[Federal Register Volume 70, Number 247 (Tuesday, December 27, 2005)]
[Notices]
[Pages 76477-76479]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-7839]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52980; File No. SR-NASD-2005-134]


Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Notice of Filing and Immediate Effectiveness of Proposed 
Rule Change Relating to the Status of Registered Persons and Sole 
Proprietors Serving in the Armed Forces of the United States

December 19, 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 November 15, 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. 
NASD has designated the proposed rule change as constituting a stated 
policy, practice, or interpretation with respect to the meaning, 
administration, or enforcement of an existing rule of the self-
regulatory organization pursuant to Section 19(b)(3)(A)(i) of the Act 
\3\ and Rule 19b-4(f)(1) thereunder,\4\ which renders the proposal 
effective upon filing with the Commission. The Commission is publishing 
this notice to solicit comments on the proposed rule change from 
interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A)(i).
    \4\ 17 CFR 240.19b-4(f)(1).
---------------------------------------------------------------------------

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

    NASD is proposing to amend NASD IM-1000-2 to (1) clarify that the 
scope of the relief provided in the IM extends to any registered person 
of a firm who volunteers for or is called into active military duty, 
not just registered representatives; (2) codify the staff's existing 
interpretation with respect to the receipt of transaction-related 
compensation by registered persons who volunteer for or are called into 
active military duty; (3) clarify that the relief provided to a 
registered person of a firm who volunteers for or is called into active 
military duty is available to the person during the period that such 
person remains registered with the firm, regardless of whether the 
person returns to employment at a different firm upon completion of his 
or her active military duty; and (4) clarify that the ``inactive'' 
status designation is available to registered persons and sole 
proprietors who volunteer for or are called into active duty in the 
Armed Forces of the United States and is available to them only while 
they remain on active military duty.
    Below is the text of the proposed rule change. Proposed new 
language is in italics; proposed deletions are in [brackets].
* * * * *
B. SCHEDULE A TO NASD BY-LAWS
* * * * *
IM-1000-2. Status of [Sole Proprietors and Registered Representatives] 
Persons Serving in the Armed Forces of the United States
    (a) Inactive Status of Currently Registered Persons
    (1) A[ny] [R]registered [Representative] person of a member who 
volunteers for or is called into active duty in the Armed Forces of the 
United States shall be placed, after proper notification to [the 
Executive Office] NASD, upon inactive status and need not be re-
registered by such member upon his or her return to active employment 
with the member. Such a person will remain eligible to receive 
transaction-related compensation, including continuing commissions, 
because he or she remains registered with a member of NASD. The 
employing member also may allow such a person to enter into an 
arrangement with another registered person of the member to take over 
and service the person's accounts and to share transaction-related 
compensation based upon the business generated by such accounts. 
However, since such persons are inactive, they may not perform any of 
the duties performed by a registered person.

[Any member (Sole Proprietor) who temporarily closes his or her 
business by reason of volunteering or being called into the Armed 
Forces of the United States, shall be placed, after proper notification 
to the Executive Office, on inactive status until his or her return to 
active participation in the investment banking and securities 
business.]

    (2) A [R]registered [Representative] person who is placed on 
inactive status [as set forth above] pursuant to this paragraph (a) 
shall not be included within the definition of ``Personnel'' for 
purposes of the dues or assessments as provided in Article VI of the 
NASD By-Laws.
    [Any member placed on inactive status as set forth above shall not 
be required to pay dues or assessments during the pendency of such 
inactive status and shall not be required to pay an admission fee upon 
return to active participation in the investment banking and securities 
business.]
    (3) A [R]registered [Representative] person who is placed on 
inactive status [as set forth above] pursuant to this paragraph (a) 
shall not be required to complete either of the Regulatory or Firm 
Elements of the continuing education requirements set forth in Rule 
1120 during the pendency of such inactive status.
    (4) The relief provided in subparagraphs (a)(1), (a)(2), and (a)(3) 
shall be available to a registered person who is placed on inactive 
status pursuant to this paragraph (a) during the period that such a 
person remains registered with the member with which he or she was 
registered at the beginning of active duty in the Armed Forces of the 
United States, regardless of whether the person returns to active 
employment with another member upon completion

[[Page 76478]]

of his or her active duty in the Armed Forces of the United States.
    (5) The relief described in this paragraph (a) will be provided 
only to a person registered with a member and only while the person 
remains on active military duty.

