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87-39 Request for Comments on Addition of a Corporate Securities Limited Representative Category of Registration Under Schedule C to the NASD By-Laws

TO: All NASD Members and Other Interested Persons

Existing Limited Representative Examinations

  • Investment Company Products/Variable Contracts
  • Direct Participation Programs
  • Municipal Securities
  • Option Securities*

Products Covered in Proposed Corporate Securities United Representative Examinations

  • Common and Preferred Stock
  • Corporate Debt Issues
  • Stock Rights and Warrants
  • Foreign Securities and ADRs
  • Mortgage and Other Asset-Backed Securities
  • REITs
  • Shares of Closed-End Investment Companies and Money Market Funds

LAST DATE FOR COMMENT: JULY 19, 1987.

EXECUTIVE SUMMARY

The NASD requests comments on a proposal to establish a category of registration for persons who transact business in corporate and certain other securities and to require such persons to pass a test that covers these areas only. Presently, these representatives must pass the Series 7—General Securities Registered Representative Examination. The Series 7 examination, however, includes extensive testing of products that are not offered by all members, such as options and municipal securities, as well as duplicate coverage of other areas for representatives who have already qualified in one or more of the existing limited registration categories.

The proposed Corporate Securities Limited Representative registration category is a continuation of the existing system of limited representative registrations for investment company products/variable contracts, direct participation programs, and municipal securities. Successful completion of all of the limited examinations would be equivalent to qualifying by passing the Series 7.

The text of the proposed amendments to Schedule C to the NASD By-Laws is attached.

BACKGROUND

When the NASD adopted the Series 7—General Securities Registered Representative Examination in 1974, the Board of Governors recognized that the broad product coverage in that test was not suitable for many representatives whose firms specialized in limited product areas of the industry. The Board, therefore, elected to retain the predecessor Series I—Registered Representative Examination to qualify those representatives who "limited" their securities activities to either investment company products and variable annuities, or to direct participation programs. The Series 1 was used until August 1980 when the Series 6— Investment Company Products/Variable Contracts Representative Examination and the Series 22—Direct Participation Programs Representative Examination were implemented. Two similar categories of limited representative were added to Schedule C to the NASD By-Laws at that time. In addition, in 1978, the Municipal Securities Rulemaking Board introduced the Series 52—Municipal Securities Representative Examination that created, from an NASD perspective, another category of limited representative.

These three limited examinations offered members and their representatives some, but not total, flexibility in qualifying for registration. For example, representatives who were already registered in one or more limited areas would be re-tested in those areas when they sought General Securities Representative status through the Series 7 examination. Also, those limited representatives who only wanted to add equity products to their qualifications would still have to engage the full spectrum of municipal securities and options products training in studying for the General Securities test. Compounding this problem, the options material in the Series 7 examination was significantly revised in June 1986, to include not only the traditional coverage of equity options, but also, debt, foreign currency, and index options.

Therefore, the NASD Qualifications Committee decided to add two more limited representative registration categories. The first, Series 62—Corporate Securities Limited Representative Examination, is the subject of this notice. The second, the Series 42—Options Limited Representative Examination, is planned for the near future. A member or representative would then have total flexibility in qualifying in one or more product areas. Additionally, representatives qualifying in all five limited categories would be designated "General Securities Representatives," thereby offering an alternative to the Series 7 examination in qualifying for that particular category. The NASD would also establish procedures with other self-regulatory organizations to ensure comparability of subject matter coverage between the Series 7 examination and the five limited examinations.

SUMMARY OF PROPOSED AMENDMENTS

Under the proposed amendments to Schedule C, a Series 62—Corporate Securities Limited Representative would be able to transact a member's business in the following products: common and preferred stocks, corporate bonds, stock rights, warrants, foreign securities, ADRs, shares of closed-end investment companies and money market funds, privately issued mortgage-backed securities, other asset-backed securities, and REITs. Registration in this category alone would not allow a representative to transact a member's business in municipal securities, direct participation programs, redeemable securities of companies registered under the Investment Company Act of 1940, variable contracts, or options. Representatives seeking to transact business in these latter products would have to register in one or more of the NASD's other limited representative categories, or as General Securities Registered Representatives.

Members have indicated a need for qualification tests that reflect the various product markets in the industry, and it is expected that a corporate securities registration category will apply broadly to many member firms. Expected users of the program include:

  • Existing limited representatives, especially those associated with insurance company members, who wish to expand their product offerings to include securities that presently require Series 7—General Securities Representative qualification;
  • Representatives of smaller firms who are not involved in all the securities markets included in the Series 7—General Securities Representative program;
  • Representatives who would prefer to attain general securities qualification in successive steps rather than in the all-or-nothing manner required by the Series 7—General Securities Representative program;
  • Equity and corporate debt traders;
  • Corporate finance personnel; and
  • Certain research personnel required to be registered under NASD rules.

