[Federal Register Volume 69, Number 19 (Thursday, January 29, 2004)]
[Notices]
[Pages 4337-4339]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-1918]



[[Page 4337]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49119; File Nos. SR-NASD-2004-03; SR-NASD-2004-10; SR-
NYSE-2004-01]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Changes by the National Association of 
Securities Dealers, Inc. and the New York Stock Exchange, Inc. Relating 
To Establishing Effective Dates for Certain Provisions of NASD Rule 
2711 and NASD Rule 1050 and Certain Provisions of NYSE Rule 472 and 
NYSE Rule 344

January 23, 2004.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Exchange Act'' or ``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice 
is hereby given that on January 9, 2004 and on January 16, 2004, the 
National Association of Securities Dealers, Inc. (``NASD''), and on 
January 16, 2004, the New York Stock Exchange, Inc. (``NYSE'' or 
``Exchange''), filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') proposed rule changes as described in Items 
I, II, and III below, which Items have been prepared by the respective 
self-regulatory organizations (``SROs'').
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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    The SROs have designated the proposed rule changes as constituting 
a stated policy, practice, or interpretation with respect to the 
meaning, administration, or enforcement of an existing rule series 
under paragraph (f)(1) of Rule 19b-4 under the Act,\3\ which renders 
the proposals effective upon filing with the Commission. The Commission 
is publishing this notice to solicit comments on the proposed rule 
changes from interested persons.
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    \3\ 17 CFR 240.19b-4(f)(1).
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I. Self-Regulatory Organizations' Statements of the Terms of Substance 
of the Proposed Rule Changes

    NASD is filing with the SEC a proposed rule change to establish 
April 26, 2004 as the effective date for the recently amended 
provisions of NASD Rule 2711(h)(2) that require certain disclosures by 
members and research analysts of compensation received by the member or 
its affiliates from the subject company of a research report or public 
appearance.
    NASD is also filing with the SEC a proposed rule change to 
establish ``not later than March 30, 2004'' as the effective date for 
Rule 1050, which requires persons associated with a member who function 
as research analysts to be registered as such and to pass a 
qualification examination. The proposal also would ensure that the 
effective date for Rule 1050 would occur no sooner than 30 days after a 
study outline for the Research Analyst Qualification Examination is 
filed by NASD with the Commission and becomes effective.
    The NYSE is filing with the SEC a proposed rule change that would 
change the effective date for certain provisions of Rule 472 
(``Communications with the Public'') and Rule 344 (``Research Analysts 
and Supervisory Analysts'').

II. Self-Regulatory Organizations' Statements of the Purpose of, and 
Statutory Basis for, the Proposed Rule Changes

    In their filings with the Commission, NASD and the NYSE included 
statements concerning the purpose of and basis for the proposed rule 
changes. The text of these statements may be examined at the places 
specified in Item IV below. NASD and the NYSE have prepared summaries, 
set forth in Sections A, B, and C below.