(b) Inactive Status of Sole Proprietorships

    (1) A member that is a sole proprietor who temporarily closes his 
or her business by reason of volunteering for or being called into 
active duty in the Armed Forces of the United States, shall be placed, 
after proper notification to NASD, on inactive status while the member 
remains on active military duty.
    (2) A sole proprietor member placed on inactive status as set forth 
in this paragraph (b) shall not be required to pay dues or assessments 
during the pendency of such inactive status and shall not be required 
to pay an admission fee upon return to active participation in the 
investment banking and securities business.
    (3) The relief described in this paragraph (b) will be provided 
only to a sole proprietor member and only while the person remains on 
active military duty.
* * * * *

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
    Since the September 11, 2001 attacks, NASD has provided tailored 
regulatory relief to securities industry professionals who volunteer 
for or are called into active military duty. Most notably, in January 
2002, NASD filed with the SEC for immediate effectiveness a rule change 
that amended NASD IM-1000-2 to codify the staff's position regarding 
the relief from NASD Rule 1120 (Continuing Education Requirements) for 
securities industry professionals who volunteer for or are called into 
active military duty.\5\
---------------------------------------------------------------------------

    \5\ See Securities Exchange Act Release No. 45259 (January 9, 
2002), 67 FR 2256 (January 16, 2002) (Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change to Relieve Registered 
Representatives Serving in the Armed Forces From Continuing 
Education Requirements) (SR-NASD-2002-03).
---------------------------------------------------------------------------

    NASD IM-1000-2 currently permits a firm to place a registered 
representative on ``inactive'' status while serving in the Armed Forces 
of the United States. Such ``inactive'' status excuses a registered 
representative from continuing education obligations, waives dues and 
assessments, and ensures that he or she is not subject to the two-year 
expiration period for securities licenses of persons who cease to be 
registered with a member (``two-year licensing expiration 
provisions'').\6\
---------------------------------------------------------------------------

    \6\ NASD Rules 1021(c), 1031(c), and 1041(c) provide that if a 
person does not register with a member within two years of his or 
her last registration, his or her qualification as a principal, 
representative, or assistant representative will lapse and the 
person must then retest to function as a principal, representative, 
or assistant representative. In the case of a person on ``inactive'' 
status due to active military duty, because he or she is considered 
registered for purposes of NASD Rules, the ``two-year licensing 
expiration provisions'' do not apply.
---------------------------------------------------------------------------

    Additionally, following discussions with the SEC staff, NASD 
published on its Web site guidance that provides that ``inactive'' 
registered persons serving in the Armed Forces of the United States may 
receive transaction-related compensation, provided that they do not 
perform any functions of a registered person while on ``inactive'' 
status.\7\
---------------------------------------------------------------------------

    \7\ See Registered Persons on Active Military Duty (available 
at: http://www.nasd.com/web/idcplg?IdcService=SS_GET_PAGE&ssDocName=NASDW_014635&ssSourceNodeId=1091 1091). The NASD 
staff's interpretation with respect to the receipt of transaction-
related compensation by registered persons serving in the Armed 
Forces of the United States is consistent with the New York Stock 
Exchange, Inc.'s (``NYSE'') interpretation to NYSE Rule 345(a), 
which the NYSE codified in June 2002. See NYSE Interpretation 
Handbook, NYSE Rule 345(a)/03. Telephone conversation between Mia 
Zur, Attorney, Jan Woo, Attorney, Division, Commission, and Afshin 
Atabaki, Counsel, NASD, dated December 8, 2005.
---------------------------------------------------------------------------

    NASD has recently received requests for further clarification on 
the scope of NASD IM-1000-2 and the accompanying guidance. In 
particular, members have questioned whether the IM applies to 
registered persons other than registered representatives and whether 
registered persons can receive commissions on accounts that have been 
temporarily re-assigned in their absence. Members also have questioned 
the manner in which the relief applies if a registered person seeks 
employment with a different member upon completing active military 
duty.\8\
---------------------------------------------------------------------------

    \8\ Some members have questioned whether the return of a 
registered person who volunteers for or is called into active 
military duty to employment at a different member would negate or 
invalidate the relief the person has received while being deemed 
``inactive'' at his original employing member.
---------------------------------------------------------------------------

    In response, NASD is proposing the following amendments to NASD IM-
1000-2 to clarify its scope and codify NASD's existing guidance with 
respect to the receipt of transaction-related compensation by 
registered persons actively serving in the Armed Forces of the United 
States.
    First, NASD is proposing to amend NASD IM-1000-2 to clarify that 
the scope of the relief provided in the IM extends to any registered 
person of a member who volunteers for or is called into active military 
duty, not just registered representatives.
    Second, NASD is proposing to amend NASD IM-1000-2 to expressly 
state that a registered person of a member who volunteers for or is 
called into active duty in the Armed Forces of the United States and 
who is placed on ``inactive'' status will remain eligible to receive 
transaction-related compensation, including continuing commissions, 
because he or she remains registered with a member of NASD. In 
addition, NASD is proposing to amend NASD IM-1000-2 to provide that an 
employing member may allow such a person to enter into an arrangement 
with another registered person of the member to take over and service 
the person's accounts and to share transaction-related compensation 
based upon the business generated by such accounts. NASD also is 
proposing to amend NASD IM-1000-2 to state that such ``inactive'' 
persons may not perform any of the duties performed by a registered 
person. As noted above, the proposed amendments are consistent with 
NASD's existing interpretation with respect to the receipt of 
transaction-related compensation by registered persons actively serving 
in the Armed Forces of the United States, as well as the NYSE's 
interpretation to NYSE Rule 345(a).\9\
---------------------------------------------------------------------------

