[Federal Register Volume 69, Number 177 (Tuesday, September 14, 2004)]
[Notices]
[Pages 55482-55485]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E4-2177]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50328; File No. SR-MSRB-2004-04]


Self-Regulatory Organizations; Municipal Securities Rulemaking 
Board; Notice of Filing of Proposed Rule Change and Amendment No. 1 
Thereto Relating to Amendments To Eliminate Exemptions From the 
Continuing Education Regulatory Element Requirements

September 7, 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 August 5, 2004, the Municipal Securities Rulemaking Board (``MSRB'' 
or ``Board'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II 
and III below, which Items have been prepared by the MSRB. On August 
27, 2004, the MSRB filed Amendment No. 1 to the proposed rule 
change.\3\ The Commission is publishing this notice to solicit comments 
on the proposed rule 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 Ronald W. Smith, Senior Legal Associate, 
MSRB, to Katherine A. England, Assistant Director, Division of 
Market Regulation, Commission, dated August 26, 2004. Amendment No. 
1 replaced the original rule filing in its entirety.

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[[Page 55483]]

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The MSRB is filing herewith a proposed rule change to amend Rule G-
3 to eliminate all exemptions from the requirement to complete the 
Regulatory Element of the Continuing Education (``CE'') Program. The 
text of the proposed rule change is set forth below. Proposed new 
language is in italics; proposed deletions are in [brackets].
    Rule G-3. Classification of Principals and Representatives; 
Numerical Requirements; Testing; Continuing Education Requirements
    (a)-(g) No change.
    (h) Continuing Education Requirements.
    This section (h) prescribes requirements regarding the continuing 
education of certain registered persons subsequent to their initial 
qualification and registration with a registered securities association 
with respect to a person associated with a member of such association, 
or the appropriate regulatory agency as defined in section 3(a)(34) of 
the Act with respect to a person associated with any other broker, 
dealer or municipal securities dealer (``the appropriate enforcement 
authority''). The requirements shall consist of a Regulatory Element 
and a Firm Element as set forth below.
    (i) Regulatory Element.
    (A) Requirements--No broker, dealer, or municipal securities dealer 
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 section (i) hereof.
    [(1)] Each registered person shall complete the Regulatory Element 
[beginning with] on the occurrence of their second registration 
anniversary date and every three years thereafter or as otherwise 
prescribed by the Board. 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 section (i). The content of the Regulatory Element 
shall be determined by the Board for each registration category of 
persons subject to the rule.
    [(2) Persons who have been continuously registered for more than 10 
years as of the effective date of this section are exempt from the 
requirements of this rule relative to participation in the Regulatory 
Element, provided such persons have not been subject to any 
disciplinary action within the last 10 years as enumerated in 
paragraphs (i)(C)(1)-(2) of this section. However, persons delegated 
supervisory responsibility or authority pursuant to rule G-27 and 
registered in such supervisory capacity are exempt from participation 
in the Regulatory Element under this provision only if they have been 
continuously registered in a supervisory capacity for more than ten 
years as of the effective date of this rule and provided that such 
supervisory person has not been subject to any disciplinary action 
under paragraphs (i)(C)(1)-(2) of this section.]
    [(3) In the event that a registered person who is exempt from 
participation in the Regulatory Element subsequently becomes the 
subject of a disciplinary action as enumerated in paragraphs (i)(C)(1)-
(2), such person shall be required to satisfy the requirements of the 
Regulatory Element as if the date the disciplinary action becomes final 
is the person's initial registration anniversary date.]
    (B) No change.
    (C) [Re-entry into Program] Disciplinary Actions--Unless otherwise 
determined by the appropriate enforcement authority, a registered 
person will be required to [re-enter] retake the Regulatory Element and 
satisfy all of its requirements in the event such person:
    (1) Becomes subject to any statutory disqualification as defined in 
Section 3(a)(39) of the Securities Exchange Act of 1934;
    (2) Becomes 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, the appropriate enforcement authority or as imposed by 
any such regulatory or self-regulatory organization in connection with 
a disciplinary proceeding; or
    (3) Is ordered as a sanction in a disciplinary action to [re-enter] 
retake the [continuing education program] Regulatory Element by any 
securities governmental agency, the appropriate enforcement authority 
or securities self-regulatory organization.
    [Re-entry] The retaking of the Regulatory Element shall commence 
with [initial] participation within 120 days of the registered person 
becoming subject to the statutory disqualification, in the case of (1) 
above, or the completion of the sanction or the disciplinary action 
becomes final, in the case of (2) or (3) above. The date that the 
disciplinary action becomes final will be deemed the person's [initial 
registration anniversary] new base date for purposes of this section 
(i).
    (D)-(G) No change.
    (ii) 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, the MSRB included statements 
concerning the purpose of and basis for the proposed rule change, as 
amended, 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. MSRB 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
    Rule G-3(h), on CE requirements, specifies the CE requirements for 
registered persons subsequent to their initial qualification and 
registration. 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