A. Self-Regulatory Organizations' Statements of the Purpose of, and 
Statutory Basis for, the Proposed Rule Changes

1. NASD's Purpose
    NASD is filing the proposed rule change to establish April 26, 2004 
as the effective date for the recently amended provisions of NASD Rule 
2711(h)(2) that require disclosure of compensation received by the 
member and its affiliates from the subject company of a research report 
or public appearance. The SEC approved these amendments to Rule 2711 on 
July 29, 2003 as part of a proposal that augmented research analyst 
conflicts of interest rules generally and imposed registration and 
continuing education requirements on research analysts.\4\
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    \4\ See Securities Exchange Act Release No. 48252 (July 29, 
2003), 68 FR 45875 (August 4, 2003) (``July Approval Order'').
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    Generally, the amendments to Rule 2711(h)(2) require a member to 
disclose in a research report (1) non-investment banking compensation 
received by it or its affiliates from a subject company in the past 12 
months and (2) if a subject company is, or during the past 12-month 
period, was a client of the member and types of client services 
provided to the subject company. The amendments further require a 
research analyst to disclose in a public appearance (1) if, to the 
extent the analyst knows or has reason to know, the member or an 
affiliate received any compensation in the past 12 months, (2) if the 
research analyst received any compensation from the subject company in 
the past 12 months, and (3) if, to the extent the analyst knows or has 
reason to know, a subject company is, or during the past 12-months 
period was, a client of the member and types of client services 
provided to the subject company. These provisions supplement 
requirements in Rule 2711(h)(2) that require disclosure of investment 
banking compensation received or sought by a member from a subject 
company and any compensation received by a research analyst that is 
based upon a member's investment banking services revenues.
    The July Approval Order established a January 26, 2004 as the 
effective date for the new compensation disclosure provisions, but also 
provided that NASD may grant an additional 90 days to comply as it 
deems necessary on a case-by-case basis.\5\ Thus, NASD believes that 
the approval order recognized that additional time might be necessary 
for some or all members to put systems in place to track various types 
of compensation and client relationships required to be disclosed under 
the new provisions.
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    \5\ Since the 90th day after the current effective date is a 
Sunday (April 25, 2004), the proposed rule change would establish 
the compliance date as the following Monday, April 26, 2004.
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    According to NASD, it has received several requests from members to 
extend the implementation date of these provisions due to the scope and 
difficulty required to implement the technology, systems and other 
changes needed to achieve compliance with the non-investment banking 
compensation and client disclosure provisions. According to NASD, its 
members noted the rule requirements necessitate that they build and 
test new systems and technology feeds to aggregate data across a wide 
range of business lines within the members. Moreover, in many 
instances, members must extend that technological infrastructure to 
global affiliates. According to NASD, members also noted that the 
timing of the implementation date overlaps with year-end technology 
``freezes'' that many firms impose to ensure that systems changes do 
not impact the accuracy of year-end information gathering related to 
financial reporting and taxes.
    NASD believes these members have demonstrated good cause for an 
extension of the effective date for the applicable provisions. 
Moreover, NASD believes the problems cited by the

[[Page 4338]]

