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90-38 Proposed Concept for Continuing Assessment of Registered Representatives in the Form of Amendment to Part HI, Section (1)(d) of Schedule C to the NASD By-Laws; Last Date for Comment: July 31, 1990
*These are suggested departments only. Others may be appropriate for your firm.
REQUEST FOR COMMENTS
The NASD requests comments on a proposed concept for the continuing assessment of registered representatives and a proposed enabling amendment to Part III, Section (1)(d) of Schedule C to the NASD By-Laws. The manner in which the proposed continuing assessment program for registered representatives would be conducted is discussed in detail in the body of this notice. The NASD Board of Governors invites comments on all aspects of this major regulatory initiative which, if adopted, will have a substantial impact on member firms.
A significant aspect of the NASD's regulatory activity involves the qualification and registration of registered representatives and principals associated with member firms. To date, this activity has been focused on the initial qualification of registered representatives and of persons assuming principal functions for the first time. This focus on initial qualification may no longer be sufficient.
The decade of the eighties brought a quantum increase in the rate of change in the securities industry. New products proliferated, new tax effects took hold, and new laws and regulations came into being to address the problems that became apparent during the course of the last decade. These and many other changes took place within a rapidly changing economic landscape that is now global in scope. The magnitude of these changes invites the question of whether it is in the best interests of the industry and the investing public to establish a formal regulatory program to provide better assurances that minimum knowledge levels are being maintained by securities industry professionals after their initial registration.
These concerns are building at the state level where continuing education requirements have been in place for many years in other fields such as insurance, real estate, law, and medicine. The North American Securities Administrators Association (NASAA) has advised the NASD that seven state securities administrators are now considering the institution of formal continuing education requirements for the securities industry. Both the NASD and NASAA are concerned that the institution of such requirements on a state-by-state basis could proliferate and that these requirements would differ widely among the states. Compliance with similar state-based programs in the insurance field is already a difficult and costly matter for many NASD members whose representatives are subject to numerous state jurisdictions. This situation would be compounded if differing state requirements were also established in the securities field.
If there were a time to establish a national program that addresses concerns about the continuing qualifications of securities industry professionals, it would appear to be now, before the momentum shifts to the individual states. If the below described proposal were adopted by the NASD and thereafter approved by the Securities and Exchange Commission (SEC), NASD and NASAA committees would work together to implement a national program.
The concept proposed herein would not institute continuing education requirements such as those that have been established in the insurance, real estate, legal, and medical professions; this is not to question the worth of well conceived continuing education programs. The proposed concept implicitly recognizes, however, that formal continuing education requirements, mandated by regulatory organizations, have proven cumbersome to administer and have often been implemented with vague standards as to what exactly such programs are meant to accomplish.
As a consequence, regulatory continuing education programs have often led to situations where mere attendance at a program becomes the measure of performance rather than a straightforward demonstration of knowledge gained from a course. Most of the traditional continuing education programs also treat all participants alike under the requirements; that is, even persons who have maintained a high level of expertise are required to attend the same number of hours of instruction as someone who has barely kept up with the field. There is a concern that a traditional continuing education approach would not be a cost-effective program in the securities industry.
These considerations have led to the proposition that the most appropriate role for the NASD is to assure that certain minimum levels of knowledge are being maintained by registered representatives. Accordingly, the NASD Board is circulating for member comment a continuing assessment program for registered representatives. In this program, aggregate performance of each firm's registered representatives would be monitored against a standard as a means to assure member involvement in the continuing education of their registered representatives. The manner in which such levels are maintained, that is by self-study, firm training programs, or educational courses, is a matter left to each member firm and its registered representatives. The structure of the proposed continuing assessment program is contained in the following sections.
Persons Subject to the Proposed Assessment Program and Assessment Cycle
The continuing assessment program, if adopted, would apply only to registered representatives. Member firms are required today to provide significant training support for principals pursuant to the provisions of Article III, Section 27 of the NASD Rules of Fair Practice. The NASD district offices are responsible for ensuring such ongoing programs for principals are adequately carried out by members. This proposal addresses the continuing assessment of registered representatives only.
The proposed assessment of registered representatives would be conducted every three years, using each representative's registration anniversary date as the scheduling mechanism. Representatives would be required to sit for the reassessment during the third year. A representative who neglects to sit for the triannual assessment requirement would be suspended at the end of the third year until the assessment is satisfied. If no such action is taken within two years of the suspension date, the person would be subject to the normal entry-level qualification requirement before the registration could be instituted again. The status of each registered representative would be monitored by the Central Registration Depository (CRD), which would generate appropriate notices to members regarding the assessment requirements of registered representatives.
