I am often asked by readers and visitors to my web site whether particular people have to register with the NASD. The question is not so easy to answer, and, like most things regulatory, often changes. So, while I attempt to discuss the categories of people associated with firms, please do not rely on this article as a complete description of the various categories of registration. There are many, and often a particular registration issue can only be resolved by an examination of the individual’s particular job function. Further, given the numerous exceptions and exemptions to the rules, these general descriptions may not apply to a particular circumstance.
General Securities Representatives
Some registration categories are obvious – a person has functions of supervision, solicitation or conduct of business in securities or who are engaged in the training of persons associated with a member for any of these functions must register as general securities representatives. (See Rule 1031). There are, within that category, limited representative registrations for personnel who only deal in specific products, such as Investment Company and Variable Contracts Products, Direct Participation Programs, Corporate Securities, Options and Government Securities.
Equity Traders require separate registration. This registration applies to those who 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. Equity traders must also register as a general securities representative or have a limited registration for corporate securities.
Brokers who retire and who receive continuing commission payments, still have to maintain their registrations, unless of course, they die, then their widows can continue to receive those payments, if pursuant to a valid agreements, without registration. (See IM 2420-2)
Corporate Officers and Directors
If the employee’s activities involve the supervision of other general securities representatives, or of limited registration representatives, then he must register as a General Securities Principal (Rule 1021), or as a Limited Principal for a particular product, pursuant to Rule 1022.
Principals are defined as persons associated with a member who are actively engaged in the management of the member’s investment banking or securities business, including supervision, solicitation, conduct of business or the training of persons associated with a member for any of these functions are designated as principals. The rule specifically includes sole proprietors, officers, partners, managers of Offices of Supervisory Jurisdiction, and directors of corporations, but applies to every person engaged in management or supervision.
The question often arises with respect to principal registration, of whether outside directors are required to register. Given the burdens of registration, it would certainly be a problem to require outside directors of a corporate broker-dealer to register as a General Securities Principal.
Fortunately, the NASD does not require registration of outside directors. The NASD considers outside directors to include directors who are not officers or employees of the member. In NASD Notice to Members 99-49, the NASD confirmed that outside directors are not required to be registered if they are not actively engaged in the management of the member’s investment banking or securities business. “Actively engaged in management” means day-to-day conduct of the member’s securities business and the implementation of corporate policies related to such business. An outside director’s regular participation in board and board committee meetings, during which corporate policies may be developed or adopted, would not by itself rise to the level of being actively engaged in a member’s management.
Officers/Directors of Parent Corporations
Similarly, an officer of a broker/dealer’s parent corporation who sits on the board of directors of the broker/dealer who is not actively engaged in the management of the broker/dealer is considered an outside director and does not need to be registered.
There is no special rule for General Counsel. He or she is required to be registered if he or she sits on the member’s board of directors or otherwise participates in the management of the member’s securities or investment banking business, and by his job functions and duties falls within one of these categories. Keep in mind that an employee of a member who sits on its board of directors is presumed to be involved in the day-to-day management of the member’s business and therefore is required to be registered as a principal.
If the general counsel is not a director but has management-level responsibilities for supervising any aspect of the member’s investment banking or securities business, then he or she would have to be registered as a principal. Management responsibilities in this context include serving as a voting member of the firm’s executive, management, or operations committees. However, if general counsel is not a voting member of such committees, and merely provides counsel to the committee, there is no registration requirement.
A limited or nominal partner who is not involved in the day-to-day management of the member’s business is not required to be registered.
Chief Compliance Officer
Historically, the answer was no, since Chief Compliance Officers do not generally supervise or manage the affairs of the broker/dealer. However, at the time of the writing of this article, the NASD was proposing to modify their view on the registration of Chief Compliance Officers as General Securities Principals. See Notice to Members 99-51.
Rule 1030 requires registration of any person who is engaged in an investment banking or securities business for a member. If the function performed by the employee communicating with members of the public to determine their interest in making investments, discussing the nature or details of particular securities or investment vehicles, recommending the purchase or sale of securities, and accepting or executing orders for the purchase or sale of securities, registration is clearly required.
Research activity, by itself, does not require registration. However, many research personnel are involved in written or oral communications with the public. In that instance, they must be registered, since their activities are part of the overall sales effort of the firms. According to the NASD, communicating with the public includes issuing and distributing research reports where the author is identified by name.
Again, this article can by no means identify all of the varied situations which arise in the registration area, and a determination often requires a review of the particular facts involved. However, given the fact that the failure to register personnel who the NASD believes require registration constitutes a violation of NASD Rules, and subjects the firm and its principals to disciplinary action, those determinations must be made.
Nothing herein is intended as legal or financial advice. The law is different in different jurisdictions, and the facts of a particular matter can change the application of the law. Please consult an attorney or your financial advisor before acting upon the information contained in this article. SECLaw.com was created by and is sponsored by Mark J. Astarita, Esq., a securities attorney and partner in the law firm of Beam & Astarita, LLC, who represents financial professionals in a wide variety of matters. Mr. Astarita can be contacted by email at email@example.com
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