[Federal Register Volume 70, Number 216 (Wednesday, November 9, 2005)]
[Notices]
[Pages 68122-68124]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-22335]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52727; File No. SR-NASD-2005-121]


Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Notice of Filing and Immediate Effectiveness of Proposed 
Rule Change Relating to Amendments to Rule 3012, Rule 3013, and IM-3013

November 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 October 14, 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, and II below, which Items have been prepared by NASD. NASD has 
designated the proposed rule change as constituting a ``non-
controversial'' rule change pursuant to Section 19(b)(3)(A) of the Act 
\3\ and Rule 19b-4(f)(6) thereunder,\4\ which renders the proposal 
effective upon receipt of this filing by the Commission. 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\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    NASD is proposing to amend NASD Rule 3012 (Supervisory Control 
System), Rule 3013 (Annual Certification of Compliance and Supervisory 
Processes), and IM-3013 (Annual Compliance and Supervision 
Certification) to allow members, by no later than April 1, 2006, to 
submit the initial annual report required by Rule 3012 and to execute 
the initial annual certification required by Rule 3013 and IM-3013. 
Below is the text of the proposed rule change. Proposed new language is 
in italics.
* * * * *
3012. Supervisory Control System
    (a) General Requirements
    (1) Each member shall designate and specifically identify to NASD 
one or more principals who shall establish, maintain, and enforce a 
system of supervisory control policies and procedures that (A) test and 
verify that the 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 (B) create additional or amend supervisory procedures where 
the need is identified by such testing and verification. The designated 
principal or principals must submit to the member's senior management 
no less than annually, a report \5\ detailing each member's system of 
supervisory controls, the summary of the test results and significant 
identified exceptions, and any additional or amended supervisory 
procedures created in response to the test results.
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    \5\ Rule 3012 became effective on January 31, 2005, which would 
require a member's first Rule 3012 report to be submitted by no 
later than January 31, 2006 and at least annually thereafter; 
however, a member may elect to submit its first Rule 3012 report by 
no later than April 1, 2006. Importantly, a member's first Rule 3012 
report must encompass the period from January 31, 2005 (the 
effective date of Rule 3012) up to the submission date (or a 
reasonable period of time immediately preceding the submission 
date). Each ensuing Rule 3012 report may not be for a period greater 
than 12 months from the date of the preceding Rule 3012 report (but 
may be for a shorter time period if a member elects to prepare a 
report more frequently than annually).
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    (2) No change.
    (b) Dual Member No change.
* * * * *
Rule 3013. Annual Certification of Compliance and Supervisory Processes
    (a) Designation of Chief Compliance Officer No change.
    (b) Annual Certification.
    Each member shall have its chief executive officer (or equivalent 
officer) certify annually,\6\ as set forth in IM-3013, that the member 
has in place processes to establish, maintain, review, test and modify 
written compliance policies and written supervisory procedures 
reasonably designed to achieve compliance with applicable NASD rules, 
MSRB rules and federal securities laws and regulations, and that the 
chief executive officer has conducted one or more meetings with the 
chief compliance officer in the preceding 12 months to discuss such 
processes.
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    \6\ Rule 3013 and IM-3013 became effective on December 1, 2004, 
which would require a member's first certification to be executed by 
December 1, 2005 and annually thereafter; however, a member may 
elect to execute its first certification by no later than April 1, 
2006 and annually thereafter.
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* * * * *

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 3013 requires that each member's chief executive officer 
(``CEO''), or other equivalent officer, certify annually according to 
the terms set forth in IM-3013 that the member has in place processes 
to establish, maintain, review, test and modify its written supervisory 
procedures. The first annual certification is currently due by December 
1, 2005.\7\ Before a CEO can complete the annual certification 
requirement, IM-3013 requires, among other things, that the CEO, chief

[[Page 68123]]