requesting members are common within the industry and that there should 
be a uniform effective date for all members. Therefore, NASD is 
establishing April 26, 2004 as the effective date for the new 
provisions of Rule 2711(h)(2) for all members. NASD notes that all 
existing provisions under Rule 2711(h)(2) remain in effect and are not 
subject to the new effective date.
    NASD is also filing the proposed rule change to establish ``not 
later than March 30, 2004'' as the effective date for Rule 1050, which 
requires that any person associated with a member who functions as a 
``research analyst'' be registered as such and pass a qualification 
examination. For the purposes of Rule 1050, ``research analyst'' means 
an associated person who is primarily responsible for the preparation 
of the substance of a research report or whose name appears on a 
research report.
    In the July Approval Order, the SEC approved NASD Rule 1050 on July 
29, 2003, together with amendments to NASD Rules 2711 and 1120 that 
augmented research analyst conflicts of interest rules generally and 
imposed registration and continuing education requirements on research 
analysts. The July Approval Order established January 26, 2004, or 
``such later date as determined by NASD'' as the effective date for the 
Rule 1050 registration provision. Thus, NASD believes that the approval 
order recognized that additional time might be necessary to fully 
develop the examination and complete the attendant administrative 
requirements necessary to begin registration and testing.
    According to NASD, it has been working diligently with NYSE to 
develop and implement the qualification examination required by Rule 
1050 and NYSE's corresponding Rule 344. As a result, NASD believes that 
it will shortly file with the Commission the study outline and 
specifications of the examination. According to NASD, NASD intends to 
submit to the Commission shortly a proposed rule change that would set 
forth certain prerequisites and exemptions to the registration and 
qualification requirements. According to NASD, a fee filing also will 
follow separately. Therefore, NASD is proposing to establish an 
effective date of ``not later than March 30, 2004'' for Rule 1050 to 
allow sufficient time for (1) consideration of, and action on, the 
aforementioned proposed rule changes by the Commission and (2) members 
to prepare their research analysts to take the examination after a 
study outline is filed with the Commission and made effective. In 
furtherance of the latter, NASD also is proposing that the effective 
date be set no sooner than 30 days after the Commission acts on a study 
outline for the Research Analyst Qualification Examination.
2. NASD's Statutory Basis
    NASD believes that the proposed rule changes are consistent with 
the provisions of section 15A(b)(6) of the Act,\6\ which requires, 
among other things, that NASD 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. NASD believes that the proposed rule change 
(SR-NASD-2004-03) will further investor protection by giving members 
adequate time to establish systems that can effectively track 
information that will reduce or expose conflicts of interest and 
thereby significantly curtail the potential for fraudulent and 
manipulative acts.
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    \6\ 15 U.S.C. 78o-3(b)(6).
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    NASD also believes that this proposed rule change (SR-NASD-2004-10) 
will foster greater investor protection by providing adequate time for 
the development of a comprehensive research analyst competency 
examination and for members to prepare their research analysts for such 
examination.
3. NYSE's Purpose
    The NYSE is filing the proposed rule change to extend by 90 
calendar days the effective date for the recently amended provisions of 
NYSE Rule 472(k)(1), (2) and (3) (``Disclosure Provisions'') that 
relate to compensation received by a member and its affiliates from the 
subject company of a research report or public appearance.\7\ In 
addition, the Exchange is also proposing to establish ``not later than 
March 30, 2004,'' as the effective date for the recently amended 
provision of NYSE Rule 344, which requires research analysts to be 
registered with and qualified by the Exchange.
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    \7\ NYSE Rule 472(k)(1)(i)d., (k)(1)(ii)a.1. and b., 
(k)(1)(iii)a., 472(k)(2)(i)c., (k)(2)(i)f. and the exceptions to 
these disclosure provisions pursuant to Rule 472(k)(3)(i).
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Background
    In the July Approval Order, the Commission approved amendments to 
Exchange Rule 472 (``Communications with the Public''), Rule 351 
(``Reporting Requirements''), Rule 344 (``Supervisory Analysts''), and 
Rule 345A (``Continuing Education for Registered Persons'').
    The Exchange proposed these additional amendments: (1) To enhance 
the SRO Rules approved in May 2002\8\ and (2) to comply with the 
mandate of the Sarbanes-Oxley Act of 2002 (``SOA'').\9\
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    \8\ See Securities Exchange Act Release No. 45908 (May 10, 
2002); 67 FR 34969 (May 16, 2002).
    \9\ See Pub. L. 107-204, 116 Stat. 745 (2002). The SOA amends 
the Exchange Act by adding new section 15D. See 15 U.S.C. 78a et 
seq.; 15 U.S.C. 78o-6.
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Disclosure Provisions
    The amendments require a member or member organization to disclose 
in a research report (1) non-investment banking compensation received 
by it or its affiliates from the subject company in the past 12 months, 
and (2) if a subject company is, or during the past 12-month period 
was, a client of the member or member organization and the types of 
client services provided to the subject company.
    The amendments further require a research analyst to disclose in a 
public appearance (1) if, to the extent the analyst knows or has reason 
to know, the member or member organization or its affiliate received 
any compensation from the subject in the past 12 months, (2) if the 
research analyst received any compensation from the subject company in 
the past 12 months, and (3) if, to the extent the analyst knows or has 
reason to know, if the subject company is, or during the past 12-month 
period, was a client of the member and the types of client services 
provided to the subject company. These provisions supplement 
requirements in Rule 472(k)(1) that require disclosure of investment 
banking compensation received, sought or expected to be received by a 
member or member organization or its affiliate from a subject company 
and any compensation received by a research analyst that is based upon 
a member's or member organization's investment banking services 
revenues.
    The July Approval Order established a January 26, 2004 
implementation date for the Disclosure Provisions, but also provided 
the Exchange with the discretion to grant, upon written request, an 
additional 90 days to members and member organizations to comply as it 
deems necessary on a case-by-case basis. NYSE believes that implicit in 
the Commission's approval order was the recognition that additional 
time might be necessary for some or all members to implement systems to 
track various types of compensation and client relationships required 
to be disclosed under the new Disclosure Provisions required by the 
SOA.

