branch office definition should 
not be bifurcated from the proposed Form BR.\78\ NASD expects to make 
the proposed rule change effective the first quarter of 2006, following 
the implementation of proposed Form BR and the accompanying deployment 
of branch office functionality in CRD[reg], which it believes will 
occur in the Fall of 2005.\79\
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    \77\ See InterSecurities Letter and TFA Letter, supra note 6.
    \78\ See ACLI Letter 2, NYLIFE Letter, and TFA Letter, supra 
note 6.
    \79\ See Amendment No. 6, supra note 11.
---------------------------------------------------------------------------

    A number of commenters suggested amendments to the proposal. Many 
of the commenters concerned about the impact the new definition would 
have on limited purpose broker-dealers affiliated with insurance 
companies requested that the filing fee be waived for current non-
branch offices that become branch offices under the new definition.\80\ 
Three commenters suggested that NASD provide a permanent exclusion from 
the branch office definition for non-branch locations distributing 
variable contracts.\81\ In response to these comments, NASD stated 
that, while it recognizes that ``life insurance broker-dealers operate 
with a different business model than many large, wirehouse, full-
service firms, NASD believes there is no basis for recognizing a 
separate category of broker-dealers in connection with the registration 
of branch offices.'' \82\
---------------------------------------------------------------------------

    \80\ See Branson Letter, Claborn Letter, Fowler Letter, Garcia 
Letter, Gruber Letter, Gurdjian Letter, Halstead Letter, Hoelzel 
Letter, IARFC Letter, Imke Letter, Jacobsen Letter, Lisle Letter, 
Mersberger Letter, NAIFA Letter, Olshanski Letter, Ridings Letter, 
and Letter Type A, supra note 6.
    \81\ See ACLI Letter 2, Ehlert Letter, and Howen Letter, supra 
note 6.
    \82\ See NASD Response Letter, supra note 7.
---------------------------------------------------------------------------

    Many of these commenters also requested an increase in the number 
of transactions that may be effected from a location used primarily for 
non-securities business before that location is considered a branch 
office.\83\ One of these commenters suggested that a gross dealer 
concession should be used as a threshold for registration because it 
would allow for easy tracking by the broker-dealer and satisfactory 
criteria for regulators in registered offices over a certain size.\84\ 
As discussed above, NASD responded to these comments stating that it 
believes that the 25-transaction limit is reasonable and

[[Page 54787]]

necessary to promote investor protection.\85\
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    \83\ See Branson Letter, Fowler Letter, Garcia Letter, Gruber 
Letter, Gurdjian Letter, Halstead Letter, Hoelzel Letter, IARFC 
Letter, Imke Letter, Jacobsen Letter, Lisle Letter, Mersberger 
Letter, NAIFA Letter, Olshanski Letter, Princor Letter, Ridings 
Letter, and Letter Type A, supra note 6.
    \84\ See 1st Global Letter and Princor Letter, supra note 6.
    \85\ See NASD Response Letter, supra note 7.
---------------------------------------------------------------------------

    Many of the commenters urged the Commission to reject the proposed 
rule change \86\ and many suggested that NASD maintain the current 
branch office registration.\87\ One of these commenters stated that 
NASD's current branch office definition provides the necessary 
safeguards to protect investors,\88\ while another queried why NASD's 
current definition was not selected as the uniform definition.\89\ 
Another commenter stated that the recent amendments to Rule 17a-4 
provide sufficient regulatory oversight.\90\ NASD responded that the 
new branch office registration system will allow NASD and other 
regulators to associate every registered representative with a specific 
branch office, a feature that is unavailable under the current system, 
and that this will provide an ``essential tool for regulators when 
conducting examinations, reviewing customer complains, or taking 
enforcement actions.'' NASD also stated that the uniform definition 
would allow for the development of a centralized branch office 
registration system through CRD[reg] (that will allow regulators to 
quickly and efficiently access this information and keep it 
current.\91\ NASD continued, stating that it ``strongly believes that 
the Proposal serves a legitimate regulatory purpose and that the impact 
on competition to certain member firms as a result of the Proposal is 
both necessary and appropriate in furtherance of these legitimate 
regulatory purposes.'' \92\
---------------------------------------------------------------------------

    \86\ See Branson Letter, Claborn Letter, Ehlert Letter, Fowler 
Letter, Garcia Letter, Geis Letter, Gruber Letter, Gurdjian Letter, 
Halstead Letter, Hoelzel Letter, Howen Letter, IARFC Letter, Imke 
Letter, Jacobsen Letter, Lisle Letter, Mersberger Letter, NAIFA 
Letter, Northrop Letter, O'Bee Letter, Olshanski Letter, Ridings 
Letter, Scott Letter, Letter Type A and Letter Type B, supra note 6.
    \87\ See ACLI Letter 2, Branson Letter, Claborn Letter, Fowler 
Letter, Garcia Letter, Geis Letter, Gruber Letter, Gurdjian Letter, 
Halstead Letter, Hoelzel Letter, IARFC Letter, Imke Letter, Jacobsen 
Letter, Lisle Letter, Mersberger Letter, NAIFA Letter, Northrop 
Letter, Olshanski Letter, Princor Letter, Ridings Letter, Letter 
Type A and Walenta Letter, supra note 6.
    \88\ See Princor Letter, supra note 6.
    \89\ See ACLI Letter 2, supra note 6.
    \90\ See NYLIFE Letter, supra note 6.
    \91\ See NASD Response Letter 2, supra note 9.
    \92\ Id.
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IV. Discussion and Commission's Findings

