[Federal Register Volume 69, Number 35 (Monday, February 23, 2004)]
[Notices]
[Pages 8257-8259]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-3779]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49253; File Nos. SR-NYSE-2003-41; SR-NASD-2004-17]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change and Amendments Nos. 1 and 2 
Thereto by the New York Stock Exchange, Inc. and Notice of Filing and 
Immediate Effectiveness of Proposed Rule Change by the National 
Association of Securities Dealers, Inc. Relating to Research Analyst 
Qualification Examination (Series 86/87)

February 13, 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 December 3, 2003, the New York Stock Exchange, 
Inc. (``NYSE'' or the ``Exchange''), and on January 29, 2004, the 
National Association of Securities Dealers, Inc. (``NASD''), filed with 
the Securities and Exchange Commission (``SEC'' or the ``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''). On December 22, 2003, NYSE filed amendment 
No. 1 to the proposed rule change, and on January 29, 2004, NYSE filed 
Amendment No. 2 to the proposed rule change.\3\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 2 replaces SR-NYSE-2003-41 and Amendment No. 1 
thereto in its entirety.
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    The SROs filed the proposals pursuant to section 19(b)(3)(A) \4\ of 
the Act and paragraph (f)(6) of Rule 19b-4 thereunder,\5\ which renders 
the proposals effective upon filing with the Commission.\6\ The 
Commission is publishing this notice to solicit comments on the 
proposed rule changes, as amended, from interested persons.
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    \4\ 15 U.S.C. 78s(b)(3)(A).
    \5\ 517 CFR 240.19b-4 (f)(6).
    \6\ For SR-NYSE-2003-41, the effective date is the date of the 
filing of Amendment No. 2.
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I. Self-Regulatory Organizations' Statements of the Terms of Substance 
of the Proposed Rule Changes

    The Exchange hereby submits the Study Outline and Examination 
Specifications for the Research Analyst Qualification Examination 
(``Series 86 and 87'').\7\ The Exchange seeks approval of the Study 
Outline and Examination Specifications.
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    \7\ The Commission has not published the Study Outline. 
Interested persons may view the Study Outline at the places 
specified in Item IV below.
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    NASD is filing with the SEC the selection specifications and study 
outline for the Research Analyst Qualification Examination program.\8\ 
The Series 86/87 examination program is proposed in connection with 
NASD Rule 1050, which requires all persons associated with a member who 
function as research analysts to register with NASD and to pass a 
qualification examination for research analysts specified by NASD. NASD 
is not proposing any textual changes to the By-Laws, Schedules to the 
By-Laws, or Rules of NASD.
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    \8\ According to NASD, based upon instruction from the 
Commission staff, NASD is submitting SR-NASD-2004-17 for immediate 
effectiveness pursuant to Section 19(b)(3)(A) of the Act and Rule 
19b-4(f)(6) thereunder, and is not filing the question bank for 
Commission review. See Letter from Belinda Blaine, Associate 
Director, Division of Market Regulation, SEC, to Alden S. Adkins, 
Senior Vice President and General Counsel, NASD Regulation (July 24, 
2000). The question bank is available for Commission review.
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    A description of the Series 86/87 examination is included in the 
Study Outline.\9\ Additional information on the examination is included 
in the Series 86/87 selection specifications, which NASD has omitted 
from this filing and has submitted under separate cover with a request 
for confidential treatment to the Commission's Secretary pursuant to 
Rule 24b-2 under the Act.\10\
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    \9\ See note 7 supra.
    \10\ 17 CFR 240.24b-2.
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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. NYSE's Purpose
    Exchange Rule 344 requires, in part, that research analysts must be 
registered with, qualified by, and approved by the Exchange.

Background

    On July 29, 2003, the SEC approved amendments to Exchange Rules: 
472 (``Communications with the Public''), 351 (``Reporting 
Requirements''), 344 (``Research Analysts and Supervisory Analysts'' 
(formerly titled ``Supervisory Analysts'')), and 345A (``Continuing 
Education for Registered Persons'') (collectively referred to as the 
``Research Analysts'' Conflicts Rules'').\11\
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    \11\ See Securities Exchange Act Release No. 48252 (July 29, 
2003), 68 FR 4575 (August 4, 2003).
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    The amendments included, among other things, a new registration 
category and qualification examination for research analysts. The 
amendments also impose requirements regarding continuing education for 
this new registration category consisting of a Regulatory Element and 
Firm Element to address applicable rules and regulations, ethics, and 
professional responsibility.
    According to NYSE, the recent amendments were part of a continuous 
and ongoing joint regulatory effort among the NYSE, NASD, and the SEC 
to address potential conflicts of interest relating to research 
analysts. This joint regulatory effort has already resulted in SEC 
approval of major self-regulatory organization (``SRO'') rule changes 
in May 2002 \12\ and July 2003.\13\
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    \12\ See Securities Exchange Act Release No. 45908 (May 10, 
2002), 67 FR 34969 (May 16, 2002).
    \13\ See note 11 supra.
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    According to NYSE, the Research Analyst Qualification Examination 
represents another phase of the SRO regulatory effort to safeguard the 
investing public from potential conflicts of interest relating to 
research analysts. As noted above the Research Analysts' Conflicts 
Rules were promulgated to mitigate and/or eliminate potential conflicts 
of interest, and also to require disclosure in research reports and 
during public appearances by research analysts of other potential 
conflicts of interest.
    NYSE believes that a new qualification examination, in conjunction 
with new rules, will benefit the investing public by helping to ensure 
that research analysts are competent to perform their jobs and are 
knowledgeable about the new regulatory

