[Federal Register Volume 70, Number 118 (Tuesday, June 21, 2005)]
[Notices]
[Pages 35756-35759]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-3191]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51816; File No. SR-Phlx-2005-23]


Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; 
Notice of Filing and Order Granting Accelerated Approval of Proposed 
Rule Change and Amendment No. 1 Thereto Relating to the Retroactive 
Amendment of Exchange Rule 640(a) Pertaining to the Continuing 
Education Regulatory Element Requirement

June 9, 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 April 15, 2005 the Philadelphia Stock Exchange, Inc. (``Phlx'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'' or ``SEC'') the proposed rule change as described in 
Items I and II below, which Items have been prepared by Phlx. On May 
10, 2005, the Exchange filed Amendment No. 1 to the proposed rule 
change to make the effective date of the proposed rule change April 4, 
2005. The Commission is publishing this notice to solicit comments on 
the proposed rule change, as amended from interested persons, and is 
approving the proposed rule change, as amended, on an accelerated 
basis.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

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

    The Phlx proposes to amend Phlx Rule 640(a) to eliminate all 
exemptions from the requirement to complete the Regulatory Element of 
the Continuing Education Program. Below is the text of the proposed 
rule change. Proposed new language is in italics. Proposed deletions 
are in [brackets].

Continuing Education for Registered Persons

Rule 640. (a) Regulatory Element [--]
    (1) Requirements--No member or participant organization 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 continuing education requirements of 
paragraph (a) of this Rule.
    Each registered person shall complete the Regulatory Element of the 
continuing education program on the occurrence of their second 
registration anniversary date(s), and every three years thereafter or 
as otherwise prescribed by the Exchange. On each occasion[s], 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 of the program shall be determined by the Exchange 
for each registration category of persons subject to the rule.
    [(1) Persons who have been continuously registered for more than 
ten years as of the effective date of this Rule are exempt from the 
requirements of this rule relative to participation in the Regulatory 
Element of the continuing education program, provided such persons have 
not been subject to any disciplinary action within the last ten years 
as enumerated in subparagraph (a)(3)(i) and (ii) of this Rule. However, 
persons delegated supervisory responsibility or authority pursuant to 
PHLX Rule 748 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 
such supervisory person has not been subject to any disciplinary action 
under paragraphs (a)(3)(i) and (ii) of this Rule.]
    [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 subsection (a)(3)(i) 
and (ii), 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.]
    (2) No change.
    (3) Disciplinary Actions [Re-entry into program]--Unless otherwise 
determined by the Exchange, a registered person will be required to re-
take [re-enter] the Regulatory Element of the program and satisfy the 
program's requirements in their entirety in the event such person:
    (i) Becomes subject to any statutory disqualification as defined in 
Section 3(a)(39) of the Securities Exchange Act of 1934;
    (ii) 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

[[Page 35757]]

organization, or as imposed by any such regulatory or self-regulatory 
organization in connection with a disciplinary proceeding; or
    (iii) Is ordered as a sanction in a disciplinary action to re-take 
[re-enter] the Regulatory Element [continuing education program] by any 
securities governmental agency or securities 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 (i) 
above, or the disciplinary action becoming final, in the case of (ii) 
or (iii) above. The date that the disciplinary action becomes final 
will be deemed the person's new base date [of initial registration 
anniversary date] for purposes of this Rule.
    (4) No change.
    (b) No change.
Commentary
    .01 No change.
    .02 No change.
    .03 Any registered person who has terminated association with a 
registered broker or dealer and who has, within two years of the date 
of termination, become reassociated in a registered capacity with a 
registered broker or dealer shall participate in the Regulatory Element 
at such intervals that may apply (second registration anniversary and 
every three years thereafter) based on the initial registration also 
known as the ``base date'', anniversary date, rather than based on the 
date of reassociation in a registered capacity.
    Any former registered person who becomes reassociated in a 
registered capacity with a registered broker or dealer more than two 
years after termination as such will be required to satisfy the 
program's requirements in their entirety, (second registration 
anniversary and every three years thereafter) based on the most recent 
registration date.
    .04 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, Phlx included statements 
concerning the purpose of, and basis for the proposed rule change, as 
amended and discussed any comments it had received on the proposed rule 
change as amended. The text of these statements may be examined at the 
places specified in Item III below. Phlx 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
    The Phlx represents that the purpose of the proposed rule change is 
to eliminate all exemptions from the Continuing Education Regulatory 
Element Program for registered representatives and, as such, to make 
Phlx Rule 640(a) consistent with applicable rules of other self-
regulatory organizations (``SROs'').\3\
---------------------------------------------------------------------------