    \9\ The relief regarding the ongoing receipt of transaction-
based compensation does not extend to a sole proprietor member 
placed on ``inactive'' status pursuant to NASD IM-1000-2. Rather, 
consistent with current practice, NASD staff, in consultation with 
SEC staff, will address such issues in the context of a sole 
proprietor member placed on ``inactive'' status on a case-by-case 
basis. See NYSE Interpretation Handbook, NYSE Rule 345(a)/03. 
Telephone conversation between Mia Zur, Attorney, Jan Woo, Attorney, 
Division, Commission, and Afshin Atabaki, Counsel, NASD, dated 
December 8, 2005.
---------------------------------------------------------------------------

    Third, NASD is proposing to amend NASD IM-1000-2 to clarify that 
the

[[Page 76479]]

relief provided to a registered person of a member who volunteers for 
or is called into active military duty is available to the person 
during the period that such person remains registered with the member, 
regardless of whether the person returns to employment at a different 
member upon completion of his or her active military duty. Accordingly, 
under the proposal, NASD will not rescind the relief provided to such a 
person simply because he or she decides to register with another member 
upon completion of his or her active military duty. For instance, if a 
registered person of Firm Y who volunteers for or is called into active 
military duty and who is placed on ``inactive'' status with Firm Y 
decides to register with Firm Z upon completion of her active military 
duty, NASD will not invalidate the relief that was provided to the 
person while on ``inactive'' status with Firm Y.
    Fourth, NASD is proposing to amend NASD IM-1000-2 to clarify that 
the ``inactive'' status designation is available to registered persons 
and sole proprietors who volunteer for or are called into active duty 
in the Armed Forces of the United States and is available to them only 
while they remain on active military duty. Therefore, under the 
proposal, a registered person who is placed on ``inactive'' status 
pursuant to NASD IM-1000-2 will be removed from ``inactive'' status if 
the person ceases to be registered with a member while serving in the 
Armed Forces of the United States.\10\ If he or she re-registers with a 
member while still serving in the Armed Forces of the United States, he 
or she will again be eligible for ``inactive'' status pursuant to the 
IM. Further, under the proposal, a registered person or sole proprietor 
who is placed on ``inactive'' status pursuant to NASD IM-1000-2 will be 
removed from ``inactive'' status if the registered person or sole 
proprietor is no longer on active military duty.
---------------------------------------------------------------------------

    \10\ In conjunction with this filing, NASD is filing a proposed 
rule change with the Commission to address the status of persons who 
terminate their registration with a member while on active military 
duty and persons who commence their active military duty within two 
years after they have ceased to be registered with a member, 
including the application of the ``two-year licensing expiration 
provisions'' to such persons. See SR-NASD-2005-135.
---------------------------------------------------------------------------

    NASD is proposing to implement the proposed rule change immediately 
upon filing with the Commission.
2. Statutory Basis
    NASD believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\11\ which requires, among 
other things, that NASD's rules must be designed to prevent fraudulent 
and manipulative acts and practices, to promote just and equitable 
principles of trade, and, in general, to protect investors and the 
public interest. NASD believes that the proposed rule change provides 
appropriate tailored relief to persons actively serving in the Armed 
Forces of the United States in a manner consistent with NASD's goals of 
investor protection and market integrity.
---------------------------------------------------------------------------

    \11\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

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.

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 proposed rule change has become effective pursuant to Section 
19(b)(3)(A)(i) of the Act \12\ and Rule 19b-4(f)(1) thereunder,\13\ in 
that the proposed rule change constitutes a stated policy, practice, or 
interpretation with respect to the meaning, administration, or 
enforcement of an existing rule of the self-regulatory organization. 
NASD has proposed to implement the rule change immediately upon filing 
with the Commission. NASD will announce the proposed rule change in a 
Notice to Members to be published no later than 60 days after SEC 
Notice of this filing.
---------------------------------------------------------------------------

    \12\ 15 U.S.C. 78s(b)(3)(A)(i).
    \13\ 17 CFR 240.19b-4(f)(1).
---------------------------------------------------------------------------

    At any time within 60 days of the filing of the 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-2005-134 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-2005-134. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, 
all written statements with respect to the proposed rule change that 
are filed with the Commission, and all written communications relating 
to the proposed rule change between the Commission and any person, 
other than those that may be withheld from the public in accordance 
with the provisions of 5 U.S.C. 552, will be available for inspection 
and copying in the Commission's Public Reference Room. Copies of such 
filing also will be available for inspection and copying at the 
principal office of the 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 
File Number SR-NASD-2005-134 and should be submitted on or before 
January 17, 2006.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\14\
---------------------------------------------------------------------------

    \14\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Jonathan G. Katz,
Secretary.
[FR Doc. E5-7839 Filed 12-23-05; 8:45 am]
BILLING CODE 8010-01-P