[Federal Register Volume 69, Number 41 (Tuesday, March 2, 2004)]
[Notices]
[Pages 9888-9892]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-4570]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49314; File Nos. SR-NYSE-2004-03; SR-NASD-2004-020]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Changes by the New York Stock Exchange, Inc. and the National 
Association of Securities Dealers, Inc. Relating to Certain 
Prerequisites to and Exemptions From Taking the Research Analyst 
Qualification Examination (``Series 86/87'')

February 24, 2004.
    Pursuant to section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (the ``Act'' or ``Exchange Act''), and Rule 19b-4 thereunder,\2\ 
notice is hereby given that on January 30, 2004, the New York Stock 
Exchange, Inc. (``NYSE'' or the ``Exchange''), and on February 3, 2004, 
the National Association of Securities Dealers, Inc. (``NASD''), filed 
with the Securities and Exchange Commission (``SEC'' or the 
``Commission'') the proposed rule changes as described in Items I, II, 
and III below, which Items have been prepared by the respective self-
regulatory organizations (``SROs''). The Commission is publishing this 
notice to solicit comments on the proposed rule changes from interested 
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organizations' Statements of the Terms of Substance 
of the Proposed Rule Changes

    The NYSE is proposing an interpretation to NYSE Rule 344 to 
establish certain prerequisites to, and exemptions from, taking the 
Research Analyst Qualification Examination (``Series 86/87'').
    NASD is proposing to amend NASD Rule 1050 to set forth certain 
prerequisites and exemptions for the requirement that all associated 
persons who function as research analysts be registered with NASD and 
pass a

[[Page 9889]]

qualification examination. Specifically, the proposed rule change would 
(1) establish, as a prerequisite to be registered as a research 
analyst, the requirement that an applicant also be registered pursuant 
to NASD Rule 1032 as a General Securities Representative and (2) 
provide for an exemption from the analytical portion of the Research 
Analyst Qualification Examination (Series 86) for certain applicants 
who have passed both Levels I and II of the Chartered Financial Analyst 
(``CFA'') Examination.
    Below is the text of the proposed rule changes. Proposed new 
language is in italics; proposed deletions are in [brackets].

A. NYSE's Proposed Interpretation Text

NYSE Rule 344 RESEARCH ANALYSTS AND SUPERVISORY ANALYSTS
/01 Qualifications
    Research Analyst candidates shall qualify by taking the Research 
Analyst Qualification Examination (Series 86/87). For purposes of this 
interpretation, the term ``research analyst'' is defined in Rule 
344.10. The Series 86 covers fundamental security analysis and 
valuation of equity securities. The Series 87 covers pertinent rules 
and regulations of the self-regulatory organizations, and the SEC.
    Supervisory Analyst candidates shall qualify by taking and passing 
the Supervisory Analyst (Series 16) Examination.

Pre-requisite

    The General Securities Registered Representative Examination 
(Series 7) qualification is a prerequisite for any Research Analyst 
candidate prior to taking either Part I (Series 86) or Part II (Series 
87) of the Research Analyst Qualification Examination.
    Alternatively, the United Kingdom Limited Registered Representative 
(Series 17) Examination and the Canadian Limited Registered 
Representative (Series 37/38) Examination will also serve as 
prerequisites to taking either Part I or Part II of the Research 
Analyst Qualification Examination.
    In satisfying the Series 7, Series 17 or Series 37/38 examination 
prerequisite, Research Analyst candidates will not be required to 
complete the four month post-examination training period required of 
Registered Representative candidates pursuant to Rule 345.15/02 (see 
page 3459). Candidates that have failed either Part I or II of the 
examination must wait 30 days before retaking either part of the 
examination.
Experience
    Appropriate experience for a candidate for Supervisory Analyst 
means having at least three years prior experience within the 
immediately preceding six years involving securities or financial 
analysis. Examples of appropriate experience may include the following:
    (a) Equity or Fixed Income Research Analyst;
    (b) Credit Analyst for a securities rating agency;
    (c) Supervising preparation of materials prepared by financial/
securities analysts;
    (d) Financial analytical experience gained at banks, insurance 
companies or other financial institutions;
    (e) Academic experience relating to the financial/securities 
markets/industry.
/02 Director of Research
    A person having the title of ``Director of Research'' need not be a 
supervisory analyst as defined by the Rule so long as he does not 
approve research reports. If, however, such a person is in charge of 
registered representatives, he must qualify as a supervisory person 
under Rule 342.13.
/03 Chartered Financial Analyst (CFA)
    Successful completion of the CFA Level I Examination given by the 
Institute of Chartered Financial Analysts (in lieu of completion of 
Levels I, II and III for a full CFA designation) will suffice to allow 
a Supervisory Analyst candidate to qualify by taking Part I of the 
Series 16 Qualification Examination.
    Successful completion of Levels I and II of the CFA Examination 
allows a Research Analyst candidate to request an exemption from Part I 
(Series 86) of the Research Analyst Qualification Examination. If an 
exemption is granted for Part I (Series 86), a candidate will be 
qualified as a Research Analyst after passing Part II (Series 87) only.
    To qualify for a CFA exemption a Research Analyst candidate must 
have: (i) Completed the CFA Part II within two years of application for 
registration or (ii) functioned as a research analyst continuously 
since having passed the CFA Part II. Applicants that have completed the 
CFA Part II that do not meet criteria (i) or (ii) where good cause is 
shown based upon previous related employment experience may make a 
written request to the Exchange for an exemption.

