[Federal Register: December 24, 2003 (Volume 68, Number 247)]
[Notices]
[Page 74674-74676]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr24de03-145]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-48932; File No. SR-NASD-2003-186]
Self-Regulatory Organizations; Notice of Filing and Immediate
Effectiveness of Proposed Rule Change by the National Association of
Securities Dealers, Inc. Relating to the Administration of
Qualification Examinations on Security Futures
December 16, 2003.
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 December 11, 2003, the National Association of Securities Dealers,
Inc. (``NASD'') submitted to the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been prepared by the NASD. The NASD has
filed the proposed rule
[[Page 74675]]
change pursuant to Rule 19b-4(f)(6) under the Act.\3\ 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\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of Proposed Rule Change
In this filing, the NASD discusses the implementation of new and
revised qualification examinations to address trading in security
futures.
The NASD does not propose to amend any of its existing rule text.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the 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. The 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
The commodity Futures Modernization Act of 2000 (``CFMA'') \4\
lifted the ban on the trading of security futures (i.e. futures on
single stocks and on narrow-based stock indexes). The NASD states that,
at the time the CFMA was enacted, expectations for security futures
were very high, and two separate markets were developed to trade these
new products. To meet the challenge of ensuring that individuals
engaging in a security futures business ere properly qualified, the
NASD took the unique step of mandating that firms include training in
security futures as part of their firm-element continuing education
program. Furthermore, to assist firms in meeting this responsibility,
the NASD and the National Futures Association (``NFA'') contracted with
the Institute for Financial Markets to develop an internet-based
training program. NASD and NFA have made this program available to
firms and registered representative for free. Since its inception in
October 2002, over 12,000 individuals have completed the Internet
training, which takes approximately two to three hours to complete.
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\4\ P.L. 106-554, 114 Stat. 2763 (December 21, 2000).
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At the time trading in security futures commenced, NASD also
indicated that it planned to both modify and create qualification
examinations to address trading in security futures. Specifically, NASD
intended to modify the Series 4 examination (Registered Options and
Security Futures Principal (replacing Registered Options Principal)),
Series 9/10 examination (Limited Principal General Securities Sales
Supervisor), and Series 42 examination (Limited Representative Options
and Security Futures (replacing Limited Representative Options)). In
addition, NASD intended to create a new Series 43 examination for
general securities representatives (those persons who have successfully
completed the Series 7 exam) seeking to engage in a security futures
business.\5\ The Series 43 is targeted at new entrants into the
securities industry. Existing registrants (i.e., those registered
before the Series 43 examination is effective) are required to complete
a firm-element continuing education program prior to engaging in a
security futures business. Once the Series 43 was developed, NASD
intended to permit existing registrants the option of completing the
firm-element continuing education program in lieu of the Series 43
examination until December 31, 2006.
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\5\ A new Series 43 examination was necessary, in part, because
the New York Stock Exchange did not intend to incorporate questions
on security futures on the Series 7 examination.
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In the approximately one year since security futures began trading,
NASD has devoted substantial resources to creating the Series 43
examination. Industry and SRO representatives \6\ have met for 11 days
and have devoted collectively over 1800 hours in meeting time
developing a content outline and a question bank for the Series 43.\7\
In addition, NASD has incurred over $45,000 in expenses to develop
these materials. The Series 43 examination development is now complete.
Revised study outlines for the Series, 4, 9/10 and 42 also have been
developed. Questions for those examinations will be borrowed from the
Series 43 question bank and developed by committees charged with
maintaining and reviewing the question banks for those examinations.
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\6\ SRO representatives from the NASD, NFA, CBOE, AMEX,
OneChicago, and NQLX helped develop the content outline and question
bank.
\7\ These totals do not include travel time, time spent
preparing for meetings (including developing and reqriting
questions), and NASD staff time administering the Series 43 program.
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Despite these efforts, current data on trading volume has shown
that there is very limited trading activity in security futures.
According to data from the Options Clearing Corporation, the average
trading volume for 2003 in security futures is around 10,000 contracts
per day across the two exchanges. In addition, NASD's market regulation
surveillance confirms that most of this volume is propriety trading
among market-maker firms. NFA representatives have informed the NASD
that security futures products represented 0.0028% of all futures
contracts traded so far in 2003. While similar statistics are not
calculated for the securities industry, the figures would be
substantially lower given the size of the securities markets.
Moreover, interest among registered representatives to engage in a
sescurity futures business has waned. Since July 2003, an average of
fewer than 50 registered persons per month in the securities industry
have completed the Internet-based continuing education.
