[Federal Register Volume 70, Number 87 (Friday, May 6, 2005)]
[Notices]
[Pages 24148-24154]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-2212]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51644; File Nos. SR-NYSE-2005-25; SR-NASD-2005-043]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Changes by the New York Stock Exchange, 
Inc. and the National Association of Securities Dealers, Inc. Relating 
to an Exemption from the Research Analyst Qualification Examination for 
Certain Associated Persons Employed by Non-Member Foreign Affiliates 
Who Contribute to the Preparation of Member Research Reports

May 2, 2005.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Exchange Act'' or the ``Act'') \1\ and Rule 19b-4 thereunder,\2\ 
notice is hereby given that on April 1, 2005, the New York Stock 
Exchange, Inc. (``NYSE'' or the ``Exchange'') and the National 
Association of Securities Dealers, Inc. (``NASD''), filed with the 
Securities and Exchange Commission (``SEC'' or ``Commission'') the 
proposed rule changes as described in Items I and II below, which Items 
have been prepared by the respective self-regulatory organizations.\3\ 
The NYSE and NASD (the ``SROs'') have each filed the proposed rule 
changes as constituting a stated policy, practice, or interpretation 
with respect to the meaning, administration, or enforcement of an 
existing rule pursuant to Section 19(b)(3)(A) of the Act \4\ and Rule 
19b-4(f)(1) thereunder,\5\ which renders the proposed rule changes 
effective upon filing with the Commission. 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.
    \3\ On May 2, 2005, the NYSE filed with the Commission Amendment 
No. 1 to its proposed rule change which made technical corrections 
to the proposed rule text of the proposed rule change.
    \4\ 15 U.S.C. 78s(b)(3)(A).
    \5\ 17 CFR 240.19b-4(f)(1).
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I. Self-Regulatory Organizations' Statements of the Terms of Substance 
of the Proposed Rule Changes

    The NYSE is filing with the Commission a proposed interpretation to 
NYSE Rule 344 to establish an exemption from the Research Analyst 
Qualification Examination Requirements for Certain Foreign Research 
Analysts.
    Pursuant to the provisions of Section 19(b)(3) of the Act,\6\ the 
NASD is filing with the Commission a proposed rule change to amend NASD 
Rule 1050 to create an exemption from the Research Analyst 
Qualification Examination (Series 86 and 87) for certain research 
analysts employed by foreign affiliates of a member who contribute to 
the preparation of a member's research reports. The proposed rule 
change also makes one non-substantive change to NASD Rule 1050 to 
correct a spelling error.
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    \6\ 15 U.S.C. 78s(b)(3).
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    Below is the text of the proposed rule changes. Brackets indicate 
deletions; italics indicate additions.

A. NYSE's Proposed Rule Text

Interpretation

Rule 344 Research Analysts and Supervisory Analysts

    /01 Research Analysts (No Change)
    /02 Foreign Research Analysts
    Exemption
    The requirement that a research analyst as defined under NYSE Rule 
344.10 must be registered with, qualified by and approved by the 
Exchange shall not apply where such analyst is an associated person of 
a member or member organization who is an employee of a non-member 
foreign affiliate of such member or member organization who contributes 
to the preparation of the member's or member organization's research 
reports (``foreign research analyst''), provided the following 
conditions are satisfied;
     The foreign research analyst resides and is employed in a 
jurisdiction that the NYSE has determined has registration and 
qualification requirements or other standards that reflect a 
recognition of principles that are consonant with NYSE Rule 344 and the 
research analyst conflicts of interest provisions pursuant to NYSE Rule 
472;
     The foreign research analyst has satisfied all applicable 
registration and qualification requirements or other research-related 
standards in the jurisdictions in which the foreign research analyst 
resides and is employed;
     Members and member organizations have imposed on 
affiliates that employ foreign research analysts, and the foreign 
research analysts all research-related standards that the member or 
member organization imposes on its research reports and research 
analysts, including the provisions of NYSE Rule 472;
     Members, member organizations and their affiliates that 
distribute research reports partially or entirely prepared by a foreign 
research analyst must subject such research reports to pre-use review 
and approval by a supervisory analyst, as required by NYSE Rule 472;
     The annual attestation required under NYSE Rule 351(f) 
must include the global application of NYSE Rule 472 to foreign 
affiliates that employ foreign research analysts;
     In addition to the disclosure requirements of NYSE Rule 
472, each research report must include a disclosure on the front page 
stating that:
     ``This research report has been prepared in whole or part 
by foreign research analysts who may be associated persons of the 
member or member organization. These research analysts are not 
registered/qualified as a research analyst with the NYSE and/or NASD, 
but instead have satisfied the registration/qualification requirements 
or other research-related standards of a foreign jurisdiction that have 
been recognized for these purposes by the NYSE and NASD.''
    Disclosure on the front page of each research report must identify:
    (1) Each affiliate contributing to the research report;
    (2) The location of such affiliate; and
    (3) The names of the foreign research analysts employed by each 
contributing affiliate.
    The cover page must also contain general disclosure language 
describing the relationship between the contributing affiliates and the 
member or member organization.
    The front page of the research report must also refer to a separate 
``Foreign Affiliate Disclosures'' section (similar to the ``Required 
Disclosure'' section currently mandated by the NYSE and NASD under 
Rules 472 and 2711 respectively) located in close proximity to the 
``Required Disclosure'' section.
    In this disclosure section, the member or member organization must 
disclose the following:
    (1) Information on the nature of the affiliation with the 
affiliate;
    (2) Each affiliate's address; and
    (3) The primary regulator in the jurisdiction(s) in which each 
affiliate is located.

