[Federal Register Volume 69, Number 162 (Monday, August 23, 2004)]
[Notices]
[Pages 51873-51876]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-19245]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50204; File No. SR-NASD-2004-098]


Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Notice of Filing of Proposed Rule Change and Amendment 
No. 1 Thereto Relating to Proposed Amendments To Eliminate Exemptions 
From the Continuing Education Regulatory Element Requirements

August 16, 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 June 25, 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. On July 23, 
2004, NASD filed Amendment No. 1 to the proposed rule change.\3\ The 
Commission is publishing this notice to solicit comments on the 
proposed rule

[[Page 51874]]

change, as amended, from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letter from Grace Yeh, Assistant General Counsel, NASD, 
to Katherine A. England, Assistant Director, Division of Market 
Regulation (``Division''), Commission, dated July 22, 2004. In 
Amendment No. 1, the NASD replaced in its entirety the original rule 
filing.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    NASD proposes to amend NASD Rule 1120 to eliminate all exemptions 
from the requirement to complete the Regulatory Element of the 
Continuing Education (``CE'') Program. Below is the text of the 
proposed rule change. Proposed new language is in italics; proposed 
deletions are in [brackets].

1120. Continuing Education Requirements

    This Rule prescribes requirements regarding the continuing 
education of certain registered persons subsequent to their initial 
qualification and registration with NASD. The requirements shall 
consist of a Regulatory Element and a Firm Element as set forth below.
(a) Regulatory Element
    (1) Requirements
    No member shall permit any registered person to continue to, and no 
registered person shall continue to, perform duties as a registered 
person unless such person has complied with the requirements of 
paragraph (a) hereof.
    [(A)] Each registered person shall complete the Regulatory Element 
on the occurrence of their second registration anniversary date and 
every three years thereafter, or as otherwise prescribed by NASD [the 
Association]. On each occasion, the Regulatory Element must be 
completed within 120 days after the person's registration anniversary 
date. A person's initial registration date, also known as the ``base 
date,'' shall establish the cycle of anniversary dates for purposes of 
this Rule. The content of the Regulatory Element shall be determined by 
NASD [the Association] and shall be appropriate to either the 
registered representative or principal status of person subject to the 
Rule.
    [(B) Persons Exempted from the Rule--Persons who have been 
continuously registered for more than 10 years on July 1, 1998, shall 
be exempt from participation in the Regulatory Element programs for 
registered representatives, provided such persons have not been subject 
within the last 10 years to any disciplinary action as enumerated in 
paragraph (a)(3). A person who has been continuously registered as a 
principal for more than ten years on July 1, 1998, shall be exempt from 
participation in the Regulatory Element programs for registered 
principals, provided such person has not been subject within the last 
ten years to any disciplinary action as enumerated in paragraph (a)(3). 
In the event that a registered representative or principal who was 
exempt from participation in Regulatory Element programs subsequently 
becomes the subject of a disciplinary action as enumerated in paragraph 
(a)(3), such person shall be required to satisfy the requirements of 
the Regulatory Element as if the date of such disciplinary action is 
such person's initial registration date with the Association.]
    [(C) Persons who have been currently registered for 10 years or 
less as of July 1, 1998, shall participate in the Regulatory Element 
within 120 days after the occurrence of the second registration 
anniversary date, or every third year thereafter, whichever anniversary 
date first applies.]
    (2) No change.
    (3) Disciplinary Actions [Re-entry into Program]
    Unless otherwise determined by NASD [the Association], a registered 
person will be required to retake [re-enter] the Regulatory Element and 
satisfy all of its requirements in the event such person:
    (A) Is subject to any statutory disqualification as defined in 
Section 3(a)(39) of the Act;
    (B) Is subject to suspension or to the imposition of a fine of 
$5,000 or more for violation of any provision of any securities law or 
regulation, or any agreement with or rule or standard of conduct of any 
securities governmental agency, securities self-regulatory 
organization, or as imposed by any such regulatory or self-regulatory 
organization in connection with a disciplinary proceeding; or
    (C) Is ordered as a sanction in a disciplinary action to retake 
[re-enter] the Regulatory Element [continuing education program] by any 
securities governmental agency or self-regulatory organization.
    The retaking of the Regulatory Element [Re-entry] shall commence 
with [initial] participation within 120 days of the registered person 
becoming subject to the statutory disqualification, in the case of (A) 
above, or the disciplinary action becoming final, in the case of (B) 
and (C) above. The date of the disciplinary action shall be treated as 
such person's new base [initial registration] date with NASD [the 
Association].
    (4) through (7) No change.
    (a) No change.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
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

