[Federal Register Volume 70, Number 63 (Monday, April 4, 2005)]
[Notices]
[Pages 17134-17137]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-1479]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51434; File No. SR-NASD-2005-033]


Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Notice of Filing of Proposed Rule Change Relating to 
Taping Rule ``Opt Out'' and Exemption Provisions

March 24, 2005.
    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 March 22, 2005, the National Association of Securities Dealers, Inc. 
(``NASD'') 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 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 filing a proposed rule change to amend paragraph (L) of 
NASD Rule 3010(b)(2) (``Taping Rule'' or ``Rule'') to (1) require 
member firms that are seeking an exemption from the Rule to submit 
their exemption requests to NASD within 30 days of receiving notice 
from NASD or obtaining actual knowledge that they are subject to the 
provisions of the Rule and (2) clarify

[[Page 17135]]

that firms that trigger application of the Taping Rule for the first 
time can elect to either avail themselves of the one-time ``opt out 
provision'' or seek an exemption from the Rule, but they may not seek 
both options. Below is the text of the proposed rule change. Proposed 
new language is in italics; proposed deletions are in brackets.
* * * * *
3010. Supervision
    (a) No Change.
    (b) Written Procedures.
    (1) No Change.
    (2) Tape recording of conversations.
    (A) Each member that either is notified by NASD [Regulation] or 
otherwise has actual knowledge that it meets one of the criteria in 
paragraph (b)(2)(H) relating to the employment history of its 
registered persons at a Disciplined Firm as defined in paragraph 
(b)(2)(J) shall establish, maintain, and enforce special written 
procedures for supervising the telemarketing activities of all of its 
registered persons.
    (B) The member must establish and implement the supervisory 
procedures required by this paragraph within 60 days of receiving 
notice from NASD [Regulation] or obtaining actual knowledge that it is 
subject to the provisions of this paragraph.
    A member that meets one of the criteria in paragraph (b)(2)(H) for 
the first time may reduce its staffing levels to fall below the 
threshold levels within 30 days after receiving notice from NASD 
[Regulation] pursuant to the provisions of paragraph (b)(2)(A) or 
obtaining actual knowledge that it is subject to the provisions of the 
paragraph, provided the firm promptly notifies the Department of Member 
Regulation, NASD [Regulation], in writing of its becoming subject to 
the Rule. Once the member has reduced its staffing levels to fall below 
the threshold levels, it shall not rehire a person terminated to 
accomplish the staff reduction for a period of 180 days. On or prior to 
reducing staffing levels pursuant to this paragraph, a member must 
provide the Department of Member Regulation, NASD [Regulation] with 
written notice, identifying the terminated person(s).
    (C) No Change.
    (D) The member shall establish reasonable procedures for reviewing 
the tape recordings made pursuant to the requirements of this paragraph 
to ensure compliance with applicable securities laws and regulations 
and applicable rules of [the Association] NASD. The procedures must be 
appropriate for the member's business, size, structure, and customers.
    (E) through (F) No Change.
    (G) By the 30th day of the month following the end of each calendar 
quarter, each member firm subject to the requirements of this paragraph 
shall submit to [the Association] NASD a report on the member's 
supervision of the telemarketing activities of its registered persons.
    (H) No Change.
    (I) For purposes of this Rule, the term ``registered person'' means 
any person registered with [the Association] NASD as a representative, 
principal, or assistant representative pursuant to the Rule 1020, 1030, 
1040, and 1110 Series or pursuant to Municipal Securities Rulemaking 
Board (``MSRB'') Rule G-3.
    (J) through (K) No Change.
    (L) Pursuant to the Rule 9600 Series, [the Association] NASD may in 
exceptional circumstances, taking into consideration all relevant 
factors, exempt any member unconditionally or on specified terms and 
conditions from the requirements of this paragraph. A member seeking an 
exemption must file a written application pursuant to the Rule 9600 
Series within 30 days after receiving notice from NASD or obtaining 
actual knowledge that it meets one of the criteria in paragraph 
(b)(2)(H). A member that meets one of the criteria in paragraph 
(b)(2)(H) for the first time may elect to reduce its staffing levels 
pursuant to the provisions of paragraph (b)(2)(B) or, alternatively, to 
seek an exemption pursuant to paragraph (b)(2)(L), as appropriate; such 
a member may not seek relief from the Rule by both reducing its 
staffing levels pursuant to paragraph (b)(2)(B) and requesting an 
exemption.
    (3) through (4) No Change.
    (c) through (g) 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
    According to the NASD, the Taping Rule, which has been in effect 
since 1998, is designed to ensure that members with a significant 
number of registered persons that previously were employed by firms 
that have been expelled from membership or have had their registration 
revoked for sales practice violations (``Disciplined Firms'') have 
proper supervisory procedures in place relating to telemarketing 
activities to prevent fraudulent and improper sales practices or other 
customer harm.
    Under the Rule, member firms that hire a specified number of 
registered persons from Disciplined Firms must establish, maintain, and 
enforce special written procedures for supervising the telemarketing 
activities of all their registered persons. Such procedures must 
include tape-recording all telephone conversations between such firms' 
registered persons and both existing and potential customers. The Rule 
provides firms up to 60 days from the date they receive notice from 
NASD or obtain actual knowledge that they are subject to the provisions 
of the Rule to establish and implement the required supervisory 
procedures, including installing taping systems. Such firms also are 
required to review the tape recordings, maintain appropriate records, 
and file quarterly reports with NASD.
    The Taping Rule permits member firms that become subject to the 
Rule for the first time a one-time opportunity to adjust their staffing 
levels to fall below the prescribed threshold levels and thus avoid 
application of the Rule (often referred to as the ``opt out 
provision''). A firm that elects this one-time option must reduce its 
staffing levels to fall below the applicable threshold levels within 30 
days after receiving notice from NASD or obtaining actual knowledge 
that it is subject to the provisions of the Rule. Once a firm has made 
the reductions, the firm is not permitted to rehire the terminated 
individuals for at least 180 days.
    NASD also has the authority to grant exemptions from the Rule in 
``exceptional circumstances.'' In reviewing exemption requests, NASD 
generally has required a firm to establish that it has alternative 
procedures to assure supervision at a level functionally equivalent to 
a taping system. The Rule currently is silent on the time frame for 
submitting an