[[Page 24149]]

    Record Keeping
    Members and member organizations must establish and maintain 
records that identify those individuals who have availed themselves of 
this exemption, the basis for such exemption, and evidence of 
compliance with the conditions of the exemption.
    [/02]/03 Supervisory Analysts
    Qualifications
    Supervisory Analyst candidates shall qualify by taking and passing 
the
    Supervisory Analyst (Series 16) 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:
     Equity or Fixed Income Research Analyst;
     Credit Analyst for a securities rating agency;
     Supervising preparation of materials prepared by 
financial/securities analysts;
     Financial analytical experience gained at banks, insurance 
companies or other financial institutions;
     Academic experience relating to the financial/securities 
markets/industry.
    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/she does not 
approve research reports. If, however, such a person is in charge of 
registered representatives, he/she must qualify as a supervisory person 
under Rule 342.13.
    Exemptions
    Successful completion of the CFA Level I Examination administered 
by the CFA Institute (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.

B. NASD's Proposed Rule Text

1050. Registration of Research Analysts

    (a) through (b) No change.
    (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:
    (1) Levels I and II of the Chartered Financial Analyst (``CFA'') 
Examination; or
    (2) Through (3) No change.
    (d) Through (e) No change
    (f) The requirements of paragraph (a) shall not apply to an 
associated person who is an employee of a non-member foreign affiliate 
who contributes to the preparation of a member's research report 
(``foreign research analyst''), provided the following conditions are 
met:
    (1) The foreign research analyst resides and is employed in a 
jurisdiction that NASD has determined has registration and 
qualification requirements or other standards that reflect a 
recognition of principles that are consonant with this rule and the 
research analyst conflict of interest rules pursuant to Rule 2711;
    (2) The foreign research analyst has satisfied all applicable 
registration and qualification requirements or other research-related 
standards in the jurisdiction in which the foreign research analyst 
resides and is employed;
    (3) The NASD member (``U.S. member'') whose research reports a 
foreign research analyst contributes in the preparation of has imposed 
on its affiliates and the foreign research analysts they employ all of 
the provisions of Rule 2711 and all other research-related standards 
the member imposes on its own research reports and research analysts;
    (4) The annual compliance attestation submitted by the U.S. member 
pursuant to Rule 2711(i) must encompass the global application of Rule 
2711 to the U.S. member's foreign affiliates that participate in the 
preparation of the U.S. member's research reports;
    (5) All U.S. member research reports to which a foreign research 
analyst contributes in the preparation must be approved by a properly 
registered principal or supervisory analyst pursuant to Rule 1022; and
    (6) In addition to the disclosure requirements of Rule 2711, each 
U.S. member research report to which a foreign research analyst 
contributes in the preparation shall include the following on the front 
page:
    (A) A statement that:
     This research report has been prepared in whole or part by 
foreign research analysts who may be associated persons of the member 
or member organization. These research analysts are not registered/
qualified as a research analyst with the NYSE and/or NASD but instead 
have satisfied the registration/qualification requirements or other 
research-related standards of a foreign jurisdiction that have been 
recognized for these purposes by the NYSE and NASD.''
    (B) disclosures identifying each affiliate contributing to the 
research report, the location of such affiliate, and the names of the 
research analysts employed by the affiliate that contributed to the 
preparation of the research report;
    (C) a general description of the relationship between the 
contributing affiliates and the U.S. member; and
    (D) a reference to the page on which a separate ``Foreign Affiliate 
Disclosures'' section can be found. Such section shall disclose 
information on the nature of the affiliation between the entities, the 
affiliates' addresses, and the primary regulator in the jurisdiction(s) 
in which each affiliated entity is located.
    (7) Members must establish and maintain records that identify those 
individuals who have availed themselves of the exemption in paragraph 
(f), specify the basis for such exemption, and evidence compliance with 
the conditions of paragraph (f).