B. NASD's Proposed Rule Text

1050. Registration of Research Analysts

    (a) All persons associated with a member who are to function as 
research analysts shall be registered with NASD. Before [their] 
registration[s] as a Research Analyst can become effective, [they]an 
applicant shall:
    (1) be registered pursuant to Rule 1032 as a General Securities 
Representative; and
    (2) pass a Qualification Examination for Research Analysts as 
specified by the Board of Governors.
    (b) For the purposes of this Rule 1050, ``research analyst'' shall 
mean 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.
    (c) Upon written request pursuant to the Rule 9600 Series, NASD 
will grant a waiver from the analytical portion of the Research Analyst 
Qualification Examination (Series 86) upon verification that the 
applicant has passed Levels I and II of the Charter Financial Analyst 
Examination and has either (1) functioned as a research analyst 
continuously since having passed the Level II examination or (2) 
applied for registration as a research analyst within two years of 
having passed the Level II examination. An applicant who has been 
granted such an exemption still must become registered as a General 
Securities Representative and then complete the regulatory portion of 
the Research Analyst Qualification Examination (Series 87) before that 
applicant can be registered as a Research Analyst.
* * * * *

9600. PROCEDURES FOR EXEMPTIONS

9610. Application

(a) Where to File
    A member seeking exemptive relief as permitted under Rules 1021, 
1050, 1070, 2210, 2315, 2320, 2340, 2520, 2710, 2720, 2810, 2850, 2851, 
2860, Interpretive Material 2860-1, 3010(b)(2), 3020, 3150, 3210, 3230, 
3350, 8211, 8212, 8213, 11870, or 11900, Interpretive Material 2110-1, 
or Municipal Securities Rulemaking Board Rule G-37 shall file a written 
application with the appropriate department or staff of the Association 
and provide a copy of the application to the Office of General Counsel 
of NASD Regulation.
    (b) through (c) No change.
* * * * *

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

    In their filings with the Commission, the NYSE and NASD included

[[Page 9890]]

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. NYSE and NASD 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
    Recent amendments to NYSE Rule 344 (``Research Analysts and 
Supervisory Analysts'') require Research Analysts to be registered 
with, qualified by, and approved by the Exchange. The Exchange is 
proposing to adopt a new interpretation to NYSE Rule 344 to establish 
certain prerequisites to and exemptions from the requirement that 
Research Analysts pass a new qualification examination.