[[Page 8258]]

requirements affecting them. Given the scope and magnitude of these 
requirements, the SROs have developed an examination, discussed in more 
detail below, with a part designed specifically to address the new 
requirements.
    The Research Analyst Qualification Examination is a five-and-a-half 
hour examination, consisting of 150 questions. The exam is divided into 
two parts. Part I, the Series 86, consists of 100 questions, which 
address fundamental security analysis and valuation of equity 
securities. Candidates will be allotted 240-minutes to complete Part I. 
Part II, the Series 87, consists of 50 questions, which primarily 
address pertinent SRO and SEC rules and regulations, including the 
recent Research Analysts' Conflict Rules. Candidates will be allotted 
90 minutes to complete Part II.
    The requirement to take and pass the proposed Series 86/87 
examination applies to all prospective and current research analysts, 
as the term is defined in Exchange Rule 344.10. Exchange Rule 344.10 
provides that the term ``research analyst'' includes a member, allied 
member, or employee who is primarily responsible for the preparation of 
the substance of a research report and/or whose name appears on such 
report. As noted above, Exchange Rule 344 requires that such analysts 
must pass a qualification examination acceptable to the Exchange.
    The NYSE intends for the Series 86/87 examination to have a pre-
requisite. Each candidate would have to pass the General Securities 
Registered Representative Examination (Series 7) prior to taking either 
Part I or Part II of the examination.
    The NYSE also intends to allow a research analyst candidate that 
has passed both Level I and Level II of the Chartered Financial 
Analysts (``CFA'') Examination to request an exemption from Part I 
(Series 86) of the Research Analyst Qualification Examination. 
Candidates will be registered and qualified as Research Analysts after 
passing the Series 86 and Series 87 examinations (or the Series 87 
only, if the candidate is exempt from Part I, the Series 86 
examination).
    In a separate filing, the Exchange will propose amendments to NYSE 
Rule 344 to require the Series 7, 17, 37 or 38 Examinations as a pre-
requisite to the Series 86/87 examination and also to accept the CFA 
Level I and II accreditations as an exemption from taking Part 1 
(Series 86) of the examination.\14\
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    \14\ On January 30, 2004, NYSE filed an amendment to establish 
certain requirements for, prerequisites to, and exemptions from, 
taking the Research Analyst Qualification Examination. See SR-NYSE-
2004-03.
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Study Outline for Series 86/87 Examination

    The Study Outline for the examination, details the scope of the 
Series 86 and 87 examinations. According to NYSE, a fee, to be 
determined at a later date, will be imposed per exam administration, 
and this fee will be the subject of a separate filing. Implementation 
of the examination is scheduled to take place not later than March 30, 
2004. Research analysts, as defined in Exchange Rule 344.10, must be 
registered with and qualified and approved by the Exchange within 365 
days of the implementation date. In addition, persons currently 
performing the function of a research analyst shall have one year from 
the implementation date of March 30, 2004 to be qualified and approved 
by the Exchange. In light of the March 30, 2004 implementation date, 
the Exchange will publish the Study Outline expeditiously in order to 
provide prospective candidates time to prepare for and complete the 
examination within the prescribed time frames. According to NYSE, in no 
event will the examination requirement be implemented until 30 days 
after the Study Outline is published by the NYSE.
    Due to the confidential nature of the material, the specifications 
for the examination have been omitted and will be filed separately with 
the Commission pursuant to 17 CFR 200.83(c).
2. NYSE's Statutory Basis
    The statutory basis for this proposed rule change is section 
6(c)(3)(B) of the Exchange Act.\15\ Under that Section, it is the 
Exchange's responsibility to prescribe standards of training, 
experience and competence for persons associated with Exchange members 
and member organizations.
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    \15\ 15 U.S.C. 78f(c)(3)(B).
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    In addition, under section 6(c)(3)(B) of the Exchange Act,\16\ the 
Exchange may bar a natural person from becoming a member or person 
associated with a member, if such natural person does not meet such 
standards of training, experience and competence as prescribed by the 
rules of the Exchange. Pursuant to this statutory obligation, the 
Exchange has developed an examination that will be administered to 
establish that Research Analysts have attained specified levels of 
competence and knowledge.
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    \16\ Id.
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3. NASD's Purpose
    NASD Rule 1050 requires all persons associated with a member who 
function as research analysts to register with NASD and to pass a 
qualification examination for research analysts specified by NASD.\17\ 
Rule 1050 defines ``research analyst'' as 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. NASD 
intends for the term ``research report'' in Rule 1050 to be defined as 
it is in Rule 2711(a)(8), which applies only to equity securities. 
Accordingly, fixed income analysts do not need to be registered as 
research analysts.
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    \17\ See note 11 supra.
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    Pursuant to section 15A(g)(3) of the Act,\18\ NASD is required to 
prescribe standards of training, experience, and competence for persons 
associated with NASD members. According to NASD, the proposed Series 
86/87 examination program has been developed to ensure that persons 
associated with NASD members who are seeking to register with NASD as 
research analysts have attained specified levels of competence and 
knowledge.
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    \18\ 15 U.S.C. 78o-3(g)(3).
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    The proposed Series 86/87 examination program will partially 
qualify \19\ an associated person of a member to function as a research 
analyst. The program consists of two parts (Series 86 and Series 87) 
that collectively test the knowledge, skills, and abilities associated 
with critical job functions of a research analyst, including a 
candidate's knowledge of applicable federal and industry rules and 
regulations.
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    \19\ Each candidate also would have to pass the General 
Securities Representative (Series 7), the Limited Registered 
Representative (Series 17), or the Canada Modules of the Series 7 
(Series 37 or Series 38) examinations before taking the Series 86/87 
examination. NASD filed a separate proposed rule change regarding 
the prerequisite requirement. See SR-NASD-2004-20 (February 3, 
2004).
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    According to NASD, the Series 86/87 examination (the selection 
specifications, study outline, and question bank) program was developed 
by NASD and NYSE staff in consultation with a committee of industry 
representatives.
    The Series 86/87 examination will be a 5\1/2\-hour, 150 multiple-
choice question examination. Since multiple forms of the examination 
will be administered, the passing score will fluctuate moderately from 
examination to examination. Candidates are allotted

