[Federal Register Volume 66, Number 60 (Wednesday, March 28, 2001)]
[Notices]
[Pages 16964-16966]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-7595]



[[Page 16964]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44091; File No. SR-NASD-00-69]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the National Association of Securities Dealers, Inc. To 
Establish a New Registration Category: Limited Representative--Private 
Securities Offerings

March 21, 2001.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on November 28, 2000, the National Association of Securities Dealers, 
Inc. (``NASD'' or ``Association''), through its wholly-owned 
subsidiary, NASD Regulation, Inc. (``NASD Regulation''), filed with the 
Securities and Exchange Commission (``SEC'' or ``Commission'') the 
proposed rule change as described in Items I, II and III below, which 
Items have been prepared by NASD Regulation. NASD Regulation filed 
Amendment No. 1 to the proposed rule change on February 28, 2001.\3\ 
Amendment No. 1 replaces the proposed rule change in its entirety. On 
March 14, 2001, NASD Regulation filed Amendment No. 2 to the proposed 
rule change.\4\ The Commission is publishing this notice to solicit 
comments on the proposed rule change, as amended, from interested 
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letter from Jeffrey S. Holik, Vice President and Acting 
General Counsel, NASD Regulation, to Katherine A. England, Assistant 
Director, Division of Market Regulation (``Division''), Commission, 
dated February 28, 2001 (``Amendment No. 1''). Amendment No. 1 was 
filed to address SEC staff comments and to make certain 
clarifications.
    \4\ See letter from Gary L. Goldsholle, Associate General 
Counsel, NASD Regulation, to Katherine A. England, Assistant 
Director, Division, Commission, dated March 14, 2001 (``Amendment 
No. 2''). Amendment No. 2 was filed to address additional SEC staff 
comments and to make further clarifications.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    NASD Regulation is proposing to amend Rule 1032 of the NASD to 
implement Section 203 the Gramm-Leach-Bliley Act of 1999 (``GLBA''),\5\ 
which becomes effective on May 12, 2001. The proposed rule change 
creates a limited registration category for an associated person of a 
member whose investment banking and securities business is limited 
solely to effecting sales of private securities offerings. Section 203 
also states that any bank employee who during the six-month period 
prior to the enactment of GLBA engaged in effecting such sales shall be 
deemed qualified in such limited registration category without having 
to complete an examination. NASD Regulation also is making clerical 
changes to Rule 1032, essentially replacing the word ``described'' for 
the word ``prescribed.'' Below is the text of the proposed rule change. 
Proposed new language is italicized; proposed deletions are in 
brackets.
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    \5\ Gramm-Leach-Bliley Act of 1999, Pub. L. No. 106-102, 113 
Stat. 1338 (1999).
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1032. Categories of Representative Registration
* * * * *
(b) Limited Representative--Investment Company and Variable Contracts 
Products
* * * * *
    (2) A person qualified solely as a Limited Representative--
Investment Company and Variable Contracts Products shall not be 
qualified to function as a representative in any area not [pr]described 
in paragraph (b)(1)(A) hereof.
(c) Limited Representative--Direct Participation Programs
* * * * *
    (2) A person qualified solely as a Limited Representative--Direct 
Participation Programs shall not be qualified to function in any area 
not [pr]described in[by] subparagraph (1) hereof.
* * * * *
(d) Limited Representative--Options
* * * * *
    (3) A person registered as a Limited Representative--Options shall 
not be qualified to function in any area not [pr]described in[by] 
subparagraph (1) hereof.
(e) Limited Representative--Corporate Securities
* * * * *
    A person qualified solely as a Limited Representative--Corporate 
Securities shall not be qualified to function in any area not 
[pr]described in[by] subparagraph (1) hereof.
(g) Limited Representative--Government Securities
* * * * *
    (2) A person registered solely as a Limited Representative--
Government Securities shall not be qualified to function in any area 
not [pr]described in[by] subparagraph (1)(A) hereof.
(h) Limited Representative--Private Securities Offerings
    (1) Each person associated with a member who is included within the 
definition of a representative as defined in Rule 1031 may register 
with the Association as a Limited Representative--Private Securities 
Offerings if:
    (A) such person's activities in the investment banking and 
securities business involve effecting sales as part of a primary 
offering of securities not involving a public offering, pursuant to 
Section 3(b), 4(2) or 4(6) of the Securities Act of 1933 and the rules 
and regulations thereunder, provided, however, that such person shall 
not effect sales of municipal or government securities, or equity 
interests in or the debt of direct participation programs as defined in 
Rule 1022(e)(2); and
    (B) subject to subparagraph (2) hereof, such person passes an 
appropriate qualification examination for Limited Representative--
Private Securities Offerings.
    (2) The Association shall, upon such evidence as the Association 
determines to be appropriate, deem any person who while employed by a 
bank, engaged in effecting sales of private securities offerings as 
described in subparagraph (1)(A) hereof, during the period from May 12, 
1999 to November 12, 1999, as qualified to register as a Limited 
Representative--Private Securities Offerings without the need to pass 
the qualification examination required by subparagraph (1)(B) hereof.
    (3) A person registered as a Limited Representative--Private 
Securities Offerings shall not be qualified to function in any area not 
described in subparagraph (1)(A) hereof.
* * * * *

