Under the 49th: U.S. regulatory update

By Philip Porado | October 13, 2005 | Last updated on October 13, 2005
3 min read

(October 13, 2005) It took more than three years, but self-regulatory organizations and state regulators in the U.S. finally harmonized their definition of “branch office” for examination, registration and supervision purposes.

Late last year, the Securities and Exchange Commission (SEC) approved a proposal hammered out by the New York Stock Exchange (NYSE), National Association of Securities Dealers (NASD) and a coalition representing the interests of securities regulators in each U.S. state. All the players at one time had slightly different definitions for the term “branch office” and used multiple forms and reporting requirements when firms wanted to register locations.

The new rules, which took effect over the summer, replace those myriad registration requirements with a single Form BR which securities firms and advisors that are dually registered can file through the Internet-based Central Registration Depository (CRD) system.

Generally, the harmonized definition says a branch office is any location where transactions are effected by one or more persons associated with a securities firm, or from which clients are contacted to discuss purchases or sales. Back office locales where no sales activities take place are exempt, as are primary residences of registered persons if they aren’t held out as offices to the public.

Locations where a client and rep meet up because it’s convenient also don’t have to be registered, nor do places that are used for 30 or fewer business days a year. Exchange floors and places where firms are moved in the event of natural disaster or other calamity also don’t require registration.

Exemptions allowing registered persons to do some work at home were one of the major stumbling blocks to getting the rules harmonized. The original proposals by the NYSE and NASD included a requirement that homes be registered if used more than 50 business days per year. NASD members complained bitterly about the requirement. They argued it would cause nearly every rep to have to register his home as a branch, and also drive up compliance costs since those new branches would have to comply with books and records requirements. In the end, registration of homes was dropped so long as they’re not held out as offices, and a 30-day exemption was applied to offsite locations other than homes.

Variable Requirements

Variable annuity sales have been on NASD’s mind since 1999 when it issued the first of what become a series of notices about the need to improve supervision of reps who exchanged one annuity product for another — sometimes without customer knowledge or at best vague approval.

NASD was also first to blow the whistle on practices whereby some reps were selling deferred variable annuities to clients who would be too old to take advantage of the benefits. In some cases, clients were in their mid and late 90s. Eventually other regulators, and especially state securities and insurance departments, caught on to the problem and began asking firms to improve due diligence and ensure sales were suitable.

NASD’s latest rule proposal calls upon firms to establish stricter supervisory procedures for monitoring and disciplining reps who have a high number of variable annuity switches on their books, ensure the sale of long-term annuities are not inappropriate given a customer’s age, and establish percentage limits on the amount of client assets invested in deferred variable annuities.

To read NASD’s proposed rule on variable annuity sales, please click here.

Filed by Philip Porado, Advisor’s Edge, philip.porado@advisor.rogers.com


Philip Porado