[[Page 55484]]

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 representatives; and the S101 
General Program for Series 7 and all other registrations. 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 
Rule G-3(h) was amended and the graduation provision eliminated, and 
who did not have a significant disciplinary action in their CRD records 
for the previous ten years.\8\
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    \4\ The Firm Element of the CE Program applies to any person 
registered with an MSRB registered firm who has direct contact with 
customers in the conduct of the dealer's municipal securities sales, 
trading and investment banking activities and to the immediate 
supervisors of such persons (collectively called ``covered 
registered persons''). The requirement stipulates that each firm 
must maintain a continuing and current education program for its 
covered registered persons to enhance their securities knowledge, 
skill and professionalism. Each firm is required annually to conduct 
a training needs analysis, develop a written training plan, and 
implement the plan.
    \5\ Rule G-3(h)(i)(G) permits a dealer 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, Rule G-3(h)(i)(G)(5)(c) 
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.
    \7\ For purposes of Rule G-3(h), 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 
Rule G-3(h)(i)(C).
    \8\ When Rule G-3(h) 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'') (American Stock Exchange LLC, Chicago Board Options 
Exchange, Inc., MSRB, NASD, New York Stock Exchange, Inc., and 
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 eliminates 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.
    The effective date of the MSRB proposed rule change is dependent 
upon the effective date of a similar proposed rule change filed by NASD 
\10\ because NASD administers the Regulatory Element computer-based 
education program. NASD has stated that it will announce the effective 
date of its proposed rule change in a Notice to Members to be published 
no later than 60 days following Commission approval. NASD stated that 
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. The effective date of 
the MSRB proposed rule change will be the same as the effective date of 
the NASD's proposed rule change.
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    \10\ See Securities Exchange Act Release No. 50204 (August 16, 
2004), 69 FR 51873 (August 23, 2004) (SR-NASD-2004-098).
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    Following the effective date of the proposed rule change, 
implementation will be based on the application of the existing 
requirements of the Regulatory Element (Rule G-3(h)(i)(A)) 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 date of 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 Rule G-3(h)(i)(C) 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).\11\
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    \11\ Bank dealers do not have access to CRD. Each bank dealer 
must track the base date of each of its employees and schedule 
appointments for those employees to complete the Regulatory Element 
when required. When developing its plan to bring formerly exempt 
registered persons into the CRD system, NASD believed that the 
number of employees of non-NASD member firms who would be affected 
would not impact the delivery plan significantly.
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    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 amendments' 
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.
    In addition, the proposed rule amendment would replace references 
in Rule G-3(h)(i)(C) 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.
1. Statutory Basis
    The MSRB believes that the proposed rule change is consistent with 
Section 15B(b)(2)(C) of the Act, which authorizes the MSRB to adopt 
rules that shall:

be designed to prevent fraudulent and manipulative acts and 
practices, to promote

[[Page 55485]]

just and equitable principles of trade, to foster cooperation and 
coordination with persons engaged in regulating, clearing, settling, 
processing information with respect to, and facilitating 
transactions in municipal securities, to remove impediments to and 
perfect the mechanism of a free and open market in municipal 
securities, and, in general, to protect investors and the public 
interest.

    The MSRB believes that the proposed rule change is consistent with 
the Act by ensuring that all registered persons are kept up-to-date on 
industry rules, regulations and practices.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The MSRB does not believe that the proposed rule change, as 
amended, will impose any burden on competition 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

    The MSRB has neither solicited nor received comments on the 
proposed rule change.

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-MSRB-2004-04 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-MSRB-2004-04. 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 offices of the MSRB. 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-MSRB-2004-04 and should be submitted on or before 
October 5, 2004.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E4-2177 Filed 9-13-04; 8:45 am]
BILLING CODE 8010-01-P