LAW OFFICES OF
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RAYMOND E. SAUNDERS
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LAWRENCE, LAWRENCE, KAMIN & SAUNDERS (1972-1983)
LAWRENCE, GOLDBERG, LAWRENCE & LEWIN (1946-1972) LEVY, GOLDBERG & LAWRENCE (1932-1946) OF COUNSEL:
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December 31, 2003
BY E-MAIL rule-comments@sec.gov
Secretary
Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549-0609
Re: File No. SR-NASD-2003-104
This is a comment letter with respect to the above file and the recent amendments to the proposed NASD Rule 3010 definition of "branch office." We represent certain broker-dealers whose securities activities are either exclusively or primarily limited to conducting proprietary trading for the account of such broker-dealers. These broker-dealers are members of major electronic securities and futures trading systems, exchanges, contract markets and ECNs and engage in proprietary trading using those electronic trading systems.
As revised, the definition of "branch office" would expand to include numerous remote locations from which these broker-dealers conduct electronic proprietary trading. However, since the proprietary trading activities do not involve customers, and since the locations are not in any way identified to the public as offices where securities business is conducted, we question whether the regulatory burden which would be placed upon such firms if these locations are deemed to be "branch offices" would yield any commensurate benefit.
Because the applicable trading systems are electronic, individual traders trading on behalf of a broker-dealer may access and trade through those electronic systems from remote offices and/or from the private residences of the traders. None of these remote locations are held out or identified to the public as locations from which the firms conduct securities business nor do such firms' proprietary traders conduct business with customers. Orders entered by these proprietary traders are routed through the broker-dealer's own server or through an internet connection to the applicable exchange or ECN. The broker-dealer receives, on a real time basis, all offers, bids and transactions entered by its remote proprietary trader. All trading is supervised on a real time basis from the broker-dealer's principal office. Such supervision includes the ability to block trading, limit trading and monitor capital and risk parameters. The remote location is not specifically identified to counterparties on the electronic trading networks and systems. Only the principal trading office of the firm is identified.
The current definition of "branch office" in Rule 3010(g)(2) reads as follows:
Branch office means any location identified by any means to the public or customers as a location to which members conduct an investment, banking or securities business excluding....
The current activities of remote electronic proprietary traders are excluded from the definition of "branch office" because although the securities trading business is conducted from a remote location. The remote location is not identified to the public, to customers or to counterparties on the electronic trading networks and systems. Only the principal trading office of the firm is identified.
Even though these locations are not held out, the revised definition of "branch office" in Rule 3010(g) would apply to:
"any location where one or more associated persons of a member regularly conduct the business of effecting any transactions or inducing or attempting to induce the purchase or sale of any security or that is held out as such excluding.... (emphasis added)."
Unfortunately, the amendment deletes the conjunctive qualification in the old definition and makes the new definition disjunctive instead of conjunctive. As a result, a remote electronic trader would now be deemed to be conducting securities business and be considered a branch even though the remote electronic trader does not deal with customers and the trader's location is not identified to anyone as an office of the broker-dealer.
As a matter of policy, the prior rule made good policy because the office is not held out to the public in any way nor are there any transactions with the public executed through the office. The prior rule and its interpretation also implicitly recognized the fact that requiring a broker-dealer to treat a remote location as a branch office yielded little, if any, tangible benefit and recognized that requiring broker-dealers to treat such locations as branch offices would only divert compliance resources away from other areas.
Requiring proprietary trading remote locations to be treated as "branch offices" yield little benefit because broker-dealers already monitor and supervise transactions on a real time basis because transactions must either be routed through the broker-dealer's server or, in the case of direct internet connection, the broker-dealer receives real time reports with offers, bids and transactions. In either instance, the broker-dealer is able to supervise trading activities on a real time basis. Equally important, all transactions are supervised on a real time basis for compliance with trading parameters, risk parameters, capital and other similar regulatory supervisory requirements. In addition, all such remote traders are registered with the NASD and have passed the appropriate examinations.
Since some of the activities of remote electronic traders are conducted from their personal residences, we believe that the carve out for the personal residence contained in subsection (b) is sound and would, if the remote trading activities were conducted from the personal residence of a remote electronic trader, be excluded from the definition of "branch office." However, we would submit that a similar exemption should be created for remote electronic proprietary traders that trade from an office that is not their personal residence provided it is not held out to the public and no customer activity is conducted by the office or the remote trader.
We would be pleased to answer further questions concerning this request or provide additional information to the staff. Thank you for your consideration.
Very truly yours,
Paul B. Uhlenhop
PBU/sh
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