[Federal Register Volume 63, Number 47 (Wednesday, March 11, 1998)]
[Notices]
[Pages 11939-11941]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-6176]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39712; File Nos. SR-CBOE-97-68; SR-MSRB-98-02; SR-NASD-
98-03; and SR-NYSE-97-33]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Changes by the Chicago Board Options Exchange, Municipal Securities 
Rulemaking Board, National Association of Securities Dealers, Inc., and 
New York Stock Exchange, Inc. Relating to Continuing Education 
Requirements

March 3, 1998.

I. Introduction

    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ on December 30, 1997, 
January 21, 1998, January 22, 1998, and December 8, 1997, the Chicago 
Board Options Exchange (``CBOE''), Municipal Securities Rulemaking 
Board (``MSRB''), National Association of Securities Dealers, Inc. 
(``NASD''), and New York Stock Exchange, Inc. (``NYSE''), respectively, 
submitted to the Securities and Exchange Commission (``Commission'') 
proposed rule changes modifying the continuing education requirements 
of registered persons.\3\ The proposed rule changes were published for 
comment in the Federal Register on January 29, 1998.\4\ The Commission 
received five comment letters regarding expanding the continuing 
education program. For the reasons discussed below, the Commission is 
approving the proposed rule changes.
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    \1\ 15 U.S.C. Sec. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ The NYSE, CBOE, and MSRB submitted technical amendments to 
the proposed rule language. See letter from James E. Buck, Senior 
Vice President, NYSE, to Gail Marshall, Special Counsel, Division of 
Market Regulation, SEC, dated February 10, 1998; letter from 
Lawrence J. Bresnahan, Assistant Vice President, Department of 
Financial and Sales Practice Compliance, CBOE, to Gail Marshall, 
SEC, dated January 23, 1998; and letter from Ronald W. Smith, Senior 
Legal Associate, MSRB, to Katherine A. England, Assistant Director, 
SEC, dated January 21, 1998. The CBOE and MSRB proposed rule 
language, as amended, is virtually identical to that of the NYSE, 
which was published in Securities Exchange Act Release No. 39577 
(January 23, 1998), 63 FR 4513 (January 29, 1998).
    \4\ See Securities Exchange Act Release Nos. 39574 (January 23, 
1998), 63 FR 4510 (January 29, 1998) (SR-NASD-98-03); 39575 (January 
23, 1998), 63 FR 4507 (January 29, 1998) (SR-CBOE-97-68); 39576 
(January 23, 1998), 63 FR 4509 (January 29, 1998) (SR-MSRB-98-02); 
and 39577 (January 23, 1998), 63 FR 4513 (January 29, 1998) (SR-
NYSE-97-33).
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II. Background

    The Securities Industry/Regulatory Council on Continuing Education 
(``CE Council'') was created in November 1993 and is comprised of six 
self-regulatory organizations (``SROs'') and thirteen broker-dealers to 
represent the interests and needs of a wide cross-section of the 
industry. The SROs include the American Stock Exchange;\5\ CBOE; MSRB; 
NASD; NYSE; and the Philadelphia Stock Exchange.\6\ The CE Council 
facilitates the industry/regulatory coordination of the administration 
and future development of the Continuing Education (``CE'') Program. 
The Council, on October 17, 1997, announced that it was recommending 
changes to the CE Program to strengthen the requirements for registered 
persons \7\ and implement a new program specifically for industry 
managers and supervisors.
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    \5\ The American Stock Exchange, Inc. (``Amex'') has also filed 
with the Commission a proposed rule change to modify its rules 
regarding the continuing education of registered persons. That rule 
proposal is duplicative of the rule proposals being approved today. 
Accordingly, the Commission, in a separate order, is approving, on 
an accelerated basis, the Amex's proposed rule change. See 
Securities Exchange Act Release No. 39711 (March 3, 1998).
    \6\ In addition, the Commission and the North American 
Securities Administrators Association each have liaisons assigned to 
the Council.
    \7\ For purposes of the proposed rules, the term ``registered 
person'' means any person required to be registered under the rules 
of the applicable SRO, including members and registered 
representatives, but does not include any person whose activities 
are limited solely to the transaction of business on the floor of a 
national securities exchange with members or registered broker-
dealers. When used with reference to the MSRB, however, the term 
``registered person'' means any person registered with the 
appropriate enforcement authority as a municipal securities 
representative, municipal securities principal, municipal securities 
sales principal, or financial and operation principal pursuant to 
MSRB Rule G-3.
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    The CE Program, which is uniform within the industry, consists of 
two parts, a Regulatory Element and a Firm Element.