    After careful consideration of the proposed rule change, the 
comment letters, and NASD's responses to the comment letters, the 
Commission finds that the proposed rule change, as amended, is 
consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities 
association.\93\ The Commission believes that the proposed rule change 
is consistent with Section 15A(b) of the Act,\94\ in general, and 
furthers the objectives of Section 15A(b)(6),\95\ in particular, in 
that it is 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.
---------------------------------------------------------------------------

    \93\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
    \94\ 15 U.S.C. 78o-3(b).
    \95\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

    Given the continued advances in technology used to conduct and 
monitor businesses and changes in the structure of broker-dealers and 
in the lifestyles and work habits of the workforce, the Commission 
believes it is reasonable and appropriate for NASD to reexamine how it 
determines whether business locations need to be registered as branch 
offices of broker-dealer members. The Commission also supports NASD, 
the NYSE, and state securities regulators' joint, regulatory effort to 
eliminate inconsistencies and duplication in developing a uniform 
definition of ``branch office.'' The Commission believes that such 
regulatory coordination and cooperation should result in an effective 
and efficient regulation that will serve the entire broker-dealer 
community by recognizing the many different business models and 
streamlining the branch office registration process significantly. In 
addition, the Commission believes the proposed definition strikes the 
right balance between providing flexibility to broker-dealer firms to 
accommodate the needs of their associated persons, while at the same 
time setting forth parameters that should ensure that all locations, 
including home offices, are appropriately supervised.
    The Commission commends the NASD for reiterating the responsibility 
of firms to supervise their associated persons, regardless of their 
location, and is concerned by the statements of some commenters that 
this proposed rule change will impose additional supervisory duties on 
them. The Commission reminds all broker-dealers of their statutory duty 
to supervise.\96\ Furthermore, the Commission believes the ability to 
identify the personnel located at each branch office is an important 
improvement to the CRD[reg] database and will provide regulators 
valuable information. The Commission is cognizant of the concerns 
raised by the ACLI and others in the insurance industry who are also in 
the securities industry. However, the Commission is also aware that 
firms with large numbers of associated persons located in smaller, 
geographically dispersed offices provide additional supervisory 
challenges, and will require NASD to devote additional staff time and 
resources to their oversight, once these offices become subject to the 
more rigorous examination protocol of branch offices.
---------------------------------------------------------------------------

    \96\ See Section 15(b)(4)(E) of the Act. 15 U.S.C. 78o(b)(4)(E).
---------------------------------------------------------------------------

    Furthermore, the Commission believes that the seven proposed 
exceptions to registering as a branch office will recognize current 
business, lifestyle, and surveillance practices and provide associated 
persons with additional flexibility. For instance, because associated 
persons may have to work from home due to illness, or to provide 
childcare or eldercare for certain family members, the Commission 
believes it is appropriate to except primary residences from the 
definition of branch office while providing certain safeguards and 
limitations to protect investors. In this regard, the Commission 
supports NASD's decision to omit the proposed 50-business day 
limitation on working from a primary residence from NASD's proposed 
definition, and the NYSE's subsequent removal of this limitation from 
its proposed definition. Moreover, the definition also would exempt 
from branch office registration any temporary location, other than the 
primary residence, provided it is used less than 30 business days in 
any calendar year.
    The Commission believes it reasonable for NASD not only to propose 
conditions on the primary residence and temporary location exceptions 
(e.g., that the location cannot be held out to the public as an office, 
and that neither customer funds nor securities can be handled there), 
but also to set forth the interpretive material in proposed NASD IM-
3010-1 to emphasize members' requirements to establish reasonable 
supervisory procedures and conduct reviews of locations taking into 
account the factors such as those enumerated therein.

[[Page 54788]]

    In addition, under both exceptions noted above, NASD has provided 
additional flexibility by defining ``business day'' to exclude any 
partial day, provided the associated person spends at least four hours 
on such business day at his or her designated branch office during the 
hours such office is normally open for business. The Commission 
believes that this should prevent associated persons from regularly 
conducting business from other remote locations for the majority of a 
business day, without such activity being counted towards the 30-day 
limitation. The Commission expects NASD to monitor and ensure that, 
where the 30-business day (other location) exemption is used by 
associated persons, members maintain records adequate to demonstrate 
compliance with the ``business day'' limitations.
    Finally, the Commission believes it is reasonable for NASD to 
implement the proposed branch office definition following the 
commencement of the branch office registration system on the CRD[reg]. 
This should allow a smooth transition to the new branch office 
registration system by, as NASD submits, providing members sufficient 
time to transition to the proposed new Form BR and associated filing 
protocols, before making the new definition effective.

V. Conclusion

    For the foregoing reasons, the Commission finds that the proposed 
rule change, as amended, is consistent with the requirements of the Act 
and rules and regulations thereunder applicable to a national 
securities association, and, in particular, Section 15A(b) of the 
Act.\97\
---------------------------------------------------------------------------

    \97\ 15 U.S.C. 78o-3(b).
---------------------------------------------------------------------------

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\98\ that the proposed rule change (SR-NASD-2003-104), as amended 
by Amendment Nos. 1 through 6, is hereby approved.
---------------------------------------------------------------------------

    \98\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\99\
---------------------------------------------------------------------------

    \99\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Jonathan G. Katz,
Secretary.
[FR Doc. E5-5034 Filed 9-15-05; 8:45 am]
BILLING CODE 8010-01-P