[Federal Register Volume 63, Number 19 (Thursday, January 29, 1998)]
[Notices]
[Pages 4510-4513]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-2186]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39574; File No. SR-NASD-98-03]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the National Association of Securities Dealers, Inc. Relating 
to Continuing Education Requirements

January 23, 1998.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on January 22, 1998, the 
National Association of Securities Dealers, Inc. (``NASD'') filed with 
the Securities and Exchange Commission (``Commission'') the proposed 
rule change as described in Items I, II, and III below, which Items 
have been prepared by NASD Regulation, Inc. (``NASD Regulation''). The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.\2\
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ The Commission is concurrently publishing notice of parellel 
proposed rule changes from other self-regulatory organizations 
relating to continuing education for registered persons. See 
Securities Exchange Act Releases Nos. 39575 (CBOE); 39576 (MSRB); 
and 39577 (NYSE).
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    NASD Regulation is proposing to Amend Rule 1120 regarding the 
continuing education requirements for registered persons. Below is the 
text of the proposed rule change. Proposed new language is italicized; 
proposed deletions are in brackets.

[[Page 4511]]

1120. Continuing Education Requirements

    This Rule prescribes requirements regarding the continuing 
education of certain registered persons subsequent to their initial 
qualification and registration with the Association. The requirements 
shall consist of a Regulatory Element and a Firm Element as set forth 
below.
(a) Regulatory Element
    (1) Requirements: No member shall permit any registered person to 
continue to, and no registered person shall continue to, perform duties 
as a registered person unless such person has complied with the 
requirements of paragraph (a) hereof.
    (A) Each registered person shall complete the Regulatory Element on 
[three occasions, after] the occurrence of their second[, fifth and 
tenth] registration anniversary [dates] date and every three years 
thereafter, or as otherwise prescribed by the Association. On each [of 
three occasions] occasion, the Regulatory Element must be completed 
within [one hundred twenty] 120 days after the person's registration 
anniversary date. A person's initial registration date shall establish 
the cycle of anniversary dates for purposes of this Rule. The content 
of the Regulatory Element shall be [prescribed by the Association] 
determined by the Association and shall be appropriate to either the 
registered representative or principal status of person subject to the 
Rule.
    (B) Persons Exempted from the Rule--[Registered persons] Persons 
who have been continuously registered for more than 10 years [as of the 
effective date of this Rule] on July 1, 1998, shall be exempt from 
participation in the Regulatory Element programs for registered 
representatives, provided such persons have not been subject within the 
last ten years to any disciplinary action [within the last 10 years] as 
enumerated in paragraph (a)(3). A person who has been continuously 
registered as a principal for more than 10 years on July 1, 1998, shall 
be exempt from participation in the Regulatory Element programs for 
registered principals, provided such person has not been subject within 
the last ten years to any disciplinary action as enumerated in 
paragraph (a)(3). In the event [of such disciplinary action,] that a 
[person] registered representative or principal who was exempt from 
participation in Regulatory Element programs subsequently becomes the 
subject of a disciplinary action as enumerated in paragraph (a)(3), 
such person shall [will] be required to satisfy the requirements of the 
Regulatory Element [by participation for the period from the effective 
date of this Rule to 10 years after the occurrence of the disciplinary 
action] as if the date of such disciplinary action is such person's 
initial registration date with the Association.
    (C) Persons who have been currently registered for 10 years or less 
as of [the effective date of this Rule] July 1, 1998, shall [initially] 
participate in the Regulatory Element within 120 days after the 
occurrence of the second[, fifth or tenth] registration anniversary 
date, or every third year thereafter, whichever anniversary date first 
applies[, and on the applicable registration anniversary date(s) 
thereafter. Such persons will have satisfied the requirements of the 
Regulatory Element after participation on the tenth registration 
anniversary].
    [(D) All registered persons who have satisfied the requirements of 
the Regulatory Element shall be exempt from further participation in 
the Regulatory Element subject to re-entry into the program as set 
forth in paragraph (a)(3).]
    (2) Failure to Complete--No change.
    (3) Re-entry into Program: Unless otherwise determined by the 
Association, a registered person will be required to re-enter the 
Regulatory Element and satisfy all of its requirements in the event 
such person:
    (A)-(C) No change.
    Re-entry shall commence with initial participation within 120 days 
of the registered person becoming subject to the statutory 
disqualification, in the case of (A) above, or the disciplinary action 
becoming final, in the case of (B) and (C) above[, and on three 
additional occasions thereafter, at intervals of two, five and 10 years 
after re-entry, notwithstanding that such person has completed all or 
part of the program requirements based on length of time as a 
registered person or completion of ten years of participation in the 
program]. The date of the disciplinary action shall be treated as such 
person's initial registration date with the Association.
    (4) Reassociation in a Registered Capacity: Any registered person 
who has terminated association with a member and who has, within two 
years of the date of termination, become reassociated in a registered 
capacity with a member shall participate in the Regulatory Element at 
such intervals [(two, five and 10 years)] that may apply (second 
anniversary and every three years thereafter) based on the initial 
registration anniversary date rather than based on the date of 
reassociation in a registered capacity.
    (5) Definition of Registered Person: For purposes of this Rule, the 
term ``registered person'' means any person registered with the 
Association as a representative, principal, or assistant representative 
pursuant to the Rule 1020, 1030, 1040, and 1110 Series.
(b) Firm Element
    (1) Persons Subject to the Firm Element--No change.
    (2) Standards for the Firm Element: (A) Each member must maintain a 
continuing and current education program for its covered registered 
persons to enhance their securities knowledge, skill, and 
professionalism. At a minimum, each member shall at least annually 
evaluate and prioritize its training needs and develop a written 
training plan. The plan must take into consideration the member's size, 
organizational structure, and scope of business activities, as well as 
regulatory developments and the performance of covered registered 
persons in the Regulatory Element. If a member's analysis establishes 
the need for supervisory training for persons with supervisory 
responsibilities, such training must be included in the member's 
training plan.
    (B) Minimum Standards for Training Programs--Programs used to 
implement a member's training plan must be appropriate for the business 
of the member and, at a minimum must cover the following matters 
concerning securities products, services, and strategies offered by the 
member:
    (i) General investment features and associated risk factors;
    (ii) Suitability and sales practice considerations; and
    (iii) Applicable regulatory requirements.
    (C) Administration of Continuing Education Program--A member must 
administer its continuing education programs in accordance with its 
annual evaluation and written plan and must maintain records 
documenting the content of the programs and completion of the programs 
by covered registered persons.
    (3) Participation in the Firm Element: Covered registered persons 
included in a member's plan must take all appropriate and reasonable 
steps to participate in continuing education programs as required by 
the member.
    (4) Specific Training Requirements: The Association may require a 
member, individually or as part of a larger group, to provide specific 
training to its covered registered persons in such areas as the 
Association deems appropriate. Such a requirement may stipulate the 
class of covered registered persons for

