Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change by the National Association of Securities Dealers, Inc. Relating to Registration Category, Study Outline and Specifications for Series 55 Examinations, Equity Trader

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-38534; File No. SR-NASD-97-21]

Self-Regulatory Organizations; Notice of Filing of Proposed Rule

Change by the National Association of Securities Dealers, Inc. Relating

to Registration Category, Study Outline and Specifications for Series

55 Examinations, Equity Trader

April 21, 1997.

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 March 26, 1997, the NASD Regulation, Inc. (``NASD Regulation'')

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 Regulation. On

April 11, 1997, NASD Regulation submitted Amendment No. 1 to the

proposed rule change.\3\ The Commission is publishing

[[Page 22985]]

this notice to solicit comments on the proposed rule change, as

amended, from interested persons.

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\1\ 15 U.S.C. 78s(b)(1).

\2\ 17 CFR 240. 19b-4.

\3\ See letter from Craig L. Landauer, Associate General

Counsel, NASD Regulation to Yvonne Fraticelli, Attorney, Division of

Market Regulation (``Division''), SEC, dated April 11, 1997

(``Amendment No. 1''). In Amendment No. 1, NASD Regulation clarified

that individuals who have been ``grandfathered'' from taking either

the General Securities Representative Examination (Series 7) or the

Limited Representative-Corporate Securities Examination (Series 62)

will not be required to take either examination to qualify to take

the Series 55 examination currently proposed by NASD Regulation.

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

of the Proposed Rule Change

The National Association of Securities Dealers, Inc. (``NASD'' or

``Association'') proposes to amend NASD Rule 1032, ``Categories of

Representative Registration,'' to add a new registration category,

Equity Trader (Series 55). Below is the text of the proposed rule

change. Proposed new language is italicized.

Rule 1032. Categories of Representative Registration

(f) Limited Representative--Equity Trader

(1) Each person associated with a member who is included within the

definition of a representative as defined in Rule 1031 must register

with the Association as a Limited Representative-Equity Trader if, with

respect to transactions in equity, preferred or convertible debt

securities effected otherwise than on a securities exchange, such

person is engaged in proprietary trading, the execution of transactions

on an agency basis, or the direct supervision of such activities, other

than any person associated with a member whose trading activities are

conducted principally on behalf of an investment company that is

registered with the Securities and Exchange Commission pursuant to the

Investment Company Act of 1940 and that controls, is controlled by or

is under common control, with the member.

(2) Before registration as a Limited Representative--Equity Trader

as defined in subparagraph (1) hereof may become effective, an

applicant must:

(A) be registered pursuant to Rule 1032, either as a General

Securities Representative or a Limited Representative--Corporate

Securities: and

(B) pass an appropriate Qualification Examination for Limited

Representative--Equity Trader. Any person who has filed an application

to take this examination by (date thirty (30) days after the effective

date of this rule) must pass the examination by (24 months after

effective date above). Any person who is eligible for this extended

qualification period and who fails this examination during such twenty-

four (24) month time period must wait (30 days from the date of failure

to take the examination again. Any person who files an application to

take this qualification examination after (date thirty (30) days after

the effective date of this rule) must pass this examination before

conducting such activities as described in paragraph (f)(1) above. In

no event may a person who is eligible for the extended qualification

period function as an Equity Trader beyond the 24-month period without

having successfully passed the appropriate qualification examination.

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 Regulation 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 Regulation 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

It is the NASD's responsibility under Section 15A(g)(3) of the Act

\4\ to prescribe standards of training, experience and competence for

persons associated with NASD members. Pursuant to this statutory

obligation, the NASD has developed examinations and administers

examination developed by other self-regulatory organizations designed

to establish that persons associated with NASD members have attained

specified levels of competence and knowledge.

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\4\ 15 U.S.C. 78o-3(g)(3).