[[Page 4339]]

    According to NYSE, the Exchange received numerous requests from 
members and member organizations to extend the implementation date of 
these provisions due to the scope and difficulty required to implement 
the technology, systems and other changes needed to achieve compliance 
with the non-investment banking compensation and client disclosure 
provisions. Members and member organizations noted that the rule 
requirements necessitate that they build and test new systems and 
technology feeds to aggregate data across a wide range of business 
lines within the members. Moreover, in many instances, members and 
member organizations must extend that technological infrastructure to 
global affiliates. In addition, members and member organizations noted 
that the timing of the implementation date overlaps with year-end 
technology ``freezes'' that many firms impose to ensure that systems 
changes do not impact the accuracy of year-end information gathering 
related to financial reporting and taxes.
    The Exchange believes that these members and member organizations 
have provided sufficient justification for an across-the-board 
extension of the effective date for the applicable provisions. 
Moreover, the NYSE believes the problems cited by the requesting 
members and member organizations are endemic to the industry and that 
there should be a uniform effective date for all members. Therefore, 
the Exchange is establishing April 26, 2004\10\ as the effective date 
for the new Disclosure Provisions. Existing provisions under Rule 
472(k)(1), (2) and (3) remain in effect and are not subject to the new 
effective date.
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    \10\ Since 90 days would provide for effectiveness on April 25, 
2004 (a Sunday), the actual effective date would be Monday, April 
26.
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Research Analyst Qualification Examination
    As noted above, in the July Approval Order, the SEC approved a new 
Research Analyst Qualification Examination requirement for Research 
Analysts primarily responsible for the preparation of the substance of 
research reports and/or whose names appear on such reports (Rule 
344.10). Accordingly, such analysts must pass a qualification 
examination that was scheduled for implementation on January 26, 2004.
    The Exchange is establishing ``not later than March 30, 2004'' as 
the effective date for the examination. The effective date for the new 
Research Analyst Qualification examination pursuant to Rule 344 would 
also not occur sooner than 30 days after the study outline, which NYSE 
believes it will file with the Commission, becomes effective. The NYSE 
believes that the extension is necessary to permit the Exchange to make 
the requisite filings regarding the study outline for the examination, 
certain pre-requisites to and exemptions from the examination, and fees 
associated with its administration.
4. NYSE's Statutory Basis
    The statutory basis for the proposed rule change is section 6(b)(5) 
of the Exchange Act \11\ which requires, among other things, that the 
rules of the Exchange are 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 
interests.
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    \11\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organizations' Statements on Burden on Competition

    NASD and NYSE do not believe that the proposed rule changes will 
result in any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Exchange Act, as 
amended.

C. Self-Regulatory Organizations' Statements on Comments on the 
Proposed Rule Changes Received From Members, Participants or Others

    The NASD and NYSE have neither solicited nor received written 
comments on the proposed rule changes.

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

    The proposed rule changes have been filed by NASD and NYSE as 
stated policies, practices, or interpretations with respect to the 
meaning, administration, or enforcement of an existing rule series 
under Rule 19b-4(f)(1) under the Act.\12\ Consequently, they have 
become effective pursuant to section 19(b)(3)(A)\13\ of the Act and 
Rule 19b-4(f)(1) thereunder.\14\
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    \12\ 17 CFR 240.19b-4(f)(1).
    \13\ 15 U.S.C. 78s(b)(3)(A).
    \14\ 17 CFR 240.19b-4(f)(1).
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    At any time within 60 days of this filing, the Commission may 
summarily abrogate these proposals 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 Exchange Act.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
changes are 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 Nos. SR-NASD-2004-03, SR-NASD-2004-10, and SR-NYSE-2004-01. These 
file numbers 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 hard copy 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 changes that are filed 
with the Commission, and all written communications relating to the 
proposed rule changes 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 
filings will also be available for inspection and copying at the 
principal offices of the NASD and NYSE. All submissions should refer to 
the file numbers SR-NASD-2004-03, SR-NASD-2004-10, and SR-NYSE-2004-01 
and should be submitted by February 19, 2004.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-1918 Filed 1-28-04; 8:45 am]
BILLING CODE 8010-01-P