A. The Regulatory 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

[[Page 11940]]

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 CBOE, MSRB, NASD, 
and NYSE have proposed rule changes for the 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 (e.g., Series 6; investment company 
products/variable contracts limited representative). The proposed rule 
changes allow the SROs to require new programs as appropriate with 
customized training for various registration categories, with the 
supervisor's program being the first initiative.
    The proposed amendments also address the time frames at which 
registered persons must participate in the Regulatory Element computer-
based training. Currently, the SROs' rules require 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 graduates from the program and is not 
required to participate further in the Regulatory Element. However, if 
at any time a registered person is subject to certain disciplinary 
actions, then the registered person is required to re-enter the 
Regulatory Element program. The SROs have proposed to require ongoing 
participation in the Regulatory Element throughout a registered 
person's career, specifically, on the second registration anniversary 
and every three years thereafter, with no graduation from the program.
    The SROs, however, have proposed 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 during the past ten years, would continue to be 
excluded from the 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.

B. The Firm Element

    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 rule changes 
require members to also 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.

III. Comments Received

    The Commission received five comment letters on the proposal to 
expand the CE Program.\8\ Three of the five commenters were concerned 
that the CE Program has not been in existence long enough to determine 
that it should be expanded upon.\9\ Since its inception on July 1, 
1995, more than 225,000 registered persons have participated in the 
Regulatory Element. The NASD provides the CE Council with statistical 
performance reports on how these registered persons do on the 
training.\10\ These reports provide the CE Council with data on how 
different registrations (i.e. Series 7, Series 6, Principal, and other) 
perform on each of the training subject areas (i.e., communications 
with the public, suitability, handling customer accounts, and business 
conduct). The Commission believes that three years of statistical 
information provides the CE Council and the SROs sufficient information 
to make a determination that changes to the Program would be beneficial 
to the industry. Moreover, the Commission believes the SROs have an 
obligation to apply the information from these performance reports in 
their oversight of the CE Program. The Commission, therefore, believes 
it is appropriate for the SROs to determine that the ``one size fits 
all approach'' is not the most effective training method and to begin 
establishing specialized training based upon a person's registration 
(e.g., Series 7, Series 6, or Principal).\11\
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    \8\ Although the rule proposals were virtually identical for 
each SRO, the comment letters referred particularly to File No. SR-
NASD-98-03. See letter from Deborah A. Barragan, Compliance Officer, 
Chase Securities Inc., to Margaret H. McFarland, Deputy Secretary, 
SEC dated February 18, 1998 (``Chase Letter''); letter from Lisa 
Clifford, Compliance Officer, Training & Education, Jefferson Pilot 
Financial, to Secretary, SEC, dated February 19, 1998 (``Jefferson 
Pilot Letter''); letter from Kevin Devereaux, Vice President, Deputy 
Director Compliance, BancBoston Securities Inc., to Office of the 
Secretary, SEC, dated February 12, 1998 (``BancBoston Letter''); 
letter from Erwin J. Dugasz, Jr., Compliance Manager, Nationwide 
Investment Services Corporation, to Secretary, SEC, dated February 
13, 1998 (``Nationwide Letter''); and letter from Chuck Thompson, 
Summit Financial Concepts, Inc., to Gail Marshall, SEC, dated 
February 26, 1998 (``Summit Letter'').
    \9\ See Chase Letter; Jefferson Pilot Letter; and BancBoston 
Letter.
    \10\ The NASD also sends a performance report to each firm 
showing the firm the industry average and the firm score, which is 
how well the different types of registered employees of the firm 
performed on the training. The rules of the SROs require the firms 
to review this feedback in the ongoing analysis of their training 
needs for the Firm Element.
    \11\ One commenter noted that their registered employees found 
the Regulatory Element too oriented to the Series 7 representatives. 
See Chase Letter. The Commission believes that this specialized 
program for Principals is the first step in establishing a 
Regulatory Element training program that is more specialized and 
therefore more effective.
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    The Regulatory Element computer-based training is administered by 
the Sylvan Learning Systems (``Sylvan''). Two commenters expressed 
concern that the Regulatory Element program was being expanded without 
regard for the existing problems with Sylvan regarding scheduling and 
accessing the training sessions. The NASD acknowledged that in 
September of 1997 there were problems in downloading the training 
sessions to Sylvan.\12\ The NASD has since implemented improvements to 
its systems to eliminate large-scale download problems and will 
continue to isolate and correct any random download problems.\13\ 
Moreover, Sylvan has implemented software and procedural changes to the 
appointment scheduling process to make it more efficient.\14\
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    \12\ See letter from Mary L. Schapiro, President, NASD 
Regulation, to Member Firms, dated October 3, 1997.
    \13\ See letter from Mary L. Schapiro, President, NASD 
Regulation, to Member Firms, dated January 20, 1998.
    \14\ Id.
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    One commenter was concerned that the lack of an ongoing graduation 
provision would significantly increase the costs associated with 
training a registered employee.\15\ While the Commission is sympathetic 
to the additional costs of the continued training of registered 
employees, the Commission, however, believes the additional costs is 
worth both the