In view of the foregoing, the NASD does not believe it is
appropriate or necessary to institute the Series 43 exam or amend other
existing qualification examinations at the present time. The NASD
believes the current system of a firm-element continuing education
requirement continues to work well. The NASD states that the feedback
it has received on the Internet-training program has been very
positive. In addition, the NASD states that it has not received any
evidence of customer complaints in these products. Moreover, the NASD
is hesitant to amend existing examinations to address security futures
because the net result will be to deemphasize other more pertinent
subject areas, as the NASD does not intend to expand the number of
questions on the Series 4, 9/10, and 42 exams.\8\ Finally, the
introduction of a separate, stand-alone qualification examination for
security futures seems excessive in view of the level of trading in
these products. The NASD also anticipates that very few representatives
would elect to take the Series 43 exam.
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\8\ The problem is equally acute on the futures industry side,
where the proposed revised Series 3 examination will have
approximately 17% of its questions addressing security futures.
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The NASD notes that its colleagues at NFA have made similar
conclusions about the need to revise the Series 3 to reflect trading of
security futures. Both NASD and NFA believe that the qualification
requirements between the securities and futures industry should
generally be comparable, and, as regulators, the NASD has sought to
avoid favoring one industry group over another, or actions leading to
regulatory arbitrage.
[[Page 74676]]
While the NASD does not plan to implement the new or revised
qualification examinations today, it intends to monitor activity in
security futures very closely. The NASD also intends to continue
coordinating with NFA. The NASD intends to make periodic assessments of
the activity in security futures to determine the appropriate time to
implement the examinations. The NASD does not believe that there is any
single factor that should be determinative of whether security futures
examinations should be implemented. Rather, the NASD intends to review
the following:
[sbull] Volume in security futures contracts
[sbull] Analysis of who is trading security futures
[sbull] Number of registered representatives completing continuing
education
[sbull] Number of accounts authorized to trade security futures
[sbull] Nature of security futures customers
[sbull] Evidence, if any, of customer complaints
[sbull] Evidence, if any, of regulatory concerns arising from the
NASD's surveillance and examination programs.
Once the NASD determines that new/revised qualifications are
appropriate, or the SEC requests that the NASD implement the
examinations, the NASD represents that it will be able to have them
effective in less than four months. The NASD states that, as its
efforts to date indicate, it remains fully committed to providing the
necessary resources to ensure that representatives engaging in a
security futures business are properly trained and qualified. The NASD
intends to closely monitor activity in security futures to determine
when, and if, it becomes an appropriate date to implement revised
qualification examinations.
NASD believes that for the reasons stated above it is appropriate
to defer implementation of revised and new qualification examinations
concerning security futures.
2. Statutory Basis
NASD believes that the proposed rule change is consistent with the
provisions of section 15A(b)(6) of the Act,\9\ 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.
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\9\ 15 U.S.C. 78o-3(b)(6).
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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 rule change has been filed by the NASD as ``non-
controversial'' pursuant to section 19(b)(3)(A) of the Act \10\ and
subparagraph (f)(6) of Rule 19b-4 thereunder.\11\ Because the foregoing
rule change: (1) Does not significantly affect the protection of
investors or the public interest; (2) does not impose any significant
burden on competition; and (3) does not become operative for thirty
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, it has become effective pursuant to section
19(b)(3)(A) of the Act \12\ and Rule 19b-4 thereunder.\13\
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\10\ 15 U.S.C. 78s(b)(3)(A).
\11\ 17 CFR 240.19b-4(f)(6).
\12\ 15 U.S.C. 78s(b)(3)(A).
\13\ 17 CFR 240.19b-4.
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The Commission hereby waives the thirty-day operative waiting
period. The Commission believes that it is consistent with the
protection of investors and the public interest to waive the thirty-day
operative waiting period because the proposed rule change explains the
NASD's reasons for delaying the implementation of the new qualification
exams for security futures.\14\ The Commission notes that the NASD
members that trade security futures are required to provide firm-
element training for individuals engaged in security futures business.
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\14\ For purposes of accelerating the operative date of the
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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NASD has requested that the Commission waive the five-day pre-
filing requirement in Rule 19b-4(f)(6)(iii).\15\ The Commission hereby
waives that requirement.
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\15\ 17 CFR 240.19b-4(f)(6)(iii).
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At any time within sixty 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. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 fifth Street, NW., Washington, DC 20549-0609.
Comments may also be submitted electronically at the following e-mail
address: rule-comments@sec.gov. All comment letters should refer to
File No. SR-NASD-2003-186. 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, comments should be sent in
hardcopy or by e-mail but not by both methods. 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
submissions should refer to File No. SR-NASD-2003-186 and should be
submitted by January 14, 2003.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\16\
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\16\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Security.
[FR Doc. 03-31650 Filed 12-23-03; 8:45 am]
BILLING CODE 8010-01-M