All persons registered as of the inauguration date of the continuing assessment program would be grandfathered. This step is suggested for three reasons. First, grandfather provisions have been a traditional part of the NASD's qualification process since it was established in the mid-1950s. At that time, practicing registered representatives were grandfathered when the first testing requirement was established by the NASD. Similar grandfather provisions were available when the principal qualification process was instituted in 1965. Second, on the basis of current turnover rates in the industry in three years, approximately 50 percent of the registered representatives would be subject to the assessment program, while approximately 90 percent would be subject to the program within 10 years.
Grandfathering would be a fair means of introducing a new regulatory program of this magnitude, and its staged implementation would provide a practical means for both members and regulators to become familiar with the operation of the continuing assessment program. Third, grandfathering is a useful transition step in order to implement the major regulatory initiative embodied in the continuing assessment program. It is possible that, at the urging of the states, grandfathering privileges may not be extended to representatives who were subject to certain disciplinary actions in the past. Furthermore, it is contemplated that disciplinary actions taken after the proposed assessment program becomes effective could result in loss of grandfather status as one of the possible sanctions imposed by the NASD or state regulators.
If the continuing assessment proposal goes forward, the program would be implemented on a specified date following SEC approval. All representatives registered after the inauguration date would be subject to the assessment requirement, with the first assessments taking place in the third year of registration. This would provide sufficient time for the industry oversight committees and NASD staff to develop the assessment programs, the supporting information systems, and the more specific rules governing various details of the program. The assessment would be conducted daily on the NASD automated testing system, and a fee schedule appropriate to the cost of administering the continuing assessment program would be established.
Persons subject to the continuing education program would be required to submit to periodic assessments of their knowledge against a standard to be established by the NASD Board. This standard would be expressed in two ways. First, a body of objectives would be identified that would precisely define the kinds of knowledge and skills registrants would be required to demonstrate. These objectives would parallel the knowledge or skill measured in the test questions used in the assessment program. In effect, any test question used in the assessment program would be reflected in a clearly stated behavioral objective, and the sum of the behavioral objectives would equate to a course outline for anyone preparing representatives for the periodic assessment. This set of objectives would be available to firms, training organizations, and representatives on a real-time basis; that is, the objectives would be updated at any time a change is made to the question bank used to support the assessment program.
The second element of the assessment program would be the identification of performance standards, for both individuals and aggregate performance of each member firm. The individual performance standard would be similar to the scores reported today on the entry level of exams. The standards for a firm would identify the proportion of its candidates that should achieve a certain score level in the assessment program. Firms would be expected to meet the performance standard and would be continuously monitored in this regard. Prolonged sub-par performance by a firm could ultimately lead to disciplinary action by the NASD.
The assessment tests would not be as broad in scope as are the entry-level qualification examinations. The latter programs are designed as entry-level tests that address all the subject matter relevant to a particular registration category. Each assessment test would be more selective in the choice of subject matter, focusing instead on the minimal maintenance level of knowledge and new developments in the industry. Such tests would also be shorter in duration than the entry-level examinations. While the details here would be the responsibility of the industry oversight committee for each assessment test, the content of each assessment program would focus on assessing registrant understanding of sales-practice regulation, investment risk, customer suitability, and new product, tax, or regulatory developments appropriate to the various registration categories.
The proposed assessment tests would also contain an educational interaction with registered representatives. While registrant initial responses would be recorded for scoring purposes, the computer program administering the assessment would be designed to confirm correct responses and to explain why an incorrect choice is wrong. In this way, the assessment process itself can serve a stronger educational purpose than the usual testing process.
The assessment program would parallel the structure of the entry-level qualification program with separate assessment tests for the different categories of registration. The industry oversight committees working with the staff on these programs would also coordinate with NASAA to ensure that the various assessment programs address the concerns of the states and that the proposed continuing assessment program emerges as a uniform, national regulatory effort.
The operation of the continuing assessment program, described in general terms above, depends on the development of a sophisticated information system in the qualification area. As indicated above, the assessment question bank must be accompanied by a complementary bank of behavioral objectives relevant to the program, and this set of behavioral objectives must be available on a real-time basis to the membership. Secondly, it would be necessary to track individual performance in a detailed fashion so as to provide the maximum amount of feedback to the member for each registrant coming through the assessment program. The level of reporting would extend to the actual behavioral objectives of the items answered incorrectly by the candidate. In this way, the candidate would have a precise definition of those areas in which he or she is weak and can then take steps to improve understanding on those matters.
