Many Exempt High-Frequency-Traders and Floor Traders are soon to be folded in to FINRA oversight by way of Series 57 registration requirement, and amendments to rule 15b9-1 and NASD 1032.
November 2015: SEC approved FINRA proposal to replace Series 55 with new series 57 registration.
This revision marks a step toward costly changes for high frequency traders applying rule 15b9-1 which bypasses FINRA association.
Examinees are scheduled to take series 57 examinations as early as January 4, 2016.
Background of High Frequency Trader Securities
Over time, the markets have undergone a substantial transformation, including the emergence of active cross-market proprietary trading firms, many of which engage in so-called high-frequency trading strategies. Often times business for these traders is not focused on an exchange floor but is responsible for a substantial percent of the trading volume in the off-exchange market. Many are not members of a national securities association because they have been able to rely on the broad proprietary trading exemption in Rule 15b9-1. With this in mind, series 57 registration was established.
Why was the series 57 trader securities license created?
The overall aim is to address concerns that High Frequency Trading, also known as HFT, has a significant impact on markets and that HFT firms need to be more closely regulated to avoid intentional and unintentional negative market impact. In the past, rule 15b9-1 exempted FINRA registration for floor brokers or HFT’s that only engaged in limited off-floor transactions. Thus, many HFT firms utilize third party exchanges or alternative trading systems of broker-dealers to qualify and avoid FINRA registration.
Thus, the rule changes focus on eliminating an exception currently used by broker-dealer proprietary trading firms to avoid registering with a regulatory association such as FINRA.
What is the impact of the series 57 trader securities qualification on Floor Traders and HFT dealers?
Changes for Floor Traders – The new rule narrows the current “floor trader” exemption from registration. Brokers losing their exemption status will now need to maintain policies and procedures reasonably designed to ensure that its hedging transactions reduce or mitigate its on-exchange risks, and these policies and procedures would be subject to Commission and SRO review.
Changes for HFT’s – Many High-Frequency-Traders, commonly called HFT, will be significantly affected by the new series 57 registration which amends rule 15b9-1. The rule proposal will require broker-dealer proprietary trading firms to register with FINRA and meet full FINRA compliance rules regarding trading practices, business conduct, financial condition and supervision. The overhead cost to meet regulatory compliance along with membership fees is expected to be significant for HFT dealers.
How do Series 57 changes tie in with NASD Rule 1032 (f) – Limited Representative or Equity Trader and the requirement for Series 57 examination
Series 57 replaces the Equity Trader registration category and Series 55 examination with the Securities Trader registration category and a new series examination.
The amended rule provides that each associated person of a firm who is included within the definition of “representative” in NASD Rule 1031 (Registration Requirements) is required to register with FINRA as a Securities Trader if such person is engaged in proprietary trading, the execution of transactions on an agency basis or the direct supervision of such activities. This is in respect to transactions in equity, and, preferred or convertible debt securities effected other than on a securities exchange. Amended NASD Rule 1032(f) provides that before registration as a Securities Trader may become effective, an applicant must pass the Series 57 examination.
There is an exception from the Securities Trader registration requirement for any associated person of a firm whose trading activities are conducted principally on behalf of an investment company that is registered with the SEC.
Amendment to U4 – As part of the proposed rule change (and in anticipation of the national securities exchanges filing similar proposed rule changes to replace the Series 56 examination with the Series 57 examination) FINRA also amended Form U4 to replace: (1) the Equity Trader registration category with the Securities Trader registration category; (2) the Proprietary Trader registration category with the Securities Trader registration category; and (3) the Proprietary Trader Principal registration category with the Securities Trader Principal registration category.
Concerned about your firms ability to adopt and comply with the rule changes?
While series 57 registration provides Securities Trading qualification, it does not meet the Securities Trading Principal requirement to oversee operations. Amendments to NASD rule 1032 (f) provide that a person solely registered as a Securities Trader is not qualified to function in any other registration category.
High Frequency Traders and Floor Traders reclassified under the new revisions to rule 15b9-1 and NASD 1032 (f) are hard-pressed for solutions to meet the regulatory filing and compliance requirements. As the regulatory landscape becomes more and more complex, firms are relying on compliance consultants and specialists to help them meet their regulatory obligations.
RND Resource Inc provides relief for HFT dealers and Floor Traders affected by the amendment to NASD rule 1032 (f).
Our principal, Dave Banerjee, has the requisite registration to act as the Securities Trader Principal on an interim or permanent basis. Dave has vast experience working with FINRA regulated firms and has helped broker firms meet their compliance requirements. At RND Resources our veteran team of FINRA experienced examiners, securities compliance experts, and audit CPA’s are able to assist with set up of procedures and policies; monitoring activities and algorithms for trading; internal controls; and much more.
Need training materials for Series 57? Knopman Financial Training has the program available as of January 8 2016
Frequently Asked Questions about Series 57
Series 57 Securities Trader Qualification is a revision to Rule 15b9-1 that is designed to require broker-dealers engaged in proprietary high-frequency trading (HFT) of securities or other applicable products to register with a regulatory association (an “Association”).
There is no prerequisite registration requirement for Securities Trader registration; however individuals who engage in sales activities with the public are still required to hold the appropriate securities registration to cover that function.
Passing score on the Series 57 Exam will be 70%.
License for series 57 alone does not qualify for registration as a Securities Trader Principal. In order to qualify as a Principal the member must pass the series 57, and the General Securities Principal examination, series 24.
Yes. Anyone holding a Series 55 or Series 56 registration will be grandfathered into the new Series 57 registration category. Individuals who have scheduled their Series 55 exam by January 4, 2016 will be permitted to take the Series 55 exam on their scheduled test date (even if after January 4). Candidates who do not schedule their Series 55 exam date by January 4, 2016 will be required to take the Series 57 Examination.
In April 2015 FINRA issued a survey to members with the series 55 license gathering statistics about current roles, responsibilities, and functions of Equity Traders and Proprietary Traders. Feedback from that survey prompted the November 2015 FINRA release of regulatory notice 15-45 announcing the implementation of series 57 at January 4, 2016.
The FINRA published content outline for Series 57 examination provides a comprehensive guide to what is covered on the examination and area candidates should familiarize themselves with for the examination.
The four major job functions performed by a Securities Trader are: (1) Market Overview and Products – 22 questions; (2) Engaging in Professional Conduct and Adhering to Regulatory Requirements – 21 questions; (3) Trading Activities – 79 questions; and (4) Maintaining Books and Records and Trade Reporting – 12 questions.