[Federal Register Volume 68, Number 247 (Wednesday, December 24, 2003)]
[Notices]
[Pages 74674-74676]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-31650]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48932; File No. SR-NASD-2003-186]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the National Association of 
Securities Dealers, Inc. Relating to the Administration of 
Qualification Examinations on Security Futures

December 16, 2003.
    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 December 11, 2003, the National Association of Securities Dealers, 
Inc. (``NASD'') submitted to 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 the NASD. The NASD has 
filed the proposed rule

[[Page 74675]]

change pursuant to Rule 19b-4(f)(6) under the Act.\3\ The Commission is 
publishing this notice to solicit comments on the proposed rule change 
from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4
    \3\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of Proposed Rule Change

    In this filing, the NASD discusses the implementation of new and 
revised qualification examinations to address trading in security 
futures.
    The NASD does not propose to amend any of its existing rule text.

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

    In its filing with the Commission, the NASD 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. The NASD 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 commodity Futures Modernization Act of 2000 (``CFMA'') \4\ 
lifted the ban on the trading of security futures (i.e. futures on 
single stocks and on narrow-based stock indexes). The NASD states that, 
at the time the CFMA was enacted, expectations for security futures 
were very high, and two separate markets were developed to trade these 
new products. To meet the challenge of ensuring that individuals 
engaging in a security futures business ere properly qualified, the 
NASD took the unique step of mandating that firms include training in 
security futures as part of their firm-element continuing education 
program. Furthermore, to assist firms in meeting this responsibility, 
the NASD and the National Futures Association (``NFA'') contracted with 
the Institute for Financial Markets to develop an internet-based 
training program. NASD and NFA have made this program available to 
firms and registered representative for free. Since its inception in 
October 2002, over 12,000 individuals have completed the Internet 
training, which takes approximately two to three hours to complete.
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    \4\ P.L. 106-554, 114 Stat. 2763 (December 21, 2000).
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    At the time trading in security futures commenced, NASD also 
indicated that it planned to both modify and create qualification 
examinations to address trading in security futures. Specifically, NASD 
intended to modify the Series 4 examination (Registered Options and 
Security Futures Principal (replacing Registered Options Principal)), 
Series 9/10 examination (Limited Principal General Securities Sales 
Supervisor), and Series 42 examination (Limited Representative Options 
and Security Futures (replacing Limited Representative Options)). In 
addition, NASD intended to create a new Series 43 examination for 
general securities representatives (those persons who have successfully 
completed the Series 7 exam) seeking to engage in a security futures 
business.\5\ The Series 43 is targeted at new entrants into the 
securities industry. Existing registrants (i.e., those registered 
before the Series 43 examination is effective) are required to complete 
a firm-element continuing education program prior to engaging in a 
security futures business. Once the Series 43 was developed, NASD 
intended to permit existing registrants the option of completing the 
firm-element continuing education program in lieu of the Series 43 
examination until December 31, 2006.
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    \5\ A new Series 43 examination was necessary, in part, because 
the New York Stock Exchange did not intend to incorporate questions 
on security futures on the Series 7 examination.
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    In the approximately one year since security futures began trading, 
NASD has devoted substantial resources to creating the Series 43 
examination. Industry and SRO representatives \6\ have met for 11 days 
and have devoted collectively over 1800 hours in meeting time 
developing a content outline and a question bank for the Series 43.\7\ 
In addition, NASD has incurred over $45,000 in expenses to develop 
these materials. The Series 43 examination development is now complete. 
Revised study outlines for the Series, 4, 9/10 and 42 also have been 
developed. Questions for those examinations will be borrowed from the 
Series 43 question bank and developed by committees charged with 
maintaining and reviewing the question banks for those examinations.
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    \6\ SRO representatives from the NASD, NFA, CBOE, AMEX, 
OneChicago, and NQLX helped develop the content outline and question 
bank.
    \7\ These totals do not include travel time, time spent 
preparing for meetings (including developing and reqriting 
questions), and NASD staff time administering the Series 43 program.
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    Despite these efforts, current data on trading volume has shown 
that there is very limited trading activity in security futures. 
According to data from the Options Clearing Corporation, the average 
trading volume for 2003 in security futures is around 10,000 contracts 
per day across the two exchanges. In addition, NASD's market regulation 
surveillance confirms that most of this volume is propriety trading 
among market-maker firms. NFA representatives have informed the NASD 
that security futures products represented 0.0028% of all futures 
contracts traded so far in 2003. While similar statistics are not 
calculated for the securities industry, the figures would be 
substantially lower given the size of the securities markets.
    Moreover, interest among registered representatives to engage in a 
sescurity futures business has waned. Since July 2003, an average of 
fewer than 50 registered persons per month in the securities industry 
have completed the Internet-based continuing education.
    In view of the foregoing, the NASD does not believe it is 
appropriate or necessary to institute the Series 43 exam or amend other 
existing qualification examinations at the present time. The NASD 
believes the current system of a firm-element continuing education 
requirement continues to work well. The NASD states that the feedback 
it has received on the Internet-training program has been very 
positive. In addition, the NASD states that it has not received any 
evidence of customer complaints in these products. Moreover, the NASD 
is hesitant to amend existing examinations to address security futures 
because the net result will be to deemphasize other more pertinent 
subject areas, as the NASD does not intend to expand the number of 
questions on the Series 4, 9/10, and 42 exams.\8\ Finally, the 
introduction of a separate, stand-alone qualification examination for 
security futures seems excessive in view of the level of trading in 
these products. The NASD also anticipates that very few representatives 
would elect to take the Series 43 exam.
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    \8\ The problem is equally acute on the futures industry side, 
where the proposed revised Series 3 examination will have 
approximately 17% of its questions addressing security futures.
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    The NASD notes that its colleagues at NFA have made similar 
conclusions about the need to revise the Series 3 to reflect trading of 
security futures. Both NASD and NFA believe that the qualification 
requirements between the securities and futures industry should 
generally be comparable, and, as regulators, the NASD has sought to 
avoid favoring one industry group over another, or actions leading to 
regulatory arbitrage.