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 
statements concerning the purpose of and basis for the proposed rule 
changes and discussed any comments they received on the proposed rule 
changes. The text of these statements may be examined at the places 
specified in Item IV below. The NYSE and NASD have prepared summaries, 
set forth in Sections A, B, and C below, of the most significant 
aspects of such statements.

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 exempt 
certain foreign research analysts employed by a non-member affiliate of 
a member or member organization from the Research Analyst Qualification 
Examination (Series 86/87).
    Background. Recent amendments to NYSE Rule 344 require that 
research analysts be registered and qualified by

[[Page 24150]]

the NYSE.\7\ According to the NYSE, the Research Analyst Qualification 
Examination is part of the SRO's regulatory efforts to safeguard the 
investing public from potential conflicts of interest relating to 
research analysts. The NYSE believes that the purpose of requiring a 
qualification examination is to protect the investing public by helping 
to ensure that research analysts are competent to perform their jobs 
and are knowledgeable about the new regulatory requirements affecting 
them. Given the scope and magnitude of these requirements, the SROs 
developed an examination with a part designed specifically to address 
the new SRO rule requirements.
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    \7\ According to the NYSE, the amendments were the culmination 
of joint regulatory efforts among the SROs and the SEC to address 
potential conflicts of interest relating to research analysts. The 
amendments included, among other things, a new registration category 
and qualification examination for research analysts.
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    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 fundamental security analysis and valuation of 
equity securities. Part II, the Series 87, consists of 50 questions, 
which primarily address pertinent SRO and SEC rules and regulations, 
including the recent Research Analysts' Conflicts Rules.
    The requirement to take and pass the Series 86/87 examination 
applies to all research analysts, as defined in Exchange Rule 344.10, 
which provides that the term ``research analyst'' includes a member, 
allied member, associated person or employee who is primarily 
responsible for the preparation of the substance of a research report 
and/or whose name appears on such report.\8\ Research analysts, must be 
registered with, qualified and approved by the Exchange. The 
registration and qualification requirement became effective March 30, 
2004. Candidates who have been functioning as research analysts as of 
the effective date of March 30, 2004, and submitted a registration 
application by June 1, 2004, have been given until April 4, 2005 to 
meet the qualification requirements.
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    \8\ See SR-NYSE-2005-24 amending the definition of ``research 
analyst'' in NYSE Rules 344.10 and 472.40 to include ``associated 
persons.''
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    Prerequisites to and Exemptions from the Qualification Examination. 
In March 2004, the SEC approved an interpretation to Exchange Rule 344 
establishing certain prerequisites to and exemptions from the Research 
Analyst Qualification Examination.\9\ The interpretation to NYSE Rule 
344 requires, among other things, that each candidate pass the General 
Securities Registered Representative Examination (Series 7) prior to 
taking either Part I or Part II of the examination. The interpretation 
to Exchange Rule 344 also allows a research analyst candidate who has 
passed both Level I and Level II of the Chartered Financial Analyst 
(``CFA'') Examination administered by the CFA Institute to request an 
exemption from Part I (Series 86) of the Research Analyst Qualification 
Examination.\10\
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    \9\ See Securities Exchange Act Release No. 49464 (March 24, 
2004), 69 FR 16628 (March 30, 2004) (SR-NYSE-2004-03).
    \10\ In February 2005, the SEC provided public notice of a 
similar alternative qualification standard for the Series 86 
examination requirement for research analysts who prepare only 
technical research reports and who have passed Levels I and II of 
the Chartered Market Technician (``CMT'') Program administered by 
the Market Technicians Association (``MTA''). See Securities 
Exchange Act Release No. 51240 (February 23, 2005), 70 FR 10451 
(March 3, 2005) (SR-NYSE-2005-12).
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    Application of Examination Requirement to Foreign Research 