[[Page 17136]]

exemption request. However, because a firm has a total of 60 days from 
the date it receives notice from NASD or obtains actual knowledge that 
it is subject to the provisions of the Rule to implement the required 
supervisory procedures, a firm implicitly has that 60-day period to 
submit an exemption request. A firm that submits an exemption request 
is not required to establish and implement the required supervisory 
procedures, including the taping system (i.e., such requirements are 
``tolled'') while the staff is reviewing the request and during the 
course of any subsequent appeals to NASD's National Adjudicatory 
Council (``NAC'').
    NASD tolls the Taping Rule's requirements during the exemption 
appeal process primarily due to the significant costs involved with 
installing a taping system and the possibility that the staff or NAC 
will grant the exemption. At the same time, it has been NASD's 
experience that firms often wait until the 60th day (or shortly before) 
to request the exemption, which, assuming the exemption is not granted, 
only further prolongs the establishment and implementation of the 
required supervisory procedures.
    To reduce these possible delays in implementation of the Taping 
Rule requirements, NASD is proposing to amend NASD Rule 3010(b)(2)(L) 
to require firms that are seeking an exemption from the provisions of 
the Rule to submit their exemption requests to NASD within 30 days of 
receiving notice from NASD or obtaining actual knowledge that they are 
subject to the provisions of the Rule. NASD believes that specifying a 
time frame for submitting an exemption request is consistent with the 
investor protection concerns that the Rule is intended to address, in 
particular given that the requirement to establish and implement the 
appropriate supervisory procedures is tolled upon the submission of an 
exemption request. Moreover, based on NASD's experience, 30 days would 
provide ample time for firms to decide whether to seek an exemption and 
to submit their requests to NASD.
    Some firms also have inquired whether they could elect to use the 
``opt out'' while simultaneously seeking an exemption, with the goal 
being that the firm would be granted an exemption and be able to 
immediately rehire the persons whose employment was terminated as part 
of the ``opt out'' (rather than waiting the requisite 180 days). It is 
NASD's belief, however, that firms should not be able to pursue these 
two alternatives simultaneously. NASD believes that a core purpose of 
the ``opt out provision'' is to provide relief to those firms that may 
have inadvertently or unintentionally become subject to the Taping Rule 
for the first time due, for example, to sudden turnover among 
registered persons or other events beyond the firm's control. In 
contrast, exemptions, which are granted only in ``exceptional 
circumstances,'' are for those situations where the firm has 
demonstrated that it has supervisory procedures that are equivalent to 
a taping system or is otherwise in a truly unique situation. NASD 
believes it would be inconsistent with the purposes of these two 
provisions to permit a firm to pursue both options with NASD, either 
simultaneously or one after the other. For instance, NASD believes that 
it would be inconsistent with the purposes of these provisions for a 
firm that chooses to submit an exemption request pursuant to NASD Rule 
3010(b)(2)(L) and is denied the exemption to then employ the NASD Rule 
3010(b)(2)(B) ``opt out'' as its second option.
    Therefore, NASD also is proposing to amend NASD Rule 3010(b)(2)(L) 
to clarify that firms that trigger application of the Taping Rule for 
the first time must elect to either avail themselves of the one-time 
``opt out provision'' (i.e., make the staff adjustment to fall below 
the thresholds of the Rule) or seek an exemption from the Rule, but 
they may not elect to do both. Accordingly, under the proposed rule 
change, firms that become subject to the Taping Rule for the first time 
would have 30 days to decide on one option and may pursue only that 
option.
    Finally, NASD no longer refers to itself or its subsidiary, NASD 
Regulation, Inc., using its full corporate name, ``the Association,'' 
``the NASD,'' or ``NASD Regulation.'' Instead, NASD uses the name 
``NASD'' unless otherwise appropriate for corporate or regulatory 
reasons. Accordingly, the proposed rule change replaces, as a technical 
change, several references to ``Association'' and ``NASD Regulation'' 
in NASD Rule 3010(b)(2) with the name ``NASD.''
    NASD will announce the effective date of the proposed rule change 
in a Notice to Members (``NtM'') to be published no later than 60 days 
following Commission approval. The effective date will be 30 days 
following publication of the NtM announcing Commission approval.
2. Statutory Basis
    NASD believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\3\ 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 will 
ensure that members with a significant number of registered persons 
from Disciplined Firms have proper supervisory procedures over 
telemarketing activities to prevent fraudulent and improper sales 
practices or other customer harm, and will ensure that members use the 
``opt out'' and exemption provisions in a manner that is consistent 
with the intent of the Rule.
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    \3\ 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.

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-2005-033 on the subject line.

[[Page 17137]]

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-2005-033. 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 such 
filing also will be available for inspection and copying at the 
principal office of 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 the File 
Number SR-NASD-2005-033 and should be submitted on or before April 25, 
2005. 

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\4\
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    \4\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5-1479 Filed 4-1-05; 8:45 am]
BILLING CODE 8010-01-P