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Self-Regulatory Organizations; Order Granting Approval of Proposed Rule Change by the National Association of Securities Dealers, Inc. Relating to Proposed Amendments to Rule 1120 Regarding Regulatory Element Contact Person

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Information about this document as published in the Federal Register.

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Start Preamble February 13, 2004.

I. Introduction

On December 9, 2003, the National Association of Securities Dealers, Inc. (“NASD” or “Association”) filed with the Securities and Exchange Commission (“Commission”), pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”)[1] and Rule 19b-4 thereunder,[2] a proposed rule change to amend NASD Rule 1120 to require that each member designate and identify to NASD the individual(s) who will receive Web Central Registration Depository (“CRD”) continuing education (“CE”) Regulatory Element e-mails. The proposed rule change further required that each member quarterly review and update the CE contact person(s) information. The proposed Start Printed Page 8256rule change was published for comment in the Federal Register on December 31, 2003.[3] The Commission received one comment letter on the proposed rule change.[4] The NASD submitted a letter in response to the Wellfleet Letter on February 12, 2004.[5] This order approves the proposed rule change, as originally proposed.

II. Description of the Proposed Rule Change

NASD Rule 1120 sets forth the CE requirements for registered persons. One of the two CE components is the Regulatory Element, a computer-based education program administered by the NASD to help ensure that registered persons are kept up-to-date on regulatory, compliance, and sales practice matters in the industry. 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. A registered person who becomes inactive for failing to complete the required Regulatory Element program (“CE inactive”) is prohibited from performing, or being compensated for, any activities requiring registration, including supervision. Members are required under NASD Rule 1120 to restrict CE inactive persons from performing the prohibited activities.

To help firms keep track of their registered persons' Regulatory Element status, NASD provides members with e-mail notifications through Web CRD when a person is both 90 days and 30 days away from the end of his or her period to complete the Regulatory Element program before becoming inactive. CRD also notifies members when a registered person at the firm becomes CE inactive. Currently, receipt of the e-mail notifications is optional, and some firms have elected not to receive the notifications. The proposed rule change would require each member to designate a contact person or persons to receive such CRD Regulatory Element e-mail notifications. The member would be required to provide to the NASD the name and e-mail address of the designated contact person(s) and to promptly notify the NASD of any changes to the information. The NASD intends to collect the contact information through the NASD Contact System [6] on the NASD Web site.

To ensure the accuracy of the CE contact information, the proposed rule change also would require that each member review and, if necessary, update its CE contact person information within 17 business days after the end of each calendar quarter.[7] The NASD is examining different methods of reminding members of the obligation to quarterly review and update contact person information, including the possibility of a web page linked to the act of filing the FOCUS report that would prompt members to update the contact person and/or through e-mail reminders to the designated CE contact person.[8]

III. Comment Summary

The Commission received one comment letter on the proposed rule change.[9] The commenter stated that either the NASD or the SEC should provide an NASD member firm with a notification 30 days before any rule requiring action by the firm. The commenter further noted that the current e-mail system can facilitate such notifications and that NASD member firms are currently provided with e-mail notifications, in certain instances.[10] Additionally, the commenter believed that notification reminders would simplify compliance with the rule.[11]

In its response letter, the NASD agreed that members would benefit from receiving reminders of the requirement to quarterly update the CE contact person(s) information, and that such reminders would serve to simplify and assist members' compliance with the rule change. In this regard, the NASD stated, in the purpose section of the proposed rule change, that the NASD is examining different methods of notifying members of their quarterly review and update requirement. The NASD methods under consideration include reminders that are tied to the act of filing quarterly FOCUS reports in the form of a link to the NASD Contact System where the CE contact person information will be collected, pop-up screen reminder messages, and periodic reminders through NASD's e-mail broadcasts distributed to members' Executive Representatives.

IV. Discussion

After careful consideration of the proposal, the Wellfleet Letter, and the NASD's response to the comment letter, the Commission finds that the proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities association,[12] and, in particular, with the requirements of section 15A of the Act.[13] Specifically, the Commission finds that the proposal is consistent with section 15A(b)(6) [14] of the Act in that the proposal is 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.

The Commission believes the NASD has adequately addressed the comment letter, and that the proposed rule change should help NASD firms avoid an NASD Rule 1120(a) violation by providing sufficient notice to enable firms to ensure that their registered persons complete the required Regulatory Element training or are prevented from conducting business if they become CE inactive. Further, the Commission believes that the proposed rule change may assist the NASD in its efforts to further automate various aspects of its examination program with a goal of removing a substantial portion of CE compliance inspections from on-site firm examinations. Start Printed Page 8257

V. Conclusion

It is therefore ordered, pursuant to section 19(b)(2) of the Act,[15] that the proposed rule change (SR-NASD-2003-183) be approved.

Start Signature

For the Commission, by the Division of Market Regulation, pursuant to delegated authority.[16]

Margaret H. McFarland,

Deputy Secretary.

End Signature End Preamble

Footnotes

3.  See Securities Exchange Act Release No. 48986 (December 23, 2003), 68 FR 75682.

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4.  See letter from Michael S. Zarin, Wellfleet Investments LLC, to Jonathan G. Katz, Secretary, Commission, dated January 8, 2004 (“Wellfleet Letter”).

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5.  See letter from Grace Yeh, Assistant General Counsel, NASD, to Katherine A. England, Assistant Director, Division, Commission, dated February 11, 2004.

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6.  Effective as of December 8, 2003, the NASD Contact System replaced the Member Firm Contact Questionnaire, the previous system used for members to update and maintain certain required contact information.

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7.  This proposed schedule is consistent with a member's quarterly FOCUS reporting schedule, as well as with the proposed rule change regarding members' business continuity plans. See Securities Exchange Act Release No. 46444 (August 30, 2002), 67 FR 57257 (September 9, 2002) (File No. SR-NASD-2002-108); Securities Exchange Act Release No. 47441 (March 4, 2003), 68 FR 11432 (March 10, 2003) (Notice of Filing of Amendment Nos. 1, 2, and 3 of File No. SR-NASD-2002-108); Securities Exchange Act Release No. 48503 (September 17, 2003), 68 FR 55686 (September 26, 2003) (Notice of Filing of Amendment Nos. 4 and 5 of File No. SR-NASD-2002-108). The Commission notes that this filing is pending at the Commission, and would require members to review and update emergency contact information within 17 business days after the end of each calendar quarter. Similarly, the proposed schedule is consistent with a proposed rule change filed with the Commission regarding the review and update of a member's Executive Representative designation and contact information. See SR-NASD-2003-184.

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8.  Similarly, NASD would prompt members to review and update, where necessary, their emergency contact and Executive Representative information. See supra note 7.

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9.  See supra note 4.

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12.  In approving this proposed rule change, the Commission notes that it has considered the proposed rule's impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f).

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[FR Doc. 04-3778 Filed 2-20-04; 8:45 am]

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