Analysts. In March 2004, the NYSE and NASD issued a Joint Memo 
providing guidance on research analyst issues. In that memo, the SROs 
stated that all of the SRO rule requirements would apply to any 
research report to whose preparation a research analyst employed or 
associated with a member or member organization contributed (e.g., 
``globally-branded'' and ``mixed research team'' \11\ research reports, 
whether or not issued by a member or member organization).
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    \11\ A ``globally-branded'' research report refers to the use of 
a single marketing identity that encompasses the member firm and its 
affiliates. A research report prepared by a ``mixed research team'' 
which includes at least one person who meets the definition of 
``research analyst'' and is associated with a member or member 
organization would be considered a report prepared by the member or 
member organization. See NYSE Information Memo 04-10, dated March 9, 
2004.
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    In April 2004, the Exchange issued an Information Memo announcing 
the approval of the examination requirements noted above and discussing 
examination-related requirements.\12\
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    \12\ See NYSE Information Memo 04-16, dated April 1, 2004. In 
these memos, the SROs advised that research analysts employed by 
foreign broker-dealer affiliates of a member or member organization 
are subject to the Series 86/87 examination to the extent that the 
research analyst is an ``associated person'' of the member or member 
organization.
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    In June 2004, the SROs received a written submission from Goldman 
Sachs & Co. (``Goldman'') requesting relief under NASD Rule 1050 and 
NYSE Rule 344 for equity research analysts employed by its foreign 
broker-dealer affiliates, and seeking further clarification as to 
whether research analysts employed by a foreign broker-dealer should 
appropriately be deemed ``associated persons'' of the NASD/NYSE member 
firms in the context of global businesses.\13\ In its submission, 
Goldman requested that U.S. regulators should consider the impact that 
such views could have on many firms' businesses, including possible 
licensing consequences on the U.S. broker-dealers in such foreign 
jurisdictions, and other issues of international comity.
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    \13\ Letter dated June 1, 2004 from Pamela Root and John Curtis 
of Goldman to the Exchange and NASD.
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    In July 2004, the Exchange received a written submission from Smith 
Barney Citigroup (``Smith Barney'') requesting clarification with 
respect to treatment of research analyst employees of foreign broker-
dealer affiliates.\14\ Citing the SROs' memos, Smith Barney advised 
that there were widely divergent approaches and practices developing as 
a result of the interpretive guidance. In this regard, some firms had 
begun the process of having foreign research analysts prepare for the 
examination, while other firms, contrary to the express language in the 
interpretation, were applying the examination requirements only to U.S. 
research analysts. In its submission, Smith Barney requested further 
clarification of the interpretive guidance to facilitate consistent 
application by member organizations.
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    \14\ Letter dated July 23, 2004 from Michael Sharp of Smith 
Barney to Richard G. Ketchum, Chief Regulatory Officer of the NYSE.
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    Smith Barney also requested that the SROs adopt a different 
approach, proposing that they recognize non-U.S. research analysts who 
(a) are properly registered and licensed to conduct securities business 
in their country of residence and (b) are subject to policies that are 
substantively identical to the SRO rules, could publish research in the 
U.S. under a global-research trademark without having to be licensed in 
the U.S. The term ``substantively identical'' was defined to include 
clearance of all research by a Series 16 supervisory analyst and 
supervision by a Series 24 principal. Under the requested relief, a 
non-U.S. research analyst would not have to take either the Series 7 
prerequisite or the Series 86/87 examination.
    According to the NYSE, in subsequent meetings and conference calls 
with member firms, they expressed their concern that the determination 
of ``associated person'' status can be very difficult to ascertain in a 
financial services enterprise that has a complex