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.

[[Page 16965]]

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 implement Section 203 
of GLBA. Section 203 adds new subsection (j) to Section 15A of the Act, 
which requires that the NASD, as a registered securities association, 
create a limited registration category for any associated person of a 
member whose investment banking and securities business is limited 
solely to effecting sales of private securities offerings. Section 203 
also states that any bank employee who during the six-month period 
prior to the enactment of GLBA (i.e., from May 12, 1999 to November 12, 
1999) engaged in effecting such sales shall not be required to pass a 
qualification examination in order to be deemed qualified in the 
limited registration category. Section 203 becomes effective on May 12, 
2001.
    GLBA also establishes functional regulation, meaning that each 
industry segment of a multi-industry organization will be regulated by 
the agency charged by law with the regulation of that industry. In 
connection with functional regulation, GLBA eliminates the long-
standing general exclusion for banks from the definitions of ``broker'' 
and ``dealer'' under the Act and instead provides exclusions for 
certain bank activities. With respect to private placement activity, 
GLBA permits private placements to be effected in a bank (that is not a 
broker or dealer) where (a) the bank is not affiliated with any broker 
or dealer, the aggregate dollar amount of any private placement 
offering (excluding government or municipal securities) does not exceed 
25% of the bank's capital. A bank that meets these conditions will be 
eligible to engage in private placement activities without having to 
register its personnel with the NASD. Notwithstanding this exclusion, 
many banks will be required to effect private securities offerings in a 
registered broker/dealer. For banks that are not excluded from the 
definition of ``broker,'' employees that effect sales of private 
securities offerings will be required to become associated persons of a 
registered broker/dealer, and as such, will be subject to NASD 
qualification examination and other requirements.
    As part of the effort to facilitate a smooth transition of private 
placement activities from banks to broker/dealers, GLBA creates a new 
limited registration category for persons engaging solely in sales of 
private securities offerings. As noted above, while certain banks will 
still be permitted to engage in private securities offerings, many 
others will be required to effect these sales in a registered broker/
dealer with appropriately registered personnel.
    The proposed rule change effectuates the provisions of Section 203 
by establishing a new registration category for persons engaged solely 
in sales of private securities offerings through a registered broker/
dealer. Applicants seeking to register with the NASD under this limited 
registration category must meet the eligibility criteria for associated 
persons of a member in the NASD By-Laws and pass the necessary 
qualification examination. However, consistent with GLBA, the proposed 
rule change provides that any person who engaged in sales of private 
securities offerings as an employee of a bank during the period from 
May 12, 1999 to November 12, 1999, is not required to complete the 
qualification examination. An applicant seeking exemption from the 
qualification examination pursuant to this provision will be required 
to provide such evidence as NASD Regulation determines to be 
appropriate, demonstrating that he or she was engaged in effecting 
sales of private securities offerings at the bank during the period 
from May 12, 1999 to November 12, 1999.
    The new limited registration category permits a person to effect 
sales of private securities offerings. However, the new limited 
registration category does not permit a person to effect sales of 
municipal or government securities or equity interests in or the debt 
of direct participation programs (``DPP securities''). Although sales 
of municipal securities and DPP securities may involve private 
securities offerings, NASD Regulation does not believe that the limited 
registration category should allow persons to sell such securities. 
Persons who effect sales of municipal securities, including bank 
employees, currently are required to be qualified in accordance with 
the rules of the Municipal Securities Rulemaking Board (``MSRB''). MSRB 
rules, among other things, require that persons pass a specific 
qualification examination. NASD Regulation does not believe that the 
new limited registration category was intended to create a subcategory 
of persons that are eligible to engage in certain offerings of 
municipal securities without meeting the specific qualification 
requirements of the MSRB.
    Based upon conversations with SEC staff, NASD Regulation has 
included language in the proposed rule change to exclude from the scope 
of the limited registration category the ability to effect sales of 
private placements of government securities. With respect to government 
securities, NASD Regulation already offers a limited registration 
category for persons involved in the solicitation, purchase or sale of 
government Securities.\6\ Moreover, although neither NASD Regulation 
nor the SEC staff currently is aware of any private offerings of 
government securities, the SEC staff believes that it is important to 
exclude government securities from the limited registration category, 
similar to the exclusion for municipal securities given the manner in 
which these products are addressed in the GLBA.
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    \6\ See NASD Rule 1032(g).
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    The new limited registration category also does not qualify a 
person to engage in offerings of DPP securities. In general, DPP 
securities are specialized programs that provide for flow-through tax 
consequences. Persons who wish to effect sales of DPP securities are 
required to register as a general securities representative or under a 
limited registration category for DPP securities.\7\ Based upon 
conversations with banking industry representatives, NASD Regulation 
does not believe that unregistered bank employees generally effect 
sales of DPP securities. In view of the highly specialized nature of 
DPP securities, the existence of a limited registration category for 
such securities, and the general lack of experience in such securities 
by unregistered bank personnel, NASD Regulation does not believe that 
the new limited registration category should qualify an associated 
person to sell DPP securities. Moreover, by eliminating DPP securities 
from the scope of the new limited registration category, the 
qualification examination will not be burdened with questions on these 
highly specialized products. However, with respect to current bank 
employees who may be eligible to register under the new limited 
registration category without taking the qualification examination 
pursuant to paragraph (h)(2) of the proposed rule change, NASD 
Regulation staff has exemptive authority under NASD Rule 1070 and under 
such authority will consider on a case-by-case basis, whether a bank 
employee with experience in DPP securities registering with a broker/
dealer should be authorized to effect sales of DPP securities without 
having to complete the general securities representative or specific 
DPP securities limited qualification examination.
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    \7\ See NASD Rule 1032(c).

