Industry observers are worried about the potential effect of an NASD proposal to eliminate the definition of “office of supervisory jurisdiction” and in its place create four new branch-office categories.
IRVINE, Calif. — Industry observers are worried about the potential effect of an NASD proposal to eliminate the definition of “office of supervisory jurisdiction” and in its place create four new branch-office categories.
In a notice to members last month, Washington-based NASD said that the change is needed in order to exempt from registration requirements those offices that merely review and approve research reports.
NASD is taking comments on the proposal until March 26.
But officials in at least one state were taken aback by the proposal.
“It was an unexpected surprise to hear [about] the release,” said Don Saxon, commissioner of Florida’s Office of Financial Regulation.
“States have not had an opportunity to discuss this with the [New York Stock Exchange] or NASD,” he said.
About one-third of states, including Florida, incorporate branch-office definitions in their rules or statutes.
Mr. Saxon didn’t immediately know what effect the changes might have on states, but he said that Florida will be looking into the issue.
Calls to the North American Securities Administrators Association Inc. and to state regulators who sit on the Washington-based organization’s broker-dealer committee weren’t returned.
The Financial Services Institute Inc. in Atlanta, which represents independent-contractor firms, has yet to consult with its members about the proposed changes, said David Bellaire, the group’s general counsel.
The proposal is going to require “some close scrutiny,” he said.
Independent contractors typically run their remote offices as OSJs.
The proposed changes, which would have to be approved by the Securities and Exchange Commission, wouldn’t replace a new uniform “branch-office” definition that went into effect only last July, said NASD spokesman Herb Perone.
That uniform definition was the result of several years of negotiations among NASD, the NYSE and state regulators.
Those efforts also involved the development of a new reporting form for branch locations.
According to Mr. Perone, NASD is proposing only to “eliminate the terminology of [the] OSJ,” which he said is separate from the uniform branch-office definition.
Mr. Perone said the proposal could be modified based on comments NASD receives.
Having their say
The industry and states might well have something to say.
The last time branch offices were redefined, brokerage firms had to register more offices and pay new registration fees, Mr. Bellaire said.
NASD’s notice says that existing OSJs will be incorporated into a new definition of “supervisory branch office.”
NASD also would create a “limited supervisory branch office,” a “non-supervisory branch office” and a “non-branch location.”
The new categories “mirror existing supervisory and inspection obligations,” Mr. Perone said.
NASD doesn’t anticipate that more locations will have to become registered under new categories, he said. But firms will have to spend “countless time and money” on changing their stationery, compliance manuals and written supervisory procedures, according to Nancy Lininger, a Camarillo, Calif.-based compliance consultant.
Every mention of OSJ or “branch office” would have to be changed, she said.
Mr. Perone said that the new definitions would require “some changes to firm procedures and communications,” but that if the rule were implemented, NASD would minimize those burdens.
Lisa Roth, a San Diego-based compliance consultant who is president of the National Association of Independent Broker/Dealers Inc. in that city, said that firms might be able to comply by making minor modifications to their materials.
Additionally, many states incorporate the OSJ definition in their rules and also would need to perform revisions, according to Michael Underwood, an attorney
in the Tallahassee, Fla., office of Cleveland-based law firm Squire Sanders & Dempsey LLP.
“Obviously, it will have impact [on] the definition of a branch, but [Florida regulators] have not had a chance to research” exactly what the effects would be, Mr. Saxon said.
States that have adopted the uniform branch-office definition won’t have to rewrite their rules, Mr. Perone said.
The newly proposed definitions also could “perhaps throw a monkey wrench into the process” of states’ adopting the uniform definition, said Mr. Saxon, who was part of a state regulator working group that collaborated with NASD and the NYSE on the uniform definition.
The proposal is the most significant change yet from efforts of NASD and the NYSE to harmonize their rule books — and some don’t like what they see.
“At first blush, it looks like they’re making [definitions] more complicated instead of making an exception” for a location like a research office, Mr. Saxon said. A number of exceptions already exist in the uniform branch-office definition.
“But I don’t know all the other factors as to why they came up with this proposal,” Mr. Saxon added.
“I see no reason why [NASD firms should] have to change their definitions to suit the white shoes in New York,” said a compliance consultant who asked not to be identified.