A similar data base would need to be constructed for each firm in order to identify performance overall and in each of the major sections of the assessment program, down to the proportion of people who answer correctly the different behavioral objectives in the assessment program. This would be invaluable information for a firm in any effort to upgrade its internal training programs to meet the assessment standards and would be provided to the firm under the applicable fee structure for the candidate assessments. The information systems envisioned here would also be expanded to permit direct access by member firms in order to foster a real-time awareness of firm performance and to permit member firms and training organizations to identify subsets of their assessed population in order to analyze results in greater detail.
Consequences of Poor Performance
Individual candidates would not fail the proposed assessment in the same way that someone would fail an entry-level examination. In the latter program, candidates for representative registration who fail are simply not permitted to engage in the securities business. Persons who do poorly on an assessment test — that is, below the established performance standard — would be provided with detailed feedback and would be required to return for a follow-up assessment within 90 calendar days. The firm would be required to place the representative under closer-than-normal supervision. Continued poor performance would require continued assessments in consecutive 90-day periods and continued closer-than-normal supervision. After three consecutive assessments below the defined standard, the employing member firm would be required to submit a plan, satisfactory to the NASD district office having jurisdiction over the representative, that would:
Very few, if any, representatives are likely to fail the assessment standard at this point, but the possibility does exist. Final NASD action at this stage would bring the continuing assessment process to a conclusion and could include revocation of a representative's registration. The representative would then be subject to re-qualification via the usual entry-level examinations in order to be registered again.
A performance standard for firms would also be established by the Board or the appropriately delegated assessment review committee. This standard would be expressed as the proportion of registrants required to achieve a minimum performance level on the individual assessments and could be expanded to include subsets of the subject matter within the assessment program. The information systems supporting the entire operation would monitor in real-time successive samples of registrants by firm coming through the assessment program. Comparison with the performance standard would be made using standard statistical quality control techniques. Permissible variations from this standard would be calibrated on the basis of the number of assessed candidates from a firm, so that a band of variation would be permitted around the performance standard. Firms with a small number of registrants would be permitted greater variability than a firm with a large number of people, an approach fully consistent with quality control measurement systems used in a variety of fields.
A member firm initially failing to achieve the performance standard would receive a warning and would be required, within a stipulated period of time, to bring the performance of the registrants up to the standard. Failure to meet the standard within the prescribed period of time, in the absence of mitigating circumstances, could lead to the NASD requiring remedial action in the member firm. Other actions would also be available to a firm. For example, if a firm's registrants were subject to an assessment program that incorporated material that was not part of their business, the firm could reconsider the registration categories of the registrants and reconfigure its registrations to comport to the types of business being done by the firm. Thus, a general securities representative who specializes in investment banking could change the registration to corporate securities representative and sit for an assessment more geared to his or her activities in the industry.
SUMMARY OF PROPOSED AMENDMENT TO PART III (1)(D) OF SCHEDULE C TO THE NASD BY-LAWS
In order for the continuing assessment program to be effective, it would be necessary to adopt a rule that would subject new registered representatives to the continuing assessment program. The following amendment to Part III (l)(d) of Schedule C to the By-Laws would create the continuing assessment requirement for all representatives who first become registered on or after the effective date of the amendment. The continuing assessment requirement would also apply to previously registered representatives who are required to requalify by entry-level examination due to the expiration of the two-year registration termination grace period pursuant to Part III, Section (l)(c) of Schedule C to the NASD By-Laws. It is anticipated that a number of other rule amendments would be proposed for Schedule C in the two-year period after the inauguration of the continuing assessment program and before the administration of the first continuing assessment examination. These rules would address the specific performance standard for individuals and member firms, the standards for closer-than-normal supervision of representatives performing poorly on an assessment examination, the procedures for revocation of registration in those situations where a representative does poorly on four consecutive assessment examinations, and such other adjudicative and administrative provisions as may be necessary to fully implement a continuing assessment program.
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The NASD encourages all members and other interested persons to comment on this important regulatory initiative and the proposed amendment to Schedule C to the By-Laws. Comments should be directed to:
Mr. Lynn Nellius
National Association of Securities Dealers, Inc.
1735 K Street, NW
Washington, D.C. 20006-1506
Comments must be received no later than July 31, 1990. All comments will be made available for public inspection. Comments received by this date will be considered by the NASD's Membership Committee and the NASD Board of Governors. If approved by the Board, the amendments must be filed with and approved by the Securities and Exchange Commission before becoming effective.
Questions concerning this notice may be directed to Frank J. McAuliffe, Vice President, Qualifications Department, at (301) 590-6694 or David Uthe, Senior Qualifications Analyst, at (301) 590-6695.
PROPOSED AMENDMENT TO SCHEDULE C OF THE NASD BY-LAWS III
REGISTRATION OF REPRESENTATIVES
(Note: New language is underlined.)