[[Page 74676]]

    While the NASD does not plan to implement the new or revised 
qualification examinations today, it intends to monitor activity in 
security futures very closely. The NASD also intends to continue 
coordinating with NFA. The NASD intends to make periodic assessments of 
the activity in security futures to determine the appropriate time to 
implement the examinations. The NASD does not believe that there is any 
single factor that should be determinative of whether security futures 
examinations should be implemented. Rather, the NASD intends to review 
the following:
    [sbull] Volume in security futures contracts
    [sbull] Analysis of who is trading security futures
    [sbull] Number of registered representatives completing continuing 
education
    [sbull] Number of accounts authorized to trade security futures
    [sbull] Nature of security futures customers
    [sbull] Evidence, if any, of customer complaints
    [sbull] Evidence, if any, of regulatory concerns arising from the 
NASD's surveillance and examination programs.
    Once the NASD determines that new/revised qualifications are 
appropriate, or the SEC requests that the NASD implement the 
examinations, the NASD represents that it will be able to have them 
effective in less than four months. The NASD states that, as its 
efforts to date indicate, it remains fully committed to providing the 
necessary resources to ensure that representatives engaging in a 
security futures business are properly trained and qualified. The NASD 
intends to closely monitor activity in security futures to determine 
when, and if, it becomes an appropriate date to implement revised 
qualification examinations.
    NASD believes that for the reasons stated above it is appropriate 
to defer implementation of revised and new qualification examinations 
concerning security futures.
2. Statutory Basis
    NASD believes that the proposed rule change is consistent with the 
provisions of section 15A(b)(6) of the Act,\9\ which requires, among 
other things, that NASD'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.
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    \9\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    NASD 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

    The foregoing rule change has been filed by the NASD as ``non-
controversial'' pursuant to section 19(b)(3)(A) of the Act \10\ and 
subparagraph (f)(6) of Rule 19b-4 thereunder.\11\ Because the foregoing 
rule change: (1) Does not significantly affect the protection of 
investors or the public interest; (2) does not impose any significant 
burden on competition; and (3) does not become operative for thirty 
days from the date on which it was filed, or such shorter time as the 
Commission may designate if consistent with the protection of investors 
and the public interest, it has become effective pursuant to section 
19(b)(3)(A) of the Act \12\ and Rule 19b-4 thereunder.\13\
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    \10\ 15 U.S.C. 78s(b)(3)(A).
    \11\ 17 CFR 240.19b-4(f)(6).
    \12\ 15 U.S.C. 78s(b)(3)(A).
    \13\ 17 CFR 240.19b-4.
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    The Commission hereby waives the thirty-day operative waiting 
period. The Commission believes that it is consistent with the 
protection of investors and the public interest to waive the thirty-day 
operative waiting period because the proposed rule change explains the 
NASD's reasons for delaying the implementation of the new qualification 
exams for security futures.\14\ The Commission notes that the NASD 
members that trade security futures are required to provide firm-
element training for individuals engaged in security futures business.
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    \14\ For purposes of accelerating the operative date of the 
proposal, the Commission has considered the proposed rule's impact 
on efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
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    NASD has requested that the Commission waive the five-day pre-
filing requirement in Rule 19b-4(f)(6)(iii).\15\ The Commission hereby 
waives that requirement.
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    \15\ 17 CFR 240.19b-4(f)(6)(iii).
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    At any time within sixty days of the filing of such proposed rule 
change, the Commission may summarily abrogate such rule change if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protection of investors, or otherwise 
in furtherance of the purposes of the Act.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change 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. 
Comments may also be submitted electronically at the following e-mail 
address: [email protected]. All comment letters should refer to 
File No. SR-NASD-2003-186. This file number should be included on the 
subject line if e-mail is used. To help the Commission process and 
review your comments more efficiently, comments should be sent in 
hardcopy or by e-mail but not by both methods. 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 File No. SR-NASD-2003-186 and should be 
submitted by January 14, 2003.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Security.
[FR Doc. 03-31650 Filed 12-23-03; 8:45 am]
BILLING CODE 8010-01-M