[[Page 11941]]

benefit to investors and to the industry of having registered persons 
regularly trained in regulatory and ethical standards.
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    \15\ See Nationwide Letter. Nationwide estimated that it would 
cost $525.00 to send an employee to the Regulatory Element training 
over a period of 20 years.
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    One commenter questioned whether the new CE training for Principals 
would be appropriate for a registered Principal that had no supervisory 
duties.\16\ The SROs have indicated that the new CE training for 
Principals is not being designed to address only personnel issues or 
office supervision. The training will also cover such topics as 
communications with the public and client accounts.
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    \16\ See Summit Letter.
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IV. Discussion

    The Commission believes that the SRO's proposed rule changes are 
consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to national securities exchanges, 
national securities associations, and the MSRB, and, in particular, the 
respective requirements of Section 6(b)(5), 15A(b)(6), and 15B(b)(2)(C) 
of the Act.\17\ Sections 6(b)(5), 15A(b)(6), and 15B(b)(2)(C) require, 
among other things, that the rules of an exchange, association, or the 
MSRB, respectively, be designed to promote just and equitable 
principles of trade, remove impediments to and perfect the mechanism of 
a free and open market, and, in general, protect investors and the 
public interest. The Commission further believes that the proposed rule 
changes also are consistent with the respective provisions of Sections 
6(c)(3)(B), 15A(g)(3)(A), and 15B(b)(2)(A) of the Act,\18\ each of 
which makes it the responsibility of an exchange, association, or the 
MSRB to prescribe standards of training, experience, and competence for 
persons associated with SRO members.
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    \17\ 15 U.S.C. Secs. 78f(b)(5), 78o-3(b)(6), and 78o-4(b)(2)(C).
    \18\ 15 U.S.C. Secs. 78f(c)(3)(B), 78o-3(g)(3)(A), and 78o-
3(g)(3)(A), and 78o-4(b)(2)(A).
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    The Commission also believes that the proposed rule change is 
consistent with the purposes underlying Section 15(b)(7) of the Act, 
which generally prohibits a registered person from effecting any 
transaction in, or inducing the purchase or sale of, any security 
unless such registered person meets the standards of training, 
competence and other qualifications as the Commission finds necessary 
or appropriate in the public interest or for the protection of 
investors.
    The Commission believes that the SRO's proposed rule changes are an 
appropriate means of maintaining and reinforcing the initial 
qualification standards required of a registered person and will 
significantly enhance the continuing education program by requiring all 
registered persons to participate in the Regulatory Element throughout 
their securities industry careers.

IV. Effective Date

    The SRO's proposed rule changes (File Nos. SR-CBOE-97-68; SR-MSRB-
98-02; SR-NASD-98-03; and SR-NYSE-97-33) will become effective July 1, 
1998.

V. Conclusion

    For the foregoing reasons, the Commission finds that the proposed 
rule changes are consistent with the Act and the rules and regulations 
thereunder applicable to national securities exchanges, national 
securities associations, and the MSRB.\19\
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    \19\ In addition, in approving these rule proposals, the 
Commission notes that it has considered the proposed rules' impact 
on efficiency, competition and capital formation. 15 U.S.C. 78c(f).
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\20\ that the proposed rule changes (File Nos. SR-CBOE-97-68; SR-
MSRB-98-02; SR-NASD-98-03; and SR-NYSE-97-33) be, and hereby are, 
approved.

    \20\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\21\
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    \21\ 17 CFR 200.3-30(a)(12).
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[FR Doc. 98-6176 Filed 3-10-98; 8:45 am]
BILLING CODE 8010-01-M