[[Page 8259]]

4 hours to complete the first part (Series 86) and 1\1/2\ hours to 
complete the second part (Series 87).
    The Series 86 is the ``Analysis'' portion of the examination and 
consists of 100 multiple-choice questions covering the critical job 
functions of ``Information and Data Collection'' (10 questions) and 
``Analysis, Modeling, and Valuation'' (90 questions). The second part, 
the Series 87, is the ``Regulatory Administration and Best Practices'' 
portion of the examination and consists of 50 multiple-choice questions 
covering the critical job functions of ``Preparation of Research 
Reports'' (32 questions) and ``Dissemination of Information'' (18 
questions). This portion of the examination focuses on rules and 
regulations applicable to the work of a research analyst.
    The selection specifications for the Series 86/87 examination, 
which NASD has omitted from this filing and has submitted under 
separate cover with a request for confidential treatment to the 
Commission's Secretary pursuant to Rule 24b-2 under the Act,\20\ 
describe additional confidential information regarding the examination.
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    \20\ 17 CFR 240.24b-2.
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4. NASD's Statutory Basis
    NASD believes that the proposed Series 86/87 examination program is 
consistent with the provisions of sections 15A(b)(6)\21\ and 15A(g)(3) 
of the Act,\22\ which authorize NASD to prescribe standards of 
training, experience, and competence for persons associated with NASD 
members.
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    \21\ 15 U.S.C. 78o-3(b)(6).
    \22\ 15 U.S.C. 78o-3(g)(3).
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B. Self-Regulatory Organizations' Statements on Burden on Competition

    NASD and NYSE do not believe that the proposed rule changes, as 
amended, 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, as amended, are effective upon filing 
\23\ pursuant to section 19(b)(3)(A) \24\ of the Act and paragraph 
(f)(6) of Rule 19b-4\25\ thereunder, in that the proposed rule changes 
(1) do not significantly affect the protection of investors or the 
public interest; (2) do not impose any significant burden on 
competition; and (3) by their terms, do not become operative for 30 
days after the date of filing.\26\ At any time within 60 days of this 
filing, the Commission may summarily abrogate this proposal 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.\27\
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    \23\ See note 6 supra.
    \24\ 15 U.S.C. 78s(b)(3)(A).
    \25\ 17 CFR 240.19b-4 (f)(6).
    \26\ The NASD notes that the proposed rule change does not alter 
the effective dates of Rule 2711 (as amended by this proposed rule 
change) that the Commission approved on May 10, 2002.
    \27\ For SR-NYSE-2003-41, the 60-day period would run from the 
date of filing of Amendment No. 2.
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    The SROs requested that the Commission waive the five-day pre-
filing notice requirement. The Commission finds good cause to designate 
the proposals effective upon filing with the Commission \28\ because 
such designation is consistent with the protection of investors and the 
public interest.
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    \28\ See note 6 supra.
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
changes, as amended, 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 email address: [email protected]. All comment letters 
should refer to File Nos. SR-NYSE-2003-41; SR-NASD-2004-17. These file 
numbers should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
comments should be sent in hard copy or by email 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 File Nos. SR-NYSE-2003-41; SR-NASD-2004-17 and should 
be submitted by March 15, 2004.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\29\
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    \29\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-3779 Filed 2-20-04; 8:45 am]
BILLING CODE 8010-01-P