[[Page 4512]]

which it is applicable, the time period in which the requirement must 
be satisfied, and, where appropriate, the actual training content.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, NASD Regulation included 
statements concerning the purpose of and basis for the proposed rule 
change and discussed any comments it received on the proposed rule 
change. The text of these statements may be examined at the places 
specified in Item IV below. NASD Regulation has prepared summaries, set 
forth in Sections A, B, and C below, of the most significant aspects of 
such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of the proposed rule change is to revise Rule 1120. 
Rule 1120 provides for a continuing education program for certain 
persons registered with the NASD. The program, which is uniform within 
the industry, consists of two parts, a Regulatory Element and a Firm 
Element. The Regulatory Element requires registered persons to 
participate in interactive computer-based training at specified 
intervals and encompasses regulatory and compliance issues, sales 
practice concerns, and business ethics. The Regulatory Element program 
applies generally to all registered persons and currently does not 
distinguish among registration types or categories. The existing 
program contains content common to registered representatives, 
supervisors, and other registration categories. The Securities 
Industry/Regulatory Council on Continuing Education \3\ has recommended 
development of a new program component specifically for supervisors. In 
addition, it is contemplated that in the future, specific programs may 
be implemented for other registration categories. The proposed 
amendments to Rule 1120 would allow for NASD Regulation to require new 
programs as appropriate with customized training for various 
registration categories, with the supervisor's program being the first 
initiative. For purposes of the proposed rule, all the principal 
registration categories under Rule 1022 would be included in the 
supervisory program.
---------------------------------------------------------------------------

    \3\ The Securities Industry/Regulatory Council on Continuing 
Education was created in November 1993 and comprises six self-
regulatory organizations (``SROs'') and 13 broker-dealers to 
represent the interests and needs of a wide cross-section of the 
industry. The SROs include the American Stock Exchange; the Chicago 
Board Options Exchange, Incorporated; the Municipal Securities 
Rulemaking Board; the National Association of Securities Dealers 
Inc.; the New York Stock Exchange, Inc.; and the Philadelphia Stock 
Exchange. In addition, the Commission and the North American 
Securities Administrators Association have each assigned liaisons to 
the Council.
---------------------------------------------------------------------------

