[Federal Register Volume 69, Number 35 (Monday, February 23, 2004)]
[Notices]
[Pages 8255-8257]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-3778]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49246; File No. SR-NASD-2003-183]


Self-Regulatory Organizations; Order Granting Approval of 
Proposed Rule Change by the National Association of Securities Dealers, 
Inc. Relating to Proposed Amendments to Rule 1120 Regarding Regulatory 
Element Contact Person

February 13, 2004.

I. Introduction

    On December 9, 2003, the National Association of Securities 
Dealers, Inc. (``NASD'' or ``Association'') filed with the Securities 
and Exchange Commission (``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 to amend NASD Rule 1120 to 
require that each member designate and identify to NASD the 
individual(s) who will receive Web Central Registration Depository 
(``CRD'') continuing education (``CE'') Regulatory Element e-mails. The 
proposed rule change further required that each member quarterly review 
and update the CE contact person(s) information. The proposed

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rule change was published for comment in the Federal Register on 
December 31, 2003.\3\ The Commission received one comment letter on the 
proposed rule change.\4\ The NASD submitted a letter in response to the 
Wellfleet Letter on February 12, 2004.\5\ This order approves the 
proposed rule change, as originally proposed.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 48986 (December 23, 
2003), 68 FR 75682.
    \4\ See letter from Michael S. Zarin, Wellfleet Investments LLC, 
to Jonathan G. Katz, Secretary, Commission, dated January 8, 2004 
(``Wellfleet Letter'').
    \5\ See letter from Grace Yeh, Assistant General Counsel, NASD, 
to Katherine A. England, Assistant Director, Division, Commission, 
dated February 11, 2004.
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II. Description of the Proposed Rule Change

    NASD Rule 1120 sets forth the CE requirements for registered 
persons. One of the two CE components is the Regulatory Element, a 
computer-based education program administered by the NASD to help 
ensure that registered persons are kept up-to-date on regulatory, 
compliance, and sales practice matters in the industry. Each registered 
person is required to complete the Regulatory Element initially within 
120 days after the person's second registration anniversary date and, 
thereafter, within 120 days after every third registration anniversary 
date. A registered person who becomes inactive for failing to complete 
the required Regulatory Element program (``CE inactive'') is prohibited 
from performing, or being compensated for, any activities requiring 
registration, including supervision. Members are required under NASD 
Rule 1120 to restrict CE inactive persons from performing the 
prohibited activities.
    To help firms keep track of their registered persons' Regulatory 
Element status, NASD provides members with e-mail notifications through 
Web CRD when a person is both 90 days and 30 days away from the end of 
his or her period to complete the Regulatory Element program before 
becoming inactive. CRD also notifies members when a registered person 
at the firm becomes CE inactive. Currently, receipt of the e-mail 
notifications is optional, and some firms have elected not to receive 
the notifications. The proposed rule change would require each member 
to designate a contact person or persons to receive such CRD Regulatory 
Element e-mail notifications. The member would be required to provide 
to the NASD the name and e-mail address of the designated contact 
person(s) and to promptly notify the NASD of any changes to the 
information. The NASD intends to collect the contact information 
through the NASD Contact System \6\ on the NASD Web site.
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    \6\ Effective as of December 8, 2003, the NASD Contact System 
replaced the Member Firm Contact Questionnaire, the previous system 
used for members to update and maintain certain required contact 
information.
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    To ensure the accuracy of the CE contact information, the proposed 
rule change also would require that each member review and, if 
necessary, update its CE contact person information within 17 business 
days after the end of each calendar quarter.\7\ The NASD is examining 
different methods of reminding members of the obligation to quarterly 
review and update contact person information, including the possibility 
of a web page linked to the act of filing the FOCUS report that would 
prompt members to update the contact person and/or through e-mail 
reminders to the designated CE contact person.\8\
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    \7\ This proposed schedule is consistent with a member's 
quarterly FOCUS reporting schedule, as well as with the proposed 
rule change regarding members' business continuity plans. See 
Securities Exchange Act Release No. 46444 (August 30, 2002), 67 FR 
57257 (September 9, 2002) (File No. SR-NASD-2002-108); Securities 
Exchange Act Release No. 47441 (March 4, 2003), 68 FR 11432 (March 
10, 2003) (Notice of Filing of Amendment Nos. 1, 2, and 3 of File 
No. SR-NASD-2002-108); Securities Exchange Act Release No. 48503 
(September 17, 2003), 68 FR 55686 (September 26, 2003) (Notice of 
Filing of Amendment Nos. 4 and 5 of File No. SR-NASD-2002-108). The 
Commission notes that this filing is pending at the Commission, and 
would require members to review and update emergency contact 
information within 17 business days after the end of each calendar 
quarter. Similarly, the proposed schedule is consistent with a 
proposed rule change filed with the Commission regarding the review 
and update of a member's Executive Representative designation and 
contact information. See SR-NASD-2003-184.
    \8\ Similarly, NASD would prompt members to review and update, 
where necessary, their emergency contact and Executive 
Representative information. See supra note 7.
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III. Comment Summary