    \3\ See Securities Exchange Act Release Nos. 50404 (September 
16, 2004), 69 FR 57126 (September 23, 2004); 50456 (September 27, 
2004), 69 FR 59285 (October 4, 2004); 50557 (October 18 2004), 69 FR 
62311 (October 25, 2004); and 50651 (November 10, 2004) 69 FR 67374 
(November 17, 2004).
---------------------------------------------------------------------------

    Currently, Phlx Rule 640(a) sets forth the rules governing the 
requirements for registered representatives to participate in the 
Continuing Education Regulatory Element Program (the ``Regulatory 
Element'').\4\ The Regulatory Element is a computer-based education 
program administered by the National Association of Securities Dealers 
(``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 representatives, and the S101 General Program for Series 7 and 
all other registrations.
---------------------------------------------------------------------------

    \4\ The Continuing Education Program also has a ``Firm 
Element.'' See Phlx Rule 640(b). The Firm Element of the Continuing 
Education 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\ Phlx Rule 640(a)(4) permits a member firm to deliver the 
Regulatory Element to registered persons on firm premises (``In-Firm 
Delivery'') as an alternative 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, Phlx Rule 
640(a)(4)(E)(iii) 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.
---------------------------------------------------------------------------

    According to the NASD, approximately 135,000 registered persons are 
exempt from the Regulatory Element. These include registered persons 
who, when the Continuing Education 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 (so-called ``grandfathered'' persons). These also 
include those persons who had ``graduated'' from the Regulatory Element 
by satisfying their tenth anniversary requirement before July 1998, 
when Phlx Rule 640 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\
---------------------------------------------------------------------------

    \7\ For purposes of Phlx Rule 640(a), 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-take the Regulatory Element. See 
Phlx Rule 640(a)(3).
    \8\ When Phlx Rule 640 was first adopted in 1995, the Regulatory 
Element 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.
---------------------------------------------------------------------------

    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

[[Page 35758]]

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.
---------------------------------------------------------------------------

    \9\ As of the date of this filing, the Council consists of 17 
individuals, six representing SROs, and 11 representing the 
industry. The Council was organized in 1995 to facilitate 
cooperative industry/regulatory coordination of the Continuing 
Education 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.
---------------------------------------------------------------------------

    In addition, the Council introduced a new content module to the 
Regulatory Element programs that specifically addresses ethics and 
requires participants to recognize ethical issues in given situations. 
Participants are 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 to Phlx Rule 640(a) would eliminate the current Regulatory 
Element exemptions. The other SRO members of the Council also supported 
eliminating the exemptions and are pursuing amendments to their 
respective rules.
    Phlx will announce the April 4, 2005 effective date of the proposed 
rule change in a notice to membership to be published upon approval of 
the proposed rule change by the Commission.\10\ Following approval of 
the proposed rule change, implementation will be based on the 
application of the existing requirements of the Regulatory Element 
(Phlx Rule 640(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 Phlx Rule 
640(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)
---------------------------------------------------------------------------

    \10\ Telephone conversation between Edith H. Hallahan, Senior 
Vice President and Deputy General Counsel and Mia C. Zur, Attorney, 
Division of Market Regulation, Commission (June 7, 2005).

------------------------------------------------------------------------
                                                               First
                                                            regulatory
                                                              element
                                                          requirement of
                                                           a registered
                                                              person
                                              Initial        formerly
            Registered person              registration     exempt from
                                               date       the regulatory
                                                              element
                                                           (assuming an
                                                          effective date
                                                            of April 4,
                                                               2005)
------------------------------------------------------------------------
A.......................................     \11\ 4/4/85          4/4/05
B.......................................          7/1/83          7/1/06
C.......................................          8/1/84          8/1/07
D.......................................          4/3/85          4/3/08
------------------------------------------------------------------------

    In addition, the proposed rule amendment would replace references 
in Phlx Rule 640(a)(3) to ``re-entry'' in the Regulatory Element with a 
requirement to ``re-take'' the Regulatory Element to clarify that the 
significant disciplinary action provisions apply to all registered 
persons and not only to currently exempt persons. A person's base date 
may also be revised to be the date on which a formerly registered 
person re-qualifies for association with a member or member firm.
---------------------------------------------------------------------------

    \11\ 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.
---------------------------------------------------------------------------

2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the provisions of Section 6(c) of the Act,\12\ in general and furthers 
the objectives of Section 6(c)(3)(B) of the Act,\13\ in particular, 
since under that section, it is the Exchange's responsibility to 
prescribe standards of training, experience and competence for persons 
associated with Exchange members and member organizations.
---------------------------------------------------------------------------

    \12\ 15 U.S.C. 78f(c).
    \13\ 15 U.S.C. 78f(c)(3)(B).
---------------------------------------------------------------------------

    Additionally, under Section 6(c)(3)(B) of the Act,\14\ 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 are prescribed by the rules of 
the Exchange. Pursuant to this statutory obligation, the Exchange is 
rescinding all currently effective exemptions from required 
participation in the Regulatory Element programs, as prescribed by Phlx 
Rule 640(a).
---------------------------------------------------------------------------

    \14\ Id.
---------------------------------------------------------------------------

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

    Phlx believes that the proposed rule change, as amended, does not 
impose 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. 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-Phlx-2005-23 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-9303.
    All submissions should refer to File Number SR-Phlx-2005-23. 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 Phlx. All comments received will be posted

[[Page 35759]]

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-Phlx-2005-23 and should be submitted on or before July 
12, 2005.

IV. Commission's Finding and Order Granting Accelerated Approval of 
Proposed Rule Change

    The Commission find good cause pursuant to Section 19(b)(2) of the 
Act \15\ for approving the proposed rule change and Amendment No. 1 
prior to the thirtieth day after publication in the Federal Register. 
The Commission finds that the proposed rule change is consistent with 
the requirements of the Act and the rules and regulations thereunder 
applicable to Phlx and, in particular, the requirements of Section 
6(c)(3)(B) and the rules and regulations thereunder.\16\ After review 
the Commission finds that the proposed rule change is consistent with 
the requirements of Section 6(c)(3)(B) of the Act\17\ because under 
this section the Exchange must prescribe standards of training, 
experience and competence for persons associated with Exchange members 
and member organizations.\18\ Specifically, the Commission believes 
that the proposed rule change should help to ensure that all registered 
persons are kept up-to-date on regulatory, compliance, and sales 
practice-related industry issues. The Commission also believes that the 
proposed rule change, as amended, will reinforce the importance of 
compliance with just and equitable principles of trade by exposing all 
registered industry participants to the full benefits of the Regulatory 
Element programs, which include a new Regulatory Element module that 
focuses specifically on ethics.
---------------------------------------------------------------------------

    \15\ 15 U.S.C. 78s(b)(2).
    \16\ 15 U.S.C. 78f(b)(3)(B).
    \17\ Id.
    \18\ In approving this proposed rule change, as amended, the 
Commission notes that it has considered the proposed rule's impact 
on efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
---------------------------------------------------------------------------

    The Commission further believes that accelerating the approval of 
the proposed rule change and allowing for retroactive effectiveness of 
the Exchange's proposed rule change to April 4, 2005 is necessary to 
make Phlx rules consistent with respect to elimination of exemptions 
from the continuing education requirement and to have a consistent 
implementation date.\19\
---------------------------------------------------------------------------

    \19\ See infra, note 6.
---------------------------------------------------------------------------

    Based on the above, the Commission believes that there is good 
cause, consistent with Section 19(b)(2) of the Act \20\ to approve the 
proposal, as amended, on an accelerated basis.
---------------------------------------------------------------------------

    \20\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\21\ that the proposed rule change (SR-Phlx-2005-23) is hereby 
approved on an accelerated basis.
---------------------------------------------------------------------------

    \21\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\22\
---------------------------------------------------------------------------

    \22\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5-3191 Filed 6-20-05; 8:45 am]
BILLING CODE 8010-01-P