[Federal Register Volume 66, Number 94 (Tuesday, May 15, 2001)]
[Notices]
[Pages 26890-26892]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-12134]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44281; File No. SR-NASD-00-69]


Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Order Approving Proposed Rule Change to Establish a New 
Registration Category: Limited Representative--Private Securities 
Offerings (Series 82)

May 8, 2001.

I. Introduction

    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''), 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and rule 19b-4 thereunder,\2\ a proposed rule change 
seeking to amend rule 1032 of the NASD to establish a new registration 
category, Limited Representative--Private Securities Offerings (Series 
82). The proposed rule change was developed to implement Section 203 of 
the Gramm-Leach-Bliley Act of 1999 (``GLBA''), which becomes effective 
on May 12, 2001.\3\ NASD Regulation also proposed clerical changes to 
rule 1032, essentially replacing the word ``described'' for the word 
``prescribed.'' NASD Regulation filed Amendment No. 1 to the proposed 
rule change on February 28, 2001.\4\ Amendment No. 1 repalces the 
proposed rule change in its entirety. On March 14, 2001, NASD 
Regulation filed Amendment No. 2 to the proposed rule change.\5\ Notice 
of the proposed rule change appeared in the Federal Register on March 
28, 2001.\6\ The Commission received no comments on the proposal. This 
order approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 15 CFR 240.19b-4
    \3\ Gramm-Leach-Bliley Act of 1999, Pub. L. No. 106-102, 113 
Stat. 1338 (1999).
    \4\ 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.
    \5\ 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 SEC staff comments 
and to make further clarifications.
    \6\ See Release No. 34-44091 (March 21, 2001), 66 FR 16964 
(March 28, 2001).
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II. Description of the Proposal

    NASD Regulation is proposing to amend Rule 1032 of the NASD to 
implement Section 203 of GLBA. Section 203 adds 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 a broker or 
dealer that is engaged in dealing, market

[[Page 26891]]

making, or underwriting, other than with respect to exempted securities 
and (b), if 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.\7\ Moreover, although neither NASD Regulation 
nor the SEC staff currently is aware of any private offerings of 
government securities, the SEC 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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    \7\ 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. Any person who wishes to effect sales of DPP securities 
is required as a general securities representative or under a limited 
registration category for DPP securities.\8\ 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 representatives or specific DPP securities limited 
qualification examination.
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    \8\ See NASD Rule 1032(c).
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    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 staff has developed a qualification examination and 
has filed the study outline and specifications with the Commission 
under separate cover.\9\
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    \9\ See Release No. 34-44228 (April 27, 2001), 66 FR 22624 (May 
4, 2001).
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    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.

III Discussion

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to the NASD and, in particular, with the 
requirements of Sections 15A(b)(6), 15A(g)(3), and 15A(j) of the 
Act.\10\ Section 15A(b)(6)

[[Page 26892]]

requires, in relevant part, that the rules of a registered securities 
association be designated to prevent fraudulent and manipulative acts 
and practices, to promote just and equitable principles of trade, and 
to protect investors and the public interest. Section 15A(g)(3) 
provides that a registered securities association may deny membership 
to, or condition the membership of, a registered broker or dealer if 
such broker or dealer does not meet the requisite levels of knowledge 
and competence. Section 15A(j) (as enacted) \11\ provides that a 
registered securities association shall create a limited qualification 
category for any associated person of a member who effects 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, and shall deem 
qualified in such limited qualification category, without testing, any 
bank employee who, within the six month period preceding the date of 
the enactment of the GLBA, engaged in effecting such sales.
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    \10\ 15 U.S.C. 78o-3(b)(6), 78o-3(g)(3), and 78o-3(j) (the 
latter as enacted in 1999 through Section 203 of GLBA and effective 
on May 12, 2001. See note, 3, supra.)
    \11\ See note 10, supra.
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IV. Conclusion

    For the above reasons, the Commission finds that the proposed rule 
change is consistent with the provisions of the Act, in general, and 
with Sections 15A(b)(6), 15A(g)(3), and 15A(j) in particular.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\12\ that the proposed rule change, SR-NASD-00-69, be and hereby 
is, approved.
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    \12\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, pursuant 
to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-12134 Filed 5-14-01; 8:45 am]
BILLING CODE 8010-01-M