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88-90 Proposed Rule Amendment, By-Laws Amendments Under Schedule C Re: Training, Qualification, and Registration of Representatives and Principals; Last Date for Comments: December 1, 1988

SUGGESTED ROUTING*

Senior Management
Legal & Compliance
Registration
Training

*These are suggested departments only. Others may be appropriate for your firm.

REQUEST FOR COMMENTS

EXECUTIVE SUMMARY

The NASD requests comments on the following:

A proposed amendment to Article III, Section 27 of the Rules of Fair Practice that would require members to provide for the appropriate training of persons initially applying for registration and to take reasonable steps to maintain the knowledge of its registered persons with respect to the products and services such persons offer to the public.

Proposed amendments to Schedule C to the By-Laws that would require members to submit applications for and maintain the registrations of only such persons who intend to engage or are engaged in the investment banking or securities business for the member and that would establish waiting periods between attempts to pass qualification examinations.

In addition, the NASD wishes to inform the membership of a policy change that substantially restricts the grounds on which requests for qualification examination waivers will be reviewed. The texts of the proposed amendments are attached. Comments must be received by December 1, 1988.

BACKGROUND

In response to certain recommendations of the NASD Regulatory Review Task Force, the Qualifications Committee of the NASD Board of Governors has undertaken to review the NASD qualification system and to consider additional means to maintain an appropriate level of knowledge and professionalism for persons associated with NASD members. This review will not only address the adequacy of existing NASD qualifications standards, but also will consider issues relating to the need to afford reasonable assurance to the investing public that registered persons remain knowledgeable about products and services available to investors, as well as applicable rules, regulations, and policies governing the investment banking and securities business.

Although the review is ongoing, the Board of Governors has determined at this time to publish for comment proposals that address certain issues associated with the training, qualifications, and registration of representatives and principals.

SUPERVISION AND TRAINING

The NASD proposes to amend Article III, Section 27 of the Rules of Fair Practice, which sets forth supervisory standards applicable to NASD members,1 to require that a member's supervisory practices and procedures include provisions for (1) the training of applicants at the time of application for registration and (2) taking reasonable steps to maintain registered persons' knowledge with respect to the products and services offered to the public.

The NASD believes that the initial training and continued competency of registered personnel is integrally linked to supervision in a complex and changing industry and that it is appropriate to require members to incorporate these responsibilities into their supervisory systems. The proposed amendment is drafted to allow a member flexibility in determining the means most appropriate to its operations in discharging this responsibility, including the use of training products and services of other organizations.

SCHEDULE C AMENDMENTS

Registration of Associated Persons

The NASD proposes to amend Part II, Section (l)(a) and Part III, Section (l)(a) of Schedule C to the By-Laws to require that members register only persons who are engaged or will engage in the investment banking or securities business on behalf of the member in the capacities of principal and representative. The proposed amendment would specifically prohibit members from maintaining registrations for persons who no longer function as principals or representatives of the firm and who no longer are active in the member's investment banking or securities business, or who wish to avoid the re-examination requirement applicable to persons who are not registered for more than two years.

Members also would be prohibited from sponsoring an application for registration where there is no intent to maintain the applicant's employment with the member after examination. The NASD believes this amendment is fully consistent with the historic intent of the qualification and registration program and that the proposed amendment is necessary to prevent such unacceptable practices as "parking" registrations and using NASD membership to gain a competitive advantage in operating a commercial training business.

Waiting Periods Between Attempts on Qualification Examinations

The NASD also proposes to amend Part VI of Schedule C to the By-Laws to establish waiting periods between attempts to pass NASD qualification examinations. Waiting periods were in effect in the NASD qualification program until 1979 and now are used in connection with the qualification examinations of the Municipal Securities Rulemak-ing Board (MSRB). The extensive automation of the registration and qualification process has made it possible for applicants to make multiple attempts to pass examinations in rapid succession, often within very brief periods.

The NASD believes this practice promotes "test learning" rather than a proper understanding of the substantive material covered in the various qualification examinations. The proposed waiting periods are intended to encourage a more professional approach to the examination process and to the training of applicants, as well as to protect the integrity of the qualification examinations. In the interest of uniformity, the proposed waiting periods are the same as those prescribed by the MSRB — 30 days between the first and second attempