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ACLI Objects To Proposed NASD Rule On Branch Offices

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The National Association of Securities Dealers, in proposing a rule to redefine what constitutes a branch office for brokers, is favoring large full service brokerages and placing an undue burden on those specializing in life products, according to an official with the American Council of Life Insurers.

Under current rules, branch offices are required to be registered with regulators from the NASD, the Securities and Exchange Commission and their state regulators, and are subject to inspection. Additionally, there are rules that require a supervisory structure within each branch office. These offices are presently defined by the functions that are undertaken there.

As an example, Carl Wilkerson, vice president and chief counsel, securities and litigation, for the ACLI, noted that brokers in a life specializing office do not take customers’ money and do not hold their accounts open. Instead, brokers focused on life products collect checks from the customers that are made out to the life insurance company.

However, under the proposed rule, that definition would be changed to include any office with a staff of one or more, Wilkerson explains, adding that this fails to take into account key differences between brokers specializing in life products and more full service brokers such as Merrill Lynch.

“Their business model is that they tend to have a few large branch offices,” Wilkerson said of the full service brokerages, adding that life product brokers are more likely to have numerous, geographically dispersed offices of one or two people. Also, life brokers offer a “very narrow range of securities,” Wilkerson noted, while full services brokerages have a much wider array of options. As such, he said, these smaller offices do engage in many of the functions that define a branch office.

Another requirement of branch offices is that they have a supervisory structure, which Wilkerson noted would constitute a major financial burden for a small office suddenly required to staff that structure. Additionally, those small offices would have to pay fees to the NASD for regulatory inspections.

According to Wilkerson, the NASD has said that its proposal represents a fair allocation of the costs of examining a branch office, a claim he called disingenuous given the difference between life brokers and full service brokers.

“They haven’t established a need” to change the rule, he said, “and they haven’t identified a regulatory reason to. Their primary motivation is a new source of fees.”

Wilkerson added that the NASD has been disingenuous by trying to slide the proposed rule redefining branch offices behind a far more popular rule to make it easier to register branch offices. That proposed rule would allow branch offices to fill out one form online in order to register with the SEC, NASD and their state regulator.

Wilkerson said the registration proposal was a “positive thing,” but added that the NASD engaged in a “clever sleight of hand” by moving it in front of the redefinition proposal. The two are “inextricably intertwined,” he said, and it would be “premature” to change the registration rules until the definition issue has been settled.

Because the NASD is a self-regulating body, any proposed rule changes are required to be reviewed by the SEC to ensure that they are not anti-competitive, and the ACLI has submitted comments challenging the proposed change.

Wilkerson noted that there is no timetable for an SEC decision, but since the NASD has said it will not be able to implement another, more popular rule change allowing branch office to register with all the various regulators at once until the fourth quarter of 2005, there is “plenty of time,” he said.

Reproduced from National Underwriter Edition, October 28, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.