    The Commission received one comment letter on the proposed rule 
change.\9\ The commenter stated that either the NASD or the SEC should 
provide an NASD member firm with a notification 30 days before any rule 
requiring action by the firm. The commenter further noted that the 
current e-mail system can facilitate such notifications and that NASD 
member firms are currently provided with e-mail notifications, in 
certain instances.\10\ Additionally, the commenter believed that 
notification reminders would simplify compliance with the rule.\11\
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    \9\ See supra note 4.
    \10\ Id.
    \11\ Id.
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    In its response letter, the NASD agreed that members would benefit 
from receiving reminders of the requirement to quarterly update the CE 
contact person(s) information, and that such reminders would serve to 
simplify and assist members' compliance with the rule change. In this 
regard, the NASD stated, in the purpose section of the proposed rule 
change, that the NASD is examining different methods of notifying 
members of their quarterly review and update requirement. The NASD 
methods under consideration include reminders that are tied to the act 
of filing quarterly FOCUS reports in the form of a link to the NASD 
Contact System where the CE contact person information will be 
collected, pop-up screen reminder messages, and periodic reminders 
through NASD's e-mail broadcasts distributed to members' Executive 
Representatives.

IV. Discussion

    After careful consideration of the proposal, the Wellfleet Letter, 
and the NASD's response to the comment letter, the Commission finds 
that the proposed rule change is consistent with the requirements of 
the Act and the rules and regulations thereunder applicable to a 
national securities association,\12\ and, in particular, with the 
requirements of section 15A of the Act.\13\ Specifically, the 
Commission finds that the proposal is consistent with section 15A(b)(6) 
\14\ of the Act in that the proposal is 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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    \12\ In approving this proposed rule change, the Commission 
notes that it has considered the proposed rule's impact on 
efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
    \13\ 15 U.S.C. 78o-3.
    \14\ 15 U.S.C. 78o-3(b)(6).
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    The Commission believes the NASD has adequately addressed the 
comment letter, and that the proposed rule change should help NASD 
firms avoid an NASD Rule 1120(a) violation by providing sufficient 
notice to enable firms to ensure that their registered persons complete 
the required Regulatory Element training or are prevented from 
conducting business if they become CE inactive. Further, the Commission 
believes that the proposed rule change may assist the NASD in its 
efforts to further automate various aspects of its examination program 
with a goal of removing a substantial portion of CE compliance 
inspections from on-site firm examinations.

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V. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\15\ that the proposed rule change (SR-NASD-2003-183) be approved.
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    \15\ 15 U.S.C. 78s(b)(2).

    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 Secretary.
[FR Doc. 04-3778 Filed 2-20-04; 8:45 am]
BILLING CODE 8010-01-P