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[[Page 16966]]

    Finally, NASD Regulation emphasizes that the new limited 
registration category permits persons only to effect sales of private 
placement securities as part of a primary offering. As such, persons 
registered in this category will not be permitted to effect resales of 
or secondary market transactions in private placement securities. Any 
person wishing to effect resales of or secondary market transactions in 
private placement securities will be required to register as a General 
Securities Representative, or, where appropriate, as a Limited 
Representative--Corporate Securities.
    NASD Regulation is making the proposed rule change to effectuate 
the provisions of Section 203 of GLBA. NASD Regulation staff is 
currently in the process of developing the qualification examination 
and will file the study outline and specifications under separate 
cover.
    NASD Regulation also is making several clerical changes to Rule 
1032, replacing the word ``described'' for the word ``prescribed.'' 
This change more accurately reflects the intended meaning of the 
affected paragraphs.
2. Statutory Basis
    NASD Regulation believes that the proposed rule change is 
consistent with the provisions of Section 15A(b)(6) of the Act,\8\ 
which requires, among other things, that the Association's rules must 
be designed to prevent fraudulent and manipulative acts and practices, 
to promote just and equitable principles of trade, and, in general, to 
protect investors and the public interest. The proposed rule change 
also is necessary to implement Section 203 of GLBA.
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    \8\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    NASD Regulation does not believe that the proposed rule change will 
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, including whether the proposed rule 
is consistent with the Act. Persons making written submissions should 
file six copies thereof with the Secretary, Securities and Exchange 
Commission, 450 Fifth Street, NW., Washington, DC 20549-0609. 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 also will be available for 
inspection and copying at the principal office of the NASD. All 
submissions should refer to the file number SR-NASD-00-69 and should be 
submitted by April 18, 2001.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-7595 Filed 3-27-01; 8:45 am]
BILLING CODE 8010-01-M