    The proposed amendments also address the time frames at which 
registered persons must participate in the Regulatory Element computer-
based training. Rule 1120 currently requires all registered persons to 
complete the training on three occasions, i.e., their second, fifth and 
tenth registration anniversaries. After a person is registered for more 
than ten years, he or she is graduated from the program and not 
required to participate further in the Regulatory Element. However, if 
at any time a registered person is subject to certain disciplinary 
actions enumerated in the Rule, then the registered person is required 
to re-enter the Regulatory Element program. The Council has recommended 
that these requirements be revised to require ongoing participation in 
the program by registered persons. In accordance with that 
recommendation, the proposed amendments to Rule 1120 would require 
participation in the Regulatory Element throughout a registered 
persons's career, specifically, on the second registration anniversary 
and every three years thereafter, with no graduation from the program.
    Proposed Rule 1120 would allow a one-time exemption for persons 
currently graduated from the program by providing that those persons 
who have been registered for more than ten years as of the effective 
date of the proposed rule, and who have not been the subject of a 
disciplinary action enumerated in the Rule during the past ten years, 
would continue to be excluded from required ongoing participation in 
the Regulatory Element. Persons registered in a supervisory capacity 
would have to have been registered in a supervisory capacity for more 
than 10 years in order to be covered by this one-time provision for 
graduation from participation in the program. Therefore, those 
supervisors who have graduated from the program requirements based on 
their initial registration date but who have not completed 10 years as 
a supervisor would be required to re-enter the program.
    The Firm Element requires that each member conduct annually an 
analysis of their training needs and administer such training, as is 
appropriate, to their registered persons who have direct contact with 
customers and the immediate supervisors of such registered persons, on 
an ongoing basis. Topics must be specifically related to their 
business, such as new products, sales practices, risk disclosure, and 
new regulatory requirements and concerns. The proposed amendments to 
Rule 1120 would require members to focus specifically on supervisory 
training needs in conducting their analysis of training needs, and if 
it is determined that there is a specific need for supervisory 
training, it must be addressed in the Firm Element training plan.
    These amendments, which would be adopted uniformly with rule 
changes of the other SRO Council members, would significantly enhance 
the continuing education program by requiring all registered persons to 
participate in the Regulatory Element on an ongoing basis throughout 
their securities industry careers. In addition, NASD Regulation 
believes that the proposed rule allowing for the implementation of a 
program specifically geared towards supervisory and the issues that may 
arise in that role would result in more effective regulatory training 
of supervisors as well as improved overall supervision of members.
    NASD Regulation proposes to make the rule change effective on July 
1, 1998.
2. Statutory Basis
    NASD Regulation believes the proposed rule change is consistent 
with the Act and the rules and regulations thereunder applicable to the 
NASD, and in particular, Section 15A(g)(3).\4\ Under that Section, it 
is the NASD's responsibility to prescribe standards of training, 
experience, and competence for persons associated with NASD members. 
Pursuant to this statutory obligation, NASD Regulation has proposed 
this rule change in order to enhance the established continuing 
education program for registered persons.
---------------------------------------------------------------------------

    \4\ 15 U.S.C. 78o-3(g)(3).
---------------------------------------------------------------------------

    The proposed rule change also is consistent with Section 15A(b)(6) 
of the Act,\5\ which requires, among other things, that the rules of a 
registered securities association be designed to promote just and 
equitable principles of trade, to remove impediments to and perfect the 
mechanism of a free and open market and a national market system, and, 
in general, to protect investors and the public interest.
---------------------------------------------------------------------------

    \5\ 15 U.S.C. 78o-3(b)(6).

---------------------------------------------------------------------------

[[Page 4513]]

B. Self-Regulatory Organization's Statement on Burden on Competition

    NASD Regulation does not believe the proposed rule change would 
result in any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Act, as amended.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Written comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    A. By order approve such proposed rule change, or
    B. Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549. 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for inspection and copying in the 
Commission's Public Reference Room. Copies of such filing will also be 
available for inspection and copying at the principal office of NASD 
Regulation. All submissions should refer to the file number in the 
caption above and should be submitted by February 19, 1998.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\6\
---------------------------------------------------------------------------

    \6\ 17 CFR 300.30(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-2186 Filed 1-28-98; 8:45 am]
BILLING CODE 8010-01-M