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In 1995, the NASD's Market Surveillance staff and the NASD's

National Business Conduct Committee (``NBCC'') became concerned about

the escalating number of rule violations by traders conducing market

making and principal trading functions in both the Nasdaq Market and

over-the-counter (``OTC'') equity trading markets. With the view that

better training and qualification of traders was necessary, the NASD's

Market Surveillance staff conducted an assessment of how traders are

prepared to carry out the role of trading and market making in equity

securities by visiting member firms and discussing the issue with

several senior managers of the Association and several members of the

NASD's Market Surveillance Committee. In particular, the NASD staff

discussed with these parties a qualification examination requirement

designated specifically for traders. The parties contacted supported

the establishment of a qualification examination for traders.

This proposed rule change will establish a registration category

(Series 55) and qualification examination for equity traders. Paragraph

(1) of proposed NASD Rule 1032(f) defines the scope of the requirement

to include market makers, agency traders and proprietary traders in

equity or convertible debt securities. The inclusion of convertible

debt securities \5\ reflects that fact that, under certain conditions,

convertible debt securities trade similarly to equity security and many

of the same regulatory issues and concerns apply to trading in both

types of securities.

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\5\ Pursuant to a telephone conversation between Craig

L.Landauer, Associate General Counsel, NASD Regulation and Yvonne

Fraticelli, Attorney, Division, SEC, on April 7, 1997, Commission

staff has replaced the word ``exclusion'' with the word

``inclusion.''

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This paragraph also contains an exemption for traders whose

principal activities are executing orders on behalf of an affiliated

investment company which is registered with the Commission under the

Investment Company Act of 1940. This exemption is intended to reflect

the reality that such traders are generally in the same position as

buy-side professionals employed within investment companies, who would

not be subject to the examination requirement.

Paragraph (2) of proposed NASD Rule 1032(f) establishes that an

individual must be registered as either a Series 7 or Series 62

representative in addition to passing the Series 55 Examination before

he can be registered in the Series 55 category.\6\ This requirement is

consistent with the requirements applicable to other specialized

registration categories.

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\6\ Under the proposal, individuals ``grandfathered'' from

taking either the Series 7 or Series 62 examinations will not be

required by the proposal to take either examination to qualify to

take the proposed Series 55 examination. See Amendment No. 1, supra

note 3.

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Paragraph (2) does not have a ``grandfather'' provision. The NASD

believes that such a provision is not appropriate due to the uneven

knowledge of existing rules among traders as well as the large number

of rule and structural changes occurring in the equity markets. The

proposed rule provides that presently registered traders must pass the

qualification examination within two years of the effectiveness of the

rule. The two year time period is intended to provide

[[Page 22986]]

traders sufficient time to study and pass the examination. This time

period also takes into consideration that some traders with many years

of experience in the securities industry may not have been required to

take either the Series 7 or Series 62 examinations.

This examination will consist of ninety questions, and candidates

will have three hours to complete the examination. The passing score

for the examination will be 70%.

The NASD believes that the proposed rule change is consistent with

the provisions of Section 15A(b)(6) \7\ and 15A(g)(3) \8\ of the Act in

that the NASD is required to prescribe standards of training,

experience and competence for persons associated with NASD members.

Pursuant to this statutory obligation, the NASD develops and

administers examinations to establish that persons associated with NASD

members have attained specified levels of competence and knowledge.

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\7\ 15 U.S.C. 78o-3(b)(6).

\8\ 15 U.S.C. 78o-3(g)(3).

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B. Self-Regulatory Organization's Statement on Burden on Competition

NASD Regulation 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 consent, 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. Persons making written submissions

should file six copies thereof with the Secretary, Securities and

Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549.

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 will also be

available for inspection and copying at the principal office of the

NASD. All submissions should refer to File No. SR-NASD-97-21 and should

be submitted by May 19. 1997.

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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Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 97-10794 Filed 4-25-97; 8:45 am]

BILLING CODE 8010-01-M