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'').\3\
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    \3\ See Securities Exchange Act Release No. 48252 (July 29, 
2003), 68 FR 45875 (August 4, 2003).
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    The Research Analysts' Conflicts Rules include, a new registration 
category and qualification examination for research analysts, address 
potential conflicts of interest, and require disclosure in research 
reports and during public appearances by research analysts of other 
potential conflicts of interest. The NYSE believes that the Research 
Analyst Qualification Examination represents a continuation of the SRO 
regulatory effort to safeguard the investing public from potential 
conflicts of interest relating to research analysts. NYSE believes that 
the new qualification examination, in conjunction with the new rules, 
assist in protecting the investing public by requiring research 
analysts to demonstrate that they are competent to perform their jobs 
and are knowledgeable about the new regulatory requirements affecting 
them.
    The Research Analyst Qualification Examination (Series 86/87) 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 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, which 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. Individuals 
who are currently functioning as Research Analysts will be required to 
pass the Series 86/87 examination within one year of its implementation 
date.
    The proposed interpretation to NYSE Rule 344 would require taking 
the General Securities Registered Representative Examination (Series 7) 
as a prerequisite to taking either Part I or Part II of the Research 
Analyst Qualification Examination. Although certain subject areas of 
the Series 7 examination are not directly related to a research 
analyst's job, the knowledge required to pass the Series 7 examination 
will provide an analyst with good general background information on the 
industry and address regulatory concerns in instances when an analyst 
might participate in sales and solicitation activities. Moreover, the 
Series 7 examination which tests, among other topics, ``communications 
with the public'' and ``know your customer'' rules, would serve an 
important regulatory purpose to have research analysts Series 7 
qualified.
    Alternatively, the United Kingdom (``UK'') Limited Registered 
Representative (Series 17) Examination and the Canadian Limited 
Registered Representative (Series 37/38) Examination will also serve as 
prerequisites to taking either Part I or Part II of the Research 
Analyst Qualification Examination. Persons qualified to conduct a 
general public securities business in the UK and Canada respectively 
can also be qualified for the same in the U.S. by taking the Series 17 
or Series 37/38 in lieu of the Series 7. These examinations are 
intended to cover subject matter unique to the U.S. securities markets 
otherwise not covered by the UK/Canada examinations.
    The proposed interpretation also allows a research analyst 
candidate that has passed both Level I and Level II of the Chartered 
Financial Analyst (``CFA'') Examination, to request an exemption from 
Part I (Series 86) of the Research Analyst Qualification Examination. A 
Research Analyst candidate that has passed Levels I and II of the CFA 
Examination will have evidenced proficiency in ``Investment Tools'' and 
``Asset Valuation'' (2 major topic areas of the exam). Exchange staff 
has reviewed the CFA Level I and II examinations and has determined 
that the content coverage is comparable to the Series 86. Many research 
analysts have completed CFA Levels I and II, and it is not necessary to 
re-qualify them with respect to such analytical skills. As such, 
granting an exemption from the securities analysis and equity valuation 
part (Series 86) of the examination can be done without compromising 
any regulatory concerns. Analysts granted waivers of the Series 86 will 
still be required to pass the Series 87 dealing with industry rules and 
regulations.
    To qualify for the CFA exemption to the examination requirement a 
Research Analyst candidate must have: (i) Completed the CFA Part II 
within 2 years of application for registration or (ii) functioned as a 
research analyst continuously since having passed the CFA Part II. 
Applicants that have completed the CFA Part II that do not meet either 
of the above criteria, may, upon a showing of good cause based upon 
previous related employment experience, make a written request to the 
Exchange for an exemption.
2. NYSE's Statutory Basis
    The statutory basis for this proposed rule change is section 
6(c)(3)(B) of the Exchange Act.\4\ 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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    \4\ 15 U.S.C. 78f(c)(3)(B).
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    In addition, under section 6(c)(3)(B) of the Exchange Act,\5\ 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: (i) Developed an examination that will be administered to 
establish that Research Analysts have attained specified levels of 
competence and knowledge, and (ii) proposed an interpretation to 
establish certain requirements and pre-requisites for

[[Page 9891]]