[[Page 24151]]

structure of supervision and multiple reporting lines and subsidiaries 
and/or affiliated firms that span a multitude of foreign jurisdictions.
    On February 25, 2005, the SROs received a written submission from 
an industry committee \15\ requesting SRO interpretive guidance to 
establish a safe harbor pursuant to which non-U.S. research analysts 
that are associated with U.S. member firms would be permitted to 
disseminate research in the U.S., notwithstanding the fact that such 
research analysts have not taken the Series 86/87 examination. 
According to the NYSE, the proposed relief sought by the industry 
committee, and the conditions thereto, are substantially similar to the 
relief the SROs are implementing in this filing.\16\
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    \15\ The signatories to the submission were representatives from 
Goldman, Morgan Stanley and Smith Barney.
    \16\ In addition, Commission staff received a copy of this 
submission with supporting documentation.
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    According to the NYSE, in seeking this relief, the industry advised 
that the safe harbor was appropriate and reasonable for the following 
reasons: (1) It respects the primacy of the laws of other jurisdictions 
by avoiding circumstances under which research analysts could become 
subject to multiple licensing requirements and taking multiple exams in 
many different countries; (2) it makes clear that non-U.S. research 
analysts associated with a member firm are held to the principles 
enumerated in the SRO rules; and (3) U.S. investors would have 
sufficient notice through the disclosure to the effect that non-U.S. 
research analysts associated with a member firm are not subject to the 
SROs' registration and qualification standards.
    According to the NYSE, while the SROs do not agree that the 
difficulty of the associated person analysis relieves a member firm 
from making the determination of such status, the SROs are concerned 
that, absent the safe harbor provided in this proposal, members and 
member organizations may have a pragmatic incentive, although not a 
defensible basis, for construing associated person status on an unduly 
narrow basis.
    According to the NYSE, in order to address these issues while 
maintaining--and in fact, extending--the safeguards in the SRO rules 
that ensure objective and quality research, the SROs are proposing an 
exemption from the research analyst qualification requirements for 
certain analysts employed by foreign entities in jurisdictions that 
reflect a recognition of the principles that are consonant with the SRO 
qualification standards and research analyst conflict of interest 
rules.
    According to the NYSE, the proposed exemption would, where 
appropriate, address: (1) the requirement that foreign research 
analysts, when they are ``associated persons,'' to register and qualify 
as research analysts under the SRO rules; (2) the applicability of the 
SRO rules with respect to research reports where foreign research 
analysts have contributed to the preparation; and (3) provide 
additional disclosure requirements related to such research reports, 
including but not limited to, globally branded and mixed research team 
reports.
    Proposed Exemptive Relief. The NYSE and NASD are proposing to 
exempt from the Series 86 and 87 examination requirements certain 
research analysts employed by foreign affiliates who contribute to the 
preparation of a member or member organization's research reports.\17\
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    \17\ The proposed rule change would have no impact on the 
obligation of any broker-dealer, including a foreign broker-dealer, 
to register pursuant to Section 15(a)(1) of the Securities Exchange 
Act of 1934 and the rules promulgated thereunder.
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    The SROs would recognize as the basis for exemptive relief from the 
Series 86 and 87 exams registration/qualification requirements, 
compliance with other standards in non-US jurisdictions that reflect 
recognition of the principles that are consonant with the SRO 
qualification standards and the research analyst conflict of interest 
rules.\18\ The SROs will identify the jurisdictions that satisfy the 
prescribed criteria.
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    \18\ Eligibility for the exemption contemplated by this proposed 
rule change in no way bears upon whether the foreign research 
analyst is an ``associated person'' of the member or member 
organization. To the extent that a member or member organization can 
determine that a foreign research analyst is not an ``associated 
person,'' those individuals need not satisfy the requirements of the 
rule or the exemption.
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    According to the NYSE, such principles generally would include a 
combination of: (1) Rules that govern research analysts and firm 
conflicts of interest in the preparation and distribution of research 
reports; (2) a requirement that research analysts be registered or 
licensed by a regulatory authority: or (3) a testing or experience 
requirement that demonstrates research analysts' skills and/or 
knowledge of rules and regulations applicable to research analysts and 
their firms in the preparation and distribution of research reports.
    Foreign research analysts who participate in preparing a member 
firm's research reports, including but not limited to globally-branded 
and/or mixed research team reports, and have met applicable 
requirements in a jurisdiction with approved standards, will not be 
required to pass the Series 86 and 87 exams, provided the member or 
member organization complies with the other requirements set forth 
herein: \19\
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    \19\ Foreign research analysts in jurisdictions that do not have 
approved standards would still be required to pass the Series 86 and 
87 examinations if they are ``associated persons'' and participate 
in the preparation of a member's or member organization's research 
report.
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    1. The SROs would require global application of a member firm's own 
standards, including full compliance with the SRO research analyst 
conflict of interest rules, to a member's or member organization's 
affiliated entities and foreign research analysts that qualify for the 
use of, and who will rely upon, these exemptive provisions. Thus, a 
member or member organization would be required to subject any 
globally-branded, mixed-team or other research deemed under the SRO 
rules and interpretations to be that of the member or member 
organization, to all of the applicable provisions of the SRO rules as 
well as any other regulatory or supervisory standards applicable to a 
member's or member organization's research. Thus, the research 
provisions of NYSE Rule 472, e.g., personal trading restrictions, would 
be applied to the specific research reports and the particular foreign 
research analysts that contributed to the preparation of a member's or 
member organization's research report. The conditions of this paragraph 
shall not apply to research reports that are wholly produced by a 
foreign affiliate and its employee and are clearly labeled as the 
product of that foreign affiliate.\20\
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    \20\ See Information Memo Nos. 02-26 (June 26, 2002) and 04-10 
(March 9, 2004) for a member's or member organization's disclosure 
requirements when distributing third party research of an affiliate 
or non-affiliate.
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    2. The annual compliance attestation required by NYSE Rules 472 and 
351 would encompass the global application of the SRO rules to foreign 
affiliates that participate in preparing a member's or member 
organization's research report.
    3. Members' and member organizations' research reports must be 
approved by a properly registered supervisory analyst/principal.\21\
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    \21\ NYSE Series 16.
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    4. In addition to the disclosure requirements of NYSE Rule 472, 
each report would include a disclosure on the front cover stating that:

    This research report has been prepared in whole or part by 
foreign research analysts

[[Page 24152]]

who may be associated persons of the member or member organization. 
These research analysts are not registered/qualified as research 
analysts with the NYSE and/or NASD, but instead have satisfied the 
registration/qualification requirements or other research-related 
standards of a foreign jurisdiction that have been recognized for 
these purposes by the NYSE and NASD.

    In addition, the front page of a research report must identify:
    (1) Each affiliate contributing to the research report;
    (2) The location of such affiliate; and
    (3) The names of the research analysts contributing to the report 
employed by each affiliate.
    The front page would also contain general disclosure language 
describing the relationship of the contributing affiliates to the NYSE/
NASD member firm. The front page of the research report would also 
refer to a separate ``Foreign Affiliate Disclosures'' section (similar 
to the ``Required Disclosure'' section currently mandated by the SROs) 
located in close proximity to the Required Disclosure section.
    In this disclosure section, the member or member organization would 
disclose the following:
    (1) Information on the nature of the affiliation of the parties;
    (2) The affiliates' addresses; and
    (3) The primary regulator in the jurisdiction(s) in which each 
affiliate is located.
    Members and member organizations must establish and maintain 
records that identify those individuals who have availed themselves of 
the exemption, the basis for such exemption, and evidence of compliance 
with the conditions of the exemption.
    As of the date of this filing, the SROs have identified the 
following jurisdictions that have satisfied the applicable standards 
noted above: \22\
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    \22\ The Exchange will announce these jurisdictions in an 
Information Memo and will issue subsequent Information Memos to 
update the list of the approved jurisdictions, as needed.
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    (1) China.
    (2) Hong Kong.
    (3) Japan.
    (4) Malaysia.
    (5) Singapore.
    (6) Thailand.
    (7) United Kingdom.
    A review of jurisdictions named above revealed that they had in 
place registration/qualification requirements for research analysts 
and/or imposed conflict of interest disclosure requirements, and/or 
restrictions on research analysts' trading that were acceptable to the 
SROs. Accordingly, the proposed amendment seeks an exemption for 
foreign research analysts employed in these jurisdictions from the 
Research Analyst Qualification Examination requirement.
(2) NYSE's Statutory Basis
    The statutory basis for this proposed rule change is Section 
6(b)(5) \23\ and Section 6(c)(3)(B) \24\ of the Exchange Act. Under 
Section 6(b)(5), the rules of the Exchange must be designed to protect 
investors and the public interest. The Exchange believes that the 
proposed rule change is consistent with Section 6(b)(5) in that it will 
ensure that those research analysts contributing to the preparation of 
a member's or member organization's research reports are subject to a 
regulatory scheme that advances objective and unbiased research thereby 
enhancing investors protection.
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    \23\ 15 U.S.C. 78f(b)(5).
    \24\ 15 U.S.C. 78f(c)(3)(B).
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    Under Section 6(c)(3)(B), it is the Exchange's responsibility to 
prescribe standards of training, experience and competence for persons 
associated with Exchange members and member organizations. In addition, 
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 developed a competency qualification examination for 
research analysts and is providing relief from this requirement where 
foreign research analysts and their member firms have demonstrated 
registration, qualification, and conflict of interest standards 
acceptable to the Exchange.
(3) NASD's Purpose
    NASD Rule 1050 requires an associated person who functions as a 
research analyst to register as such with NASD and pass a qualification 
examination. According to NASD, 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. In the context of this requirement, NASD Rule 1050 defines 
``research analyst'' as ``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.'' The term ``research 
report'' in NASD Rule 1050 has the meaning as defined in NASD Rule 
2711(a)(8): ``A written or electronic communication that includes an 
analysis of equity securities of individual companies or industries, 
and that provides information reasonably sufficient upon which to base 
an investment decision.''
    Pursuant to NASD Rule 1050, and in conjunction with the NYSE, NASD 
has implemented the Research Analyst Qualification Examination (Series 
86/87). The examination consists of an analysis part (Series 86) and a 
regulatory part (Series 87). 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). Persons who were functioning as research analysts on the 
effective date of March 30, 2004 and submitted a registration 
application to NASD by June 1, 2004, have until April 4, 2005 to meet 
the registration requirements.
    NASD Rule 1050 currently provides exemptions from the Series 86 
examination for certain applicants who have passed Levels I and II of 
the Chartered Financial Analyst examination or have passed Levels I and 
II of the Chartered Market Technician Examination and produce only 
``technical research reports'' as that term is defined in NASD Rule 
1050.
    NASD has observed that members with global operations sometimes 
produce research reports under a single global brand name or jointly 
with a research analyst employed by a non-member affiliate, i.e. a 
``mixed team'' research report. NASD and NYSE have deemed such research 
reports to be attributable to the member and therefore subject to the 
applicable requirements of NASD Rule 2711. This interpretation has 
raised the question of whether a research analyst employed by a non-
member foreign affiliate who contributes to the preparation of such a 
research report or whose name appears on such report must meet the 
licensing and examination requirements set forth in NASD Rule 1050. 
According to NASD, the determination turns on whether the research 
analyst employed by the foreign affiliate is an ``associated person'' 
of the NASD member.
    According to NASD, several members have expressed to NASD and NYSE 
that the determination of ``associated person'' status can be very 
difficult to ascertain in a financial services enterprise that has a 
complex structure of supervision and multiple reporting lines and 
subsidiaries and/or affiliated firms that span a multitude of foreign 
jurisdictions. While NASD does not subscribe to the viewpoint that the 
difficulty of the associated person analysis relieves a member from 
making the determination of such status, it is

[[Page 24153]]

concerned that absent the safe harbor provided in this proposal, 
members may have a pragmatic incentive, although not a defensible 
basis, for construing associated person status on an unduly narrow 
basis.
    According to NASD, in order to help alleviate these issues while 
maintaining--and in some cases, extending--the safeguards in NASD Rules 
1050 and 2711 that ensure objective and quality research, NASD and the 
NYSE are proposing an exemption from the research analyst qualification 
requirements for certain analysts employed by member foreign affiliates 
in jurisdictions that reflect a recognition of the principles that are 
consonant with the SRO qualification standards and research analyst 
conflict of interest rules.
    The conditions for eligibility for the proposed exemption are as 
follows:
    1. The SROs would recognize as the basis for exemptive relief from 
the Series 86 and 87 examinations compliance with registration and 
qualification requirements or other standards in foreign jurisdictions 
that reflect a recognition of the principles that are consonant with 
the SRO qualification standards and the research analyst conflict of 
interest rules. According to NASD, such principles generally will 
include a combination of (1) rules that govern analyst and firm 
conflicts of interest in the preparation and distribution of research, 
(2) a requirement that analysts be registered or licensed by a 
regulatory authority, or (3) a testing or experience requirement that 
demonstrates analyst skills and/or knowledge of rules and regulations 
applicable to analysts and their firms in the preparation and 
distribution of research.
    Foreign analysts who participate in preparing a member's research 
reports and have met such requirements in an approved jurisdiction will 
not be required to pass the Series 86 and 87 exams, provided the member 
complies with the other requirements set forth as conditions for the 
exemption. Analysts in jurisdictions that do not have approved 
standards still would be required to pass the Series 86 and 87 
examinations if they are associated persons and participate in the 
preparation of a member's research report;
    2. The SROs would require global application of member firm 
standards, including full compliance with the SRO research analyst 
conflict of interest rules, to a member's affiliated entities and 
foreign research analysts that qualify for the use of, and would rely 
upon, these exemptive provisions. Thus, a member would be required to 
apply to any globally-branded, mixed-team or other research deemed 
under SRO rules and interpretations to be that of the member, all of 
the applicable provisions of the SRO rules, as well as any other 
regulatory or supervisory standards applicable to a member's own 
research. The personal trading restrictions and other SRO rules 
applicable to the conduct of a research analyst need only be applied to 
the specific research reports in which a foreign research analyst 
contributed to the preparation. None of the conditions of this 
paragraph shall apply to research reports that are wholly produced by a 
foreign affiliate and its employees and are clearly labeled as the 
product of that foreign affiliate.
    3. The annual compliance attestation required by NASD Rule 2711 
would encompass the global application of the SRO rules to foreign 
affiliates that participate in preparing a member's research reports.
    4. Members must agree to have their research approved by a properly 
registered supervisory analyst or principal in accordance with NASD 
Rule 1022; and
    5. In addition to the disclosure requirements of NASD Rule 2711, 
each report would need to include, when applicable, a disclosure on the 
front cover stating that:

    This research report has been prepared in whole or part by 
foreign research analysts who may be associated persons of the 
member or member organization. These research analysts are not 
registered/qualified as a research analyst with the NYSE and/or 
NASD, but instead have satisfied the registration/qualification 
requirements or other research-related standards of a foreign 
jurisdiction that have been recognized for these purposes by the 
NYSE and NASD.

    In addition, the cover page of a research report must identify: (1) 
Each broker-dealer entity contributing to the report; (2) its location; 
and (3) the research analysts contributing to the research report from 
each broker-dealer. The cover page would also contain general 
disclosure language regarding the relationship of the listed broker-
dealers to the NYSE/NASD member firm.
    The front page of the research report would need to reference to a 
separate ``Foreign Affiliate Disclosures'' section (similar to the 
``Required Disclosure'' section currently mandated by the SROs) located 
in close proximity to that section. In this proposed disclosure 
section, the member would be required to disclose the following: (1) 
Information on the nature of the affiliation of the parties; (2) the 
affiliates' addresses; and (3) the primary regulator in the 
jurisdiction(s) in which each affiliate is located.
    Eligibility for the exemption contemplated by this proposed rule 
change in no way bears upon whether the foreign research analyst is an 
associated person of the member. And to the extent that a member can 
determine that a foreign research analyst is not an associated person, 
those individuals need not satisfy the requirements of the exemption.
    NASD will identify in a Notice to Members those jurisdictions that, 
based on a review of their regulatory and qualification requirements, 
meet the standard set forth above and shall issue subsequent Notices to 
Members to update the list of approved jurisdictions, as need.\25\
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    \25\ As of the date of this filing, the SROs have identified the 
following jurisdictions as having met the applicable standard: the 
United Kingdom, China, Hong Kong, Singapore, Thailand, Malaysia and 
Japan.
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    Members must establish and maintain records that identify those 
individuals who have availed themselves of the exemption, the basis for 
such exemption, and evidence compliance with the conditions of the 
exemption.
    The proposed rule change would have no impact on the obligation of 
a broker-dealer, including a foreign broker-dealer, to register 
pursuant to Section 15(a)(1) of the Exchange Act \26\ and the rules 
promulgated thereunder.
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    \26\ 15 U.S.C. 78o(a)(1).
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    The proposed rule change also makes one non-substantive change to 
NASD Rule 1050 to correct a spelling error.
(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,\27\ 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 that the proposed rule change is 
consistent with the provisions of the Act noted above in that it will 
ensure that those individuals contributing to the preparation of a 
member's research reports are subject to a regulatory scheme that 
advances objective and quality research, thereby enhancing investor 
protection.
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    \27\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organizations' Statements on Burden on Competition

    The NYSE and NASD do not believe that the proposed rule changes 
will result in any burden on competition that

[[Page 24154]]

is not necessary or appropriate in furtherance of the purposes of the 
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.

III. Date of Effectiveness of the Proposed Rule Changes and Timing for 
Commission Action

    The foregoing rule changes have become effective pursuant to 
Section 19(b)(3)(A) of the Act \28\ and paragraph (f)(1) of Rule 19b-4 
thereunder,\29\ in that the proposed rule changes constitute a stated 
policy, practice or interpretation with respect to the meaning, 
administration, or enforcement of an existing rule. At any time within 
60 days of the filing of the proposed rule changes, the Commission may 
summarily abrogate such rule changes if it appears to the Commission 
that such action is necessary or appropriate in the public interest, 
for the protection of investors, or otherwise in furtherance of the 
purposes of the Act.
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    \28\ 15 U.S.C. 78s(b)(3)(A).
    \29\ 17 CFR 240.19b4-4(f)(1).
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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. 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 Numbers SR-NYSE-2005-25 and/or SR-NASD-2005-043 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 Numbers SR-NYSE-2005-25 and/or 
SR-NASD-2005-043. 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, 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 
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, 450 Fifth Street, NW., Washington, DC 20549. Copies of 
such filing also will be available for inspection and copying at the 
principal offices of the NYSE and 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 Numbers SR-NYSE-2005-25 and/or SR-NASD-2005-
043 and should be submitted on or before May 27, 2005.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\30\
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    \30\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. E5-2212 Filed 5-5-05; 8:45 am]
BILLING CODE 8010-01-P