Transamerica Financial Advisors, Inc.
January 6, 2004
Via e-mail: firstname.lastname@example.org
Securities and Exchange Commission
Re: Proposed New Uniform Definition of "Branch Office" Under NASD Rule 3010(g)(2) [File No. SR-NASD-2003-104]
To Whom It May Concern:
Transamerica Financial Advisors, Inc. ("TFA") appreciates the opportunity to respond to the Securities and Exchange Commission's proposed revisions to the definition of a "branch office" contained in NASD Rule 3010(g). TFA is a registered broker-dealer conducting business in all 50 states/jurisdictions. TFA, like many insurance-affiliated broker-dealers, operates as an introducing firm distributing variable insurance products and mutual funds on a fully disclosed basis. TFA has approximately 1,100 registered representatives assigned to approximately 100 branch offices and offices of supervisory jurisdiction.
Cost of Registering Primary Residences
We support the goal of the Securities and Exchange Commission (SEC), the National Association of Securities Dealers (NASD) and the North American Securities Administrators Association (NASAA) to achieve more uniformity among securities regulators on the definition of a "branch office". However, several of the exclusions are too restrictive and will result in the registration of 1000's of primary residences at a significant cost, with no added benefit to customers.
The proposed rule change solicits comments on the exclusion of "primary residences" from the definition of "branch office." We support the SEC's decision to drop the restriction that representatives must work from their primary residences for less than 50 business days to qualify for the exclusion. However, the requirements, that: 1) representatives may not handle customer monies or securities at the location; and 2) all electronic communications must be sent through the member's electronic e-mail system, may be too restrictive requiring insurance affiliated broker-dealers to register the residences of most of their representatives.
Our first concern is with the prohibition against "handling customer monies" at a primary residence. No explanation of this term is provided. Sales of mutual funds, variable annuities, and variable life insurance policies frequently occur at the customer's home, where the registered representative obtains a completed application, along with a check made payable to the product provider. The application, check and new account paperwork are forwarded to the representative's designated reviewing Principal for review and sign off on behalf of the firm. Under the proposed "branch office" definition, a representative could accept the application and check and drop it into a mailbox on the way home, but the representative could not take the paperwork to his primary residence to mail or forward to the firm's home office or local branch office, for processing in accordance with the firm's procedures, as this would constitute "handling of customer monies" at the representative's primary residence. We suggest that the exclusion clarify that representatives may receive, at such offices, checks and other forms of payment made payable to providers.
The requirement to send all electronic communication through the member's electronic system is also more restrictive than current NASD rules pertaining to supervising electronic communication. There are mistaken underlying assumptions that: 1) all member firms allow electronic mail; and 2) all NASD member firms have an electronic mail system. In effect, the proposed rule prohibits firms that do not have an electronic mail system from having any representatives who work from their "primary residences." We respectfully submit that the proposed rule should be modified to eliminate section (g)(B)(vi) - the requirement to send all electronic communication through the member's electronic system - and that section (g)(B)(v) should be expanded to clarify that "all correspondence and communications with the public (written or electronic) are subject to the firm's supervision in accordance with Rule 3010." NASD Rule 3010 (d) already requires registered principals to review all incoming and outgoing written and electronic correspondence. To the extent electronic correspondence is distributed to many customers, the correspondence is also subject to NASD Rule 2210 governing advertising and sales literature. Firms have established policies and procedures to comply with Rules 3010(d) and 2210 that may not include firm-controlled electronic mail systems. Firms should be permitted to use existing compliance procedures to supervise electronic mail of primary residence offices that utilize publicly-sponsored e-mail systems, such as Earthlink or AOL.
Without the above-recommended changes, insurance-affiliated broker-dealers will be forced to register the primary residences of many representatives as branch offices. We estimate that the proposed rule change will require us to register as many as 600 additional branch offices at an additional cost of $45,000. These are costs required simply to register the offices with the NASD, but does not include amounts states may charge for those additional branch offices. We believe that the proposed rule change will provide no additional protection to investors for the costs incurred.
Less than 25 "Securities Transactions"
Proposed changes to NASD Rule 3010 (g)(2)(E) would exclude, from the definition of "branch office," locations used primarily for non-securities activities from which representatives affect no more than 25 securities transactions in a calendar year. The commentary to the proposed rule indicates that many firms raised questions about the definition of a "securities transaction" for purposes of this exclusion in response to the NASD's request for comments. The same questions remain unanswered. Does an application to make monthly deposits into a mutual fund constitute 12 "securities transactions" for the year, or one? Does the sale of a 401(k) or 403(b) plan to an employer, and the subsequent participation of 15 employees, constitute a single securities transaction, or 16? If a representative receives a "split" of commission on a securities transaction executed by another representative, does this count toward the 25? The commentary in the Federal Register indicates the NASD has elected to address this question on a case by case basis. [68 FR 70066 December 16, 2003]. But, firms must have a definition for this term to determine how many locations need to be registered.
It should be noted that even if the NASD provides a definition, it's questionable whether firms will be able to comply with this exclusion. Monitoring whether a location effects more than 25 transactions a year would pose significant challenges to the industry and to regulators attempting to enforce these requirements.
We further question how the NASD and NASAA arrived at a limit of 25 transactions? The commentary explains that the exclusion for non-resident offices at which representatives engage in securities business for less than 30 business days in a calendar year was meant to address situations where representatives worked from offices while on vacation. No explanation has been provided for the 25-transaction limit.
A definition of "securities transaction" for purposes of this rule must be included in the proposed rule, or the requirement to limit the number of transactions in non-securities locations should be dropped.
The proposed rule provided no expected effective date for the definition. We strongly urge the SEC to coordinate the effective date of these revisions to NASD Rule 3010 with the creation of the NASD's centralized registration system on CRD, to minimize the disruption and cost to members' registration procedures. One of the stated purposes of the rule change was to simplify the registration process; this would seem consistent with that goal.
Thank you for the opportunity to comment on this proposal.