1. Purpose
    NASD Rule 1120 (CE Requirements) specifies the CE requirements for 
registered persons subsequent to their initial qualification and 
registration with NASD. The requirements consist of a Regulatory 
Element and a Firm Element.\4\ The Regulatory Element is a computer-
based education program administered by NASD to help ensure that 
registered persons are kept up-to-date on regulatory, compliance, and 
sales practice matters in the industry.\5\ Unless exempt, 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.\6\ There are three Regulatory Element 
programs: the S201 Supervisor Program for registered principals and 
supervisors, the S106 Series 6 Program for Series 6

[[Page 51875]]

representatives, and the S101 General Program for Series 7 and all 
other registrations.
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    \4\ The Firm Element of the CE Program applies to any person 
registered with an NASD member firm who has direct contact with 
customers in the conduct of the member's securities sales, trading 
and investment banking activities, any person registered as a 
research analyst pursuant to NASD Rule 1050, and to the immediate 
supervisors of such persons (collectively called ``covered 
registered persons''). The requirement stipulates that each member 
firm must maintain a continuing and current education program for 
its covered registered persons to enhance their securities 
knowledge, skill and professionalism. Each firm has the requirement 
to annually conduct a training needs analysis, develop a written 
training plan, and implement the plan.
    \5\ NASD Rule 1120(a)(6) permits a member firm to deliver the 
Regulatory Element to registered persons on firm premises (``In-Firm 
Delivery'') as an option to having persons take the training at a 
designated center provided that firms comply with specific 
requirements relating to supervision, delivery site(s), technology, 
administration, and proctoring. In addition, NASD Rule 1043 requires 
that persons serving as Proctors for the purposes of In-Firm 
Delivery must be registered.
    \6\ This is the current Regulatory Element schedule, as amended 
in 1998.
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    Approximately 135,000 registered persons currently are exempt from 
the Regulatory Element. These include registered persons who, when the 
CE Program was adopted in 1995, had been registered for at least ten 
years and who did not have a significant disciplinary action \7\ in 
their CRD record for the previous ten years (``grandfathered'' 
persons). These also include those persons who had ``graduated'' from 
the Regulatory Element by satisfying their tenth anniversary 
requirement before July 1998, when NASD Rule 1120 was amended and the 
graduation provision eliminated, and who did not have a significant 
disciplinary action in their CRD record for the previous ten years.\8\
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    \7\ For purposes of NASD Rule 1120, a significant disciplinary 
action generally means a statutory disqualification, a suspension or 
imposition of a fine of $5,000 or more, or being subject to an order 
from a securities regulator to re-enter the Regulatory Element. See 
NASD Rule 1120(a)(3).
    \8\ When NASD Rule 1120 was first adopted in 1995, the 
Regulatory Element schedule required registered persons to satisfy 
the Regulatory Element on the second, fifth, and tenth anniversary 
of their initial securities registration. After satisfying the tenth 
anniversary requirement, a person was ``graduated'' from the 
Regulatory Element. A graduated principal re-entered the Regulatory 
Element if he or she incurred a significant disciplinary action. A 
graduated person who was not a principal re-entered if he or she 
acquired a principal registration or incurred a significant 
disciplinary action.
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    At its December 2003 meeting, the Securities Industry/Regulatory 
Council on Continuing Education (``Council'')\9\ discussed the current 
exemptions from the Regulatory Element and agreed unanimously to 
recommend that the SROs repeal the exemptions and require all 
registered persons to participate in the Regulatory Element. In 
reaching this conclusion, the Council was of the view that there is 
great value in exposing all industry participants to the benefits of 
the Regulatory Element, in part because of the significant regulatory 
issues that have emerged over the past few years. The Regulatory 
Element programs include teaching and training content that is 
continuously updated to address current regulatory concerns as well as 
new products and trading strategies. Exempt persons currently do not 
have the benefit of this material.
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    \9\ As of the date of this rule filing, the Council consists of 
17 individuals, six representing self-regulatory organizations 
(``SROs'') (the American Stock Exchange LLC, the Chicago Board 
Options Exchange, Inc., the Municipal Securities Rulemaking Board, 
NASD, the New York Stock Exchange, Inc., and the Philadelphia Stock 
Exchange, Inc.) and 11 representing the industry. The Council was 
organized in 1995 to facilitate cooperative industry/regulatory 
coordination of the CE Program in keeping with applicable industry 
regulations and changing industry needs. Its roles include 
recommending and helping to develop specific content and questions 
for the Regulatory Element, defining minimum core curricula for the 
Firm Element, developing and updating information about the program 
for industry-wide dissemination, and maintaining the program on a 
revenue-neutral basis while assuring adequate financial reserves.
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    In addition, the Council will introduce a new content module to the 
Regulatory Element programs that will specifically address ethics and 
will require participants to recognize ethical issues in given 
situations. Participants will be required to make decisions in the 
context of, for example, peer pressure, the temptation to rationalize, 
or a lack of clear-cut guidance from existing rules or regulations. The 
Council strongly believes that all registered persons, regardless of 
their years of experience in the industry, should have the benefit of 
this training.
    Consistent with the Council's recommendation, the proposed rule 
change would eliminate the current Regulatory Element exemptions. The 
other SRO members of the Council also support eliminating the 
exemptions and are pursuing amendments to their respective rules. NASD 
staff will coordinate with the staffs of the other SROs to synchronize 
the rule changes.
    NASD will announce the effective date of the proposed rule change 
in a Notice to Members to be published no later than 60 days following 
Commission approval. The effective date will be (1) not more than 30 
days following publication of the Notice to Members announcing 
Commission approval, (2) not more than 30 days following the 
implementation of necessary changes to Web Central Registration 
Depository (``Web CRD''), or (3) April 4, 2005, whichever date is the 
latest to occur.
    Following the effective date of the proposed rule change, 
implementation will be based on the application of the existing 
requirements of the Regulatory Element (NASD Rule 1120(a)(1)) to all 
registered persons. The way in which CRD applies these requirements is 
as follows. CRD establishes a ``base date'' for each registered person 
and calculates anniversaries from that date. Usually, the base date is 
the person's initial securities registration. However, the base date 
may be revised to be the effective date of a significant disciplinary 
action in accordance with NASD Rule 1120(a)(3) or the date on which a 
formerly registered person re-qualifies for association with an NASD 
member by qualification exam. Using the base date, CRD creates a 
Regulatory Element requirement on the second anniversary of the base 
date and then every three years thereafter. Beginning on or after the 
effective date of the proposed rule change, registered persons formerly 
exempt from the Regulatory Element requirement must satisfy such 
requirement on the occurrence of a Regulatory Element base date 
anniversary (i.e., the second anniversary of the base date and every 
three years thereafter) (see examples in the Table below).
    NASD staff has reviewed a projection of how the anniversaries of 
the formerly exempt registered persons (about 135,000 persons) will 
occur using the base dates that CRD maintains for these persons. The 
projection shows that within three years from the proposed rule's 
effective date, all formerly exempt registered persons will have been 
brought into the Regulatory Element program. Furthermore, anniversaries 
will occur at a more-or-less steady rate so that there would be no 
extraordinary stress placed upon the capacity of the existing test/
training facilities during the next three years or thereafter.