analysts before taking such an examination.
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    \5\ Id.
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1. NASD's Purpose
    The proposed rule change would implement certain aspects of NASD 
Rule 1050, which requires that associated persons who function as 
research analysts register with NASD and pass a qualification 
examination. NASD Rule 1050 is intended to ensure that research 
analysts possess a certain competency level to perform their jobs 
effectively and in accordance with applicable rules and regulations. 
The proposed rule change would require such persons not only to pass 
the Research Analyst Qualification Examination (Series 86/87), but also 
to be registered pursuant to NASD Rule 1032 as a General Securities 
Representative (Series 7, 17, 37 or 38). The proposed rule change 
further would provide for an exemption from the Series 86 analytical 
portion of the qualification examination for certain associated persons 
who have passed both Levels I and II of the CFA Examination 
administered by the Association for Investment Management and Research 
(``AIMR'').
    As to the General Representative qualification requirement, NASD 
believes it is important for those functioning as research analysts to 
be familiar with general industry rules and practices, particularly 
those of registered representatives, who are a primary source for 
distributing research. The requirement further would develop in 
research analysts a sensitivity to the interests of public customers 
who are the end users of their work product. According to NASD, the 
proposed Series 86/87 examination program was developed jointly by NASD 
and NYSE staff in consultation with a committee of research analysts, 
and the committee unanimously recommended that research analysts be 
required to pass the Series 7 in addition to a more job-specific 
research analyst qualification examination.\6\
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    \6\ The Series 17, 37, and 38 are modified versions of the 
Series 7 for associated persons who are registered in good standing 
with the Financial Services Authority of the United Kingdom or one 
of the Canadian securities regulatory organizations.
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    NASD intends to require applicants to pass the Series 7 examination 
prior to taking the Series 86 or 87 examinations. NASD believes this is 
the most logical testing sequence and will provide a better foundation 
for applicants to understand and address the more specific topics and 
rules covered by the Series 86 and 87 examinations.
    NASD has reviewed the content of the CFA examination and found the 
major areas tested in Levels I and II of that examination to be 
comparable to topics covered by the Series 86 examination. Moreover, 
NASD believes that the minimum passing scores for Levels I and II of 
the CFA examination are sufficient to ensure that those who succeed in 
passing those Levels have obtained a level of analytic competency 
commensurate with a passing score on the Series 86 examination. 
Accordingly, the proposed rule change would provide for an exemption 
\7\ from the Series 86 examination where an applicant has passed Levels 
I and II of the CFA examination and either (i) functioned as a research 
analyst continuously since having passed Level II or (ii) applied for 
registration as a research analyst within two years of having passed 
Level II. NASD believes these limitations will ensure that applicants 
have current knowledge of the concepts covered by the CFA Level I and 
II examinations, as well as familiarity with the current regulatory 
environment. Applicants who do not meet these criteria may, based upon 
previous related employment/experience, make written request to NASD 
for a waiver.\8\
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    \7\ Initially, the Series 86 exemption must be requested and 
granted manually; however, NASD anticipates that at some point the 
exemption will be granted automatically through the CRD system.
    \8\ Pursuant to NASD Rule 1070 and the NASD Rule 9600 Series, 
NASD may, in exceptional cases and where good cause is shown, waive 
the applicable qualification examination and accept other standards 
as evidence of an applicant's qualifications for registration. While 
NASD will consider waivers of the Series 86/87 in extraordinary 
circumstances, in light of the purpose of the new research analyst 
qualification requirements, NASD does not intend to grant waivers 
except to those who have either passed the Series 86/87 or the CFA 
Levels I and II. To request either the CFA exemption or a waiver, a 
member must submit a written request to NASD's Testing and 
Qualification Department on behalf of the applicant that sets forth 
the basis for the request. If granted, NASD will then enter the 
exemption or waiver in the CRD system, which will register the 
applicant as a research analyst when the other examination 
requirements have been satisfied.
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    An applicant who has been granted such an exemption still must 
become registered as a General Securities Representative and then 
complete the regulatory portion of the Research Analyst Qualification 
Examination (Series 87) before the applicant can be registered and 
function as a Research Analyst.
4. NASD's 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 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 is 
consistent with the provisions of the Act noted above in that it will 
ensure that those functioning as research analysts possess a minimum 
competency level and knowledge of applicable laws, rules and 
regulations, thereby enhancing investor protection.
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    \9\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organizations' Statements on Burden on Competition

    NYSE and NASD 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 NYSE and NASD 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

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding, or (ii) as to 
which the Exchange consents, the Commission:
    (a) By order approve such proposed rule change, or
    (b) institute proceedings to determine whether the proposed rule 
change should be disapproved.

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-NYSE-2004-03, SR-NASD-2004-020. 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

[[Page 9892]]

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 NYSE and NASD. All submissions should refer to 
the file numbers SR-NYSE-2004-03, SR-NASD-2004-020 and should be 
submitted by March 17, 2004.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-4570 Filed 3-1-04; 8:45 am]
BILLING CODE 8010-01-P