Nothing in this proposal would affect a member's ability to require its associated persons to qualify as Series 7—General Securities Representatives as a matter of firm policy. The Series 62—Corporate Securities Limited Representative Examination, either alone or in conjunction with other limited representative examinations, is intended to provide greater flexibility to members in qualifying their personnel, while still maintaining the necessary investor protection afforded by the NASD's qualification programs. The Series 62—Corporate Securities Limited Representative Examination, like the other limited examinations, would be administered on a daily basis using the NASD's automated testing system in the PLATO network.

The NASD Qualifications Committee authorized the changes to Schedule C that incorporate a new category of limited representative. This new category would qualify associated persons to conduct a member's business in corporate and certain other securities. The Committee also authorized development of a qualification examination (Series 62) for this new limited representative category. Accordingly, a study outline was developed by a task force of NASD member delegates and a bank of test questions is now being completed.

Additional information in the form of a draft study outline for the Series 62 is available from the NASD Qualifications Department at (301) 738-6693.

The proposed amendments to Schedule C to the NASD By-Laws would add a paragraph (e) to Part III, Section (2). Conforming changes to Part II, Section (2)(a) are also being proposed to permit the use of the Corporate Securities Limited Representative Examination as a prerequisite for the Series 24—General Securities Principal Examination.

* * * * *

The NASD urges members to comment on these proposals. The Board of Governors requests that commentators specifically address the issue of whether creation of this separate registration category would result in lessening the qualification standards for the industry and whether a system that permits persons to hold multiple registrations would make it burdensome for firms to supervise their associated persons' activities. Comments should be directed to:

Mr. Lynn Nellius
Secretary
National Association of Securities Dealers, Inc.
1735 K Street, N.W.
Washington, D.C. 20006-1506

All comments and suggestions must be received no later than July 19, 1987. All comments and suggestions received by this date will be considered by the NASD Board of Governors. If the proposed amendments are approved by the Board, they must be filed with and approved by the Securities and Exchange Commission before becoming effective.

Questions concerning this notice may be directed to either Frank McAuliffe, Vice President, NASD Qualifications, at (301) 738-6694, or David Uthe, Senior Qualifications Analyst, at (301) 738-6695.

Sincerely,

John T. Wall
Executive Vice President
Member and Market Services

Attachments

AMENDMENT TO SCHEDULE C, PART III TO THE NASD BY-LAWS

III

REGISTRATION OF REPRESENTATIVES



(2) Categories of Representative Registration



[The following section is new.]

(e) Limited Representative—Corporate Securities
(i) Each person associated with a member who is included within the definition of a representative in Part III, Section (1) hereof may register with the Corporation as a Limited Representative—Corporate Securities if:
(a.) Such person's activities in the investment banking or securities business involve the solicitation, purchase, and/or sale of a "security," as that term is defined in Section 3(a)(10) of the Securities Exchange Act of 1934 (the "Act"), and do not include such activities with respect to the following securities unless such person is separately qualified and registered in the category or categories of registration related to these securities:
(1.) Municipal securities as defined in Section 3(a)(29) of the Act;
(2.) Option securities as defined in Article III, Section 33(d) of the NASD Rules of Fair Practice;
(3.) Redeemable securities of companies registered pursuant to the Investment Company Act of 1940, except for money market funds;
(4.) Variable contracts of insurance companies registered pursuant to the Securities Act of 1933; and/or,
(5.) Direct Participation Programs as defined in Part II, Section 2(d)(ii) hereof.
(b.) Such person passes an appropriate qualification examination for Limited Representative—Corporate Securities.
(ii) A person qualified solely as a Limited Representative—Corporate Securities shall not be qualified to function in any area not prescribed by Part III Section 2(e)(i) hereof.

CONFORMING CHANGE TO SCHEDULE C, PART II TO THE NASD BY-LAWS*

II

REGISTRATION OF PRINCIPALS



(2) Categories of Principal Registration
(a) General Securities Principal
(i) [Change to last sentence of this paragraph:]
Each person seeking to register and qualify as a General Securities Principal must, prior to or concurrent with such registration, become registered pursuant to Part III hereof, either as a General Representative or as a Limited Representative—Corporate Securities.
(ii) A Limited Representative—Corporate Securities seeking registration as General Securities Principal who will have supervisory responsibility over the conduct of business in investment company and variable contracts products and/or direct participation programs as defined herein must, prior to or concurrent with registration as a General Securities principal, become registered pursuant to Part III hereof as a Limited Representative—Investment Company and Variable Contracts Products and/or a Limited Representative—Direct Participation Programs.

[Existing Sections (ii) through (v) are renumbered to reflect the above.]


* A limited registration category for Options Representatives presently exists under Schedule C. A new examination for this category is planned for late 1987.

* New language is underlined.



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