                                                      Table
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                                                                                        First regulatory element
                                                                                            requirement of a
                                                                                           registered person
                     Registered person                      Initial registration date   formerly exempt from the
                                                                                           regulatory element
                                                                                         (assuming an effective
                                                                                         date of April 4, 2005)
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A.........................................................              \10\ 4/4/1985                   4/4/2005
B.........................................................                   7/1/1983                   7/1/2006
C.........................................................                   8/1/1984                   8/1/2007

[[Page 51876]]

 
D.........................................................                   4/3/1985                   4/3/2008
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    In addition, the proposed rule change would replace references in 
NASD Rule 1120(a)(3) to ``re-entry'' into the Regulatory Element with a 
requirement to ``retake'' the Regulatory Element to clarify that the 
significant disciplinary action provisions apply to all registered 
persons and not only to currently exempt persons.
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    \10\ A registered person with an initial registration date of 
April 4, 1985 will have a Regulatory Element anniversary date on 
April 4 of 1987, 1990, 1993, 1996, 1999, 2002 and 2005.
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2. Statutory Basis
    NASD believes that the proposed rule change is consistent with the 
provisions of Section 15A of the Act,\11\ in general and with Section 
15A(b)(6) of the Act,\12\ in particular, which requires, among other 
things, that NASD's rules 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 
designed to accomplish these ends by ensuring that all registered 
persons are kept up-to-date on industry rules, regulations, and 
practices.
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    \11\ 15 U.S.C. 78o-3.
    \12\ 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.

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, as amended, 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-2004-098 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 Number SR-NASD-2004-098. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. 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 the 
filing also will be available for inspection and copying at the 
principal office of the NASD. All comments received will be posted 
without change; the Commission does not edit personal identifying 
information from submissions. You should submit only information that 
you wish to make available publicly. All submissions should refer to 
File Number SR-NASD-2004-098 and should be submitted on or before 
September 13, 2004.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-19245 Filed 8-20-04; 8:45 am]
BILLING CODE 8010-01-P