compliance officer (``CCO''), and any other necessary officers review a 
report that evidences the member's processes.
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    \7\ Each ensuing annual certification must be effected no later 
than on the anniversary date of the previous year's certification. 
See IM-3013, n.1.
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    Rule 3012(a)(1) requires, among other things, that each member 
submit to its senior management no less than annually a report 
detailing its supervisory controls system that will test and verify the 
adequacy of its supervisory procedures, the summary of the test 
results, and any additional or amended supervisory procedures created 
in response to the test results. Currently, members must complete and 
submit the report by January 31, 2006 and at least annually 
thereafter.\8\
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    \8\ See Notice to Members 04-71 (October 2004) (announcing, 
among other things, the effective date of January 31, 2005); see 
also Transcript of December 16, 2004 Call-in Workshop 
(``Transcript'') reminding members that Rule 3012 Report is due 
within one year of the January 31, 2005 effective date and at least 
annually thereafter. The Transcript is available at www.nasd.com/SupervisoryControl.
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    Since the adoption of these rules, NASD has received a number of 
inquiries from members regarding whether the reports required by Rule 
3012 and IM-3013 could be combined. Although NASD has advised members 
that they may combine the Rule 3012 report with the report required by 
IM-3013 as long as all of the required elements of the respective 
reports are addressed and clearly identified, members have indicated 
that it would be difficult to combine the reports since the first 
annual certification required by Rule 3013 must be executed by December 
1, 2005 (and thus the related report must be prepared in advance of, 
but reasonably close in time to, such execution), while the Rule 3012 
report is not required to be submitted until January 31, 2006.
    In addition, dual members have inquired whether they can combine 
the reports required by Rule 3012 and IM-3013 with the Annual Report 
required by NYSE Rule 342.30, which is due by April 1st of each year. 
As support for their request, dual members have noted that the NYSE 
Rule 342.30 Annual Report mandates similar, though not identical, 
requirements as the Rule 3012 report. Dual members have also noted that 
IM-3013 specifically provides that the IM-3013 report may be combined 
with any other compliance or other similar report required by another 
self-regulatory organization. Dual members assert that being able to 
complete one report instead of being required to complete three reports 
that could cover overlapping topics and issues would prevent the 
duplication of significant resources. However, because of the disparate 
dates by which the three reports must be completed, the dual members 
have indicated that it would be nearly impossible to combine the 
reports.\9\
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    \9\ It should be noted that Rule 3012(b) provides that any dual 
member electing to comply with the substantially similar 
requirements of the NYSE shall be deemed in compliance with the 
provisions of Rule 3012. A dual member must comply with all of the 
NYSE's substantially similar requirements to be considered in 
compliance with Rule 3012. Accordingly, any dual member electing to 
comply with the substantially similar requirements of the NYSE would 
comply with Rule 3012's reporting requirement by completing the NYSE 
Rule 342.30 Annual Report. The member, however, would still be 
required to complete the report required by IM-3013 prior to the 
initial certification date required by Rule 3013 and IM-3013.
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    Accordingly, NASD is filing this proposed rule change to address 
those issues. Specifically, the proposed rule change will amend Rule 
3012 to provide that a member may submit its initial Rule 3012 report 
by no later than April 1, 2006. The proposed rule change explains that 
due to Rule 3012's January 31, 2005 effective date, a member choosing 
to rely on any date after January 31, 2005 through April 1, 2006 as the 
submission deadline for its initial Rule 3012 report will have to 
encompass the period from January 31, 2004 up to that submission date 
(or a reasonable period of time immediately preceding the submission 
date). Each ensuing Rule 3012 report must encompass the 12 months 
following the previous Rule 3012 report (or such shorter time period if 
a member elects to prepare a report more frequently than annually).
    Additionally, the proposed rule change will amend Rule 3013 and IM-
3013 to provide that a member may execute its first annual 
certification by no later than April 1, 2006 and annually thereafter. A 
member should keep in mind that the report required by IM-3013 that 
evidences the member's processes must be prepared in advance of, but 
reasonably close in time to, April 1, 2006.
    As a result of these proposed changes members will be able, if they 
so choose, to combine the respective reports, provided the single 
report clearly identifies and addresses all of the requirements set 
forth in Rule 3012, Rule 3013 and IM-3013. The proposed rule change 
will also allow dual members to comply with the respective reporting 
requirements of Rule 3012, Rule 3013, IM-3013, and NYSE Rule 342.30 
without undue duplication of effort.
    NASD has filed the proposed rule change for immediate effectiveness 
and has requested that the Commission waive the 5-day pre-filing 
requirement and the 30-day period for the proposed rule change to 
become operative, in order to allow NASD members to have as much time 
as possible to adjust their procedures to the new submission dates for 
the initial Rule 3012 report and the initial certification required by 
Rule 3013 and IM-3013. The effective date and the implementation date 
will be the date of filing, October 14, 2005.
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 that synchronizing the date of the 
report required by Rule 3012 and the date of execution of the 
certification required by Rule 3013 and IM-3013 will reasonably serve 
to minimize duplication of effort on the part of members, while still 
ensuring the protection of investors.

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

    The foregoing proposed rule change is subject to Section 
19(b)(3)(A)(iii) of the Act \10\ and Rule 19b-4(f)(6) thereunder \11\ 
because the proposal (i) Does not significantly affect the protection 
of investors or the public interest; (ii) does not impose any 
significant burden on competition; and (iii) does not become operative 
for 30 days from the date on which it was filed, or such shorter time 
as the Commission may designate if consistent with the protection of 
investors and the public interest; provided that the self-regulatory 
organization has given the Commission notice of its intent to file the 
proposed rule change, along with a brief description of the text of the 
proposed rule change, at least five business days prior to the date of 
filing of the

[[Page 68124]]

proposed rule change, or such shorter time as designated by the 
Commission.
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    \10\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \11\ 17 CFR 240.19b-4(f)(6).
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    NASD has requested that the Commission waive the five-day pre-
filing requirement and the 30-day operative delay so that the proposed 
rule change will become immediately effective upon filing. The 
Commission believes that waiving the five-day pre-filing provision and 
the 30-day operative delay is consistent with the protection of 
investors and the public interest.\12\ Waiving the pre-filing 
requirement and accelerating the operative date will merely permit the 
immediate implementation of changes that will allow firms to more 
efficiently discharge their reporting obligations. For these reasons, 
the Commission designates the proposed rule change as effective and 
operative immediately.
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    \12\ For purposes only of accelerating the operative date of 
this proposal, the Commission has considered the proposed rule's 
impact on efficiency, competition, and capital formation. 15 U.S.C. 
78c(f).
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    At any time within 60 days of the filing of such proposed rule 
change, the Commission may summarily abrogate such rule change 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.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to [email protected]. Please include 
File Number SR-NASD-2005-121 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-2005-121. 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-2005-121 and should 
be submitted on or before November 30, 2005.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 05-22335 Filed 11-8-05; 8:45 am]
BILLING CODE 8010-01-P