[Federal Register Volume 69, Number 120 (Wednesday, June 23, 2004)]
[Notices]
[Pages 35106-35108]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-14235]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49857; File No. SR-NASD-2004-078]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by National Association of Securities Dealers, Inc. To Establish 
Certain Qualification Requirements for Supervisors of Research Analysts

June 15, 2004.
    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 May 10, 2004, the National Association of Securities Dealers, Inc. 
(``NASD''), filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission'') the proposed rule change as described in Items I, 
II, and III below, which Items have been prepared by NASD. 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.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    NASD is proposing a rule change to amend NASD Rule 1022 to 
establish certain qualification requirements for supervisors of 
research analysts. More specifically, the proposed rule change would 
require supervisors of research analysts to pass the regulatory part 
(Series 87) of the Research Analyst Qualification Examination or the 
Series 16 Supervisory Analyst Examination administered by the New York 
Stock Exchange (``NYSE'').

[[Page 35107]]

    Below is the text of the proposed rule change. Proposed new 
language is in italics.
1022. Categories of Principal Registration
(a) General Securities Principal
    (1) through (4) No change.
    (5) A person registered solely as a General Securities Principal 
shall not be qualified to supervise the conduct of a ``research 
analyst'' as defined in Rule 1050, or a supervisory analyst qualified 
pursuant to Rule 344 of the New York Stock Exchange who approves 
research reports on equity securities as permitted by Rule 2210(b)(1), 
unless such principal has passed a Qualification Examination as 
specified by the Board of Governors.
* * * * *

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

    In its filing with the Commission, 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. 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

(a) Purpose
    New NASD Rule 1050, which became effective on March 30, 2004, 
requires all persons associated with a member who are to function as 
research analysts to be registered as such with NASD and pass a 
qualification examination.\3\ Those individuals required to be 
registered as research analysts must pass the new Research Analyst 
Qualification Examination (Series 86/87) or qualify for an exemption. 
NASD and the NYSE jointly developed the new examination, which consists 
of two parts: an analysis part (Series 86) that tests fundamental 
analysis and valuation of equity securities and a regulatory part 
(Series 87) that tests knowledge of applicable rules, including Rule 
2711, NYSE Rule 344 and SEC Regulation AC.
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    \3\ For the purposes of this registration requirement, a 
research analyst is ``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.'' To be 
consistent with Rule 2711, Research Analysts And Research Reports, 
the registration requirement applies only to equity research 
analysts; fixed income analysts do not need to be registered as 
research analysts at this time.
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    Prior to taking either the Series 86 or 87, a candidate also must 
have passed the General Securities Registered Representative 
Examination (Series 7), the Limited Registered Representative (Series 
17), or the Canada Module of Series 7 (Series 37 or 38). Individuals 
who have passed Level II of the Charter Financial Analyst Examination 
administered by the Association for Investment Management and Research 
can apply for an exemption from the Series 86. Those persons who were 
functioning as research analysts on the effective date have been 
granted a one-year grace period within which to meet the registration 
requirements. There is no ``grandfather'' provision for this new 
qualification requirement.
    In light of the new research analyst registration requirement and 
the scope and importance of the comprehensive analyst conflict rules 
that have been implemented recently, NASD believes it appropriate for 
supervisors of research analysts to have particular knowledge of this 
new regulatory environment. Accordingly, NASD is proposing to amend 
Rule 1022 to require supervisors of research analysts to pass the 
regulatory part (Series 87) of the Research Analyst Qualification 
Examination or, for dual NASD-NYSE members, the NYSE Supervisory 
Analyst Examination (Series 16).
    For dual members, NASD currently permits either a Series 16 
supervisory analyst or a Series 24 General Securities Principal to 
supervise the content of research reports under the advertising rule 
(Rule 2210) and to review research reports for the applicable conflict 
of interest disclosures required by Rule 2711(h). NASD requires a 
Series 24 General Securities Principal to supervise all other conduct 
of an individual who functions as a research analyst. For NASD-only 
members, a Series 24 General Securities Principal currently is required 
to supervise both the content of research reports and research 
analysts.
    Under the proposed rule change, dual members would be required to 
have a principal who has passed either the Series 24 and the Series 87 
or the Series 16 to supervise the content of research. If the member 
elects to have a Series 16 be responsible for supervising the content 
of research, then a Series 24 principal who has also passed either the 
Series 87 or the Series 16 would be responsible for supervising the 
conduct of both the Series 16 supervisory analyst and the research 
analyst.\4\ This proposed rule change would provide dual members some 
flexibility in their supervisory structure for research analysts. NASD-
only members would be required to have a principal who has passed the 
Series 24 and the Series 87 supervise both the content of research 
reports and the conduct of registered research analysts.
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    \4\ NYSE has represented to NASD that it will conform the Series 
16 examination to include applicable NASD rules by December 31, 
2004. Based on that representation, NASD has agreed to recognize the 
Series 16 in lieu of the Series 87 until at least year-end, at which 
point NASD will reassess the applicability of the Series 16 for NASD 
members.
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    NASD believes that this approach will promote investor protection 
by ensuring that persons responsible for either reviewing and approving 
research reports and for providing general supervision of the conduct 
of research analysts have demonstrable knowledge of Rule 2711 and 
related analyst conflict of interest laws, rules and regulations. At 
the same time, the proposal would preserve the longstanding NASD 
requirement that a General Securities Principal be responsible for the 
general conduct of a registered person.
    NASD does not anticipate providing a ``grandfather'' provision for 
current supervisors of research analysts. However, NASD would provide a 
reasonable amount of time for those supervisors to meet the 
requirements of the proposed rule changes, so as not to disrupt a 
member's research business.
(b) Statutory Basis
    NASD believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) \5\ of the Act, 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 because it will better 
protect investors by ensuring that those who supervise research 
analysts demonstrate particularized knowledge of the research analyst 
conflict of interest laws, rules and regulations.
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    \5\ 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.

[[Page 35108]]

(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

    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 self-regulatory organization consents, the Commission will:
    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 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:
    Electronic Comments:
     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to [email protected]. Please include 
File Number SR-NASD-2004-078 on the subject line.
    Paper Comments:
     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., 
Washington, DC 20549-0609.
    All submissions should refer to File No. SR-NASD-2004-078. This 
file number should be included on the subject line if e-mail is used. 
To help us process and review comments more efficiently, comments 
should be sent in hardcopy or by e-mail but not by both methods. The 
Commission will post all comments on the Commission's Internet Web site 
(http://www.sec.gov/rules/sro.shtml). 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 will also be available for 
inspection and copying at the principal office of NASD. All submissions 
should refer to file number SR-NASD-2004-078 and should be submitted by 
July 14, 2004.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\6\
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    \6\ 17 CFR 200.30-3(a)(12).
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J. Lynn Taylor,
Assistant Secretary.
[FR Doc. 04-14235 Filed 6-22-04; 8:45 am]
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