[Federal Register Volume 70, Number 152 (Tuesday, August 9, 2005)]
[Notices]
[Pages 46242-46243]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-4302]



[[Page 46242]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52195; File No. SR-NASD-2005-084]


Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Notice of Filing of Proposed Rule Change and Amendment 
Nos. 1 and 2 Thereto Relating to Amendments to the Rule Regarding 
Supervisory Control Systems, Rule 3012, To Require Notification of 
Reliance on ``Limited Size and Resources'' Exception

August 3, 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 June 23, 2005, the National Association of Securities Dealers, Inc. 
(``NASD'') filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission'') the proposed rule change as described in items I, 
II, and III below, which items have been prepared by NASD. On July 8, 
2005, NASD filed amendment No. 1 to the proposed rule.\3\ On July 27, 
2005, NASD filed amendment No. 2 to the proposed rule.\4\ 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.
    \3\ The amendment clarified the rule's text.
    \4\ Amendment No. 2 replaced and superseded Amendment No. 1. 
Amendment No. 2 further clarified the rule's text.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    NASD is proposing to amend the rule regarding supervisory control 
systems, Rule 3012, to require members relying on the ``limited size 
and resources'' exception to Rule 3012's general supervisory 
requirement for conducting producing managers' supervisory reviews to 
report electronically to NASD their reliance on the exception. Below is 
the text of the proposed rule change. Proposed new language is in 
italics; proposed deletions are in brackets.
* * * * *
    Rule 3012 Supervisory Control System
    (a) No Change.
    (1) No Change.
    (2) The establishment, maintenance, and enforcement of written 
supervisory control policies and procedures pursuant to paragraph (a) 
shall include:
    (A) Procedures that are reasonably designed to review and supervise 
the customer account activity conducted by the member's branch office 
managers, sales managers, regional or district sales managers, or any 
person performing a similar supervisory function.
    (i) General Supervisory Requirement. A person who is either senior 
to, or otherwise independent of, the producing manager must perform 
such supervisory reviews. For purposes of this Rule, an ``otherwise 
independent'' person: May not report either directly or indirectly to 
the producing manager under review; must be situated in an office other 
than the office of the producing manager; must not otherwise have 
supervisory responsibility over the activity being reviewed (including 
not being directly compensated based in whole or in part on the 
revenues accruing for those activities); and must alternate such review 
responsibility with another qualified person every two years or less.
    (ii) ``Limited Size and Resources'' Exception. If a member is so 
limited in size and resources that there is no qualified person senior 
to, or otherwise independent of, the producing manager to conduct the 
reviews pursuant to (i) above (e.g., a member has only one office or an 
insufficient number of qualified personnel who can conduct reviews on a 
two-year rotation), the reviews may be conducted by a principal who is 
sufficiently knowledgeable of the member's supervisory control 
procedures, provided that the reviews are in compliance with (i) to the 
extent practicable.
    (iii) Notification Requirement. If a member determines that it must 
rely on the ``limited size and resources'' exception set forth in (ii) 
above to conduct any of its producing managers' supervisory reviews, 
the member must notify NASD through an electronic process (or any other 
process prescribed by NASD) within 30 days of the date on which the 
member first relies on the exception,5 and annually thereafter.6 If a 
member subsequently determines that it no longer needs to rely on the 
exception to conduct any of its producing managers' supervisory 
reviews, the member must, within 30 days of ceasing to rely on the 
exception, notify NASD by using the electronic process or any other 
process prescribed by NASD.
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    \5\ The ``limited size and resources'' exception became 
effective on January 31, 2005, prior to the effective date of the 
notification requirement set forth in this subparagraph (iii). In 
the event a member is already relying on the ``limited size and 
resources'' exception (or determines to rely on the exception prior 
to the effective date of the notification requirement), the member 
must notify NASD of such reliance within 30 days of the effective 
date of the notification requirement.
    \6\ Members must ensure that each ensuing annual notification is 
effected no later than on the anniversary date of the previous 
year's notification.
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    [(iii)](iv) Documentation Requirement. A member relying on (ii) 
above must document in its supervisory control procedures the factors 
used to determine that complete compliance with all of the provisions 
of (i) is not possible and that the required supervisory systems and 
procedures in place with respect to any producing manager comply with 
the provisions of (i) above to the extent practicable.
* * * * *

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
    Rule 3012 (Supervisory Control System) requires members to have a 
system of supervisory control policies and procedures that tests and 
verifies that a member's supervisory procedures are reasonably designed 
with respect to the activities of the member and its registered 
representatives and associated persons to achieve compliance with 
applicable securities laws and regulations, and with applicable NASD 
rules, and to amend those supervisory procedures when the testing and 
verification demonstrate a need to do so. Rule 3012 also requires that 
a member's supervisory control policies and procedures include, among 
other things, procedures that are reasonably designed to review and 
supervise the customer account activity conducted by a member's 
producing managers.
    Generally, only a person senior to or ``otherwise independent'' of 
a producing manager may conduct the producing manager's reviews. 
However, Rule 3012 provides a limited exception for any member firm 
that is so limited in size and resources (the ``limited size and 
resources'' exception) that the member

[[Page 46243]]

does not have associated persons who can conduct the required 
supervisory reviews. In such situations, a member may have the reviews 
conducted by a principal who is sufficiently knowledgeable of the 
member's supervisory control procedures.
    In its Order approving Rule 3012, the SEC specified that NASD must 
notify the SEC of those members that elect to rely on Rule 3012's 
``limited size and resources'' exception.\7\ To fulfill this 
obligation, NASD will need to identify those members relying on the 
exception. Accordingly, NASD is filing this rule change requiring firms 
that rely on the ``limited size and resources'' exception to notify 
NASD of their reliance on the exception. In Notice to Members 04-71 
(October 2004), the Notice announcing the SEC's approval of the 
Supervisory Control Amendments, NASD advised its members of its intent 
to file this rule change.
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    \7\ See Exchange Act Release No. 50477 (Sept. 30, 2004), 69 FR 
59972 (Oct. 6, 2004) (SR-NASD-2004-116).
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    The proposed rule change will require a member that has determined 
that it must rely on the ``limited size and resources'' exception to 
Rule 3012 to conduct any of its producing managers' supervisory 
reviews, to notify NASD electronically (or through any other process 
prescribed by NASD) within thirty (30) days of the date on which the 
member first relies on the exception.\8\ Afterwards, the member will 
need to notify NASD of its continued reliance on the exception on an 
annual basis. Members must ensure that each ensuing annual notification 
is effected no later than on the anniversary date of the previous 
year's notification. If a member determines that it no longer needs to 
rely on the ``limited size and resources'' exception to Rule 3012 to 
conduct any of its producing managers' supervisory reviews, the member 
must notify NASD electronically (or through any other process 
prescribed by NASD) within thirty (30) days of ceasing to rely on the 
exception.
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    \8\ Because the ``limited size and resources'' exception became 
effective on January 31, 2005, a member may already be relying on 
the exception prior to the effective date of the proposed rule 
change and, consequently, will be unable to comply with the rule 
change's requirement that NASD be notified within thirty (30) days 
of the date on which the member first relies on the exception. In 
such instance, the proposed rule change requires the member to 
notify NASD within thirty (30) days of the rule change's effective 
date.
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    NASD has recently designed an electronic reporting system that will 
enable members to notify NASD of their reliance on the exception. 
Members will be able to access this reporting system on the effective 
date of this proposed rule change.
    NASD will announce the effective date of the proposed rule change 
in a Notice to Members to be published no later than 60 days following 
Commission approval. The effective date will be 30 days following 
publication of the Notice to Members 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, 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 this notification requirement will help 
ensure that NASD members have in place supervisory controls policies 
and procedures that are reasonably designed to prevent fraudulent and 
manipulative acts, thereby protecting investors and the public 
interest.

(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, as amended, is consistent with the Act. Comments may be 
submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to [email protected]. Please include 
File Number SR-NASD-2005-084 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-NASD-2005-084. 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, 100 F Street, 
NE., Washington, DC 20549. 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-
084 and should be submitted on or before August 30, 2005.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. E5-4302 Filed 8-8-05; 8:45 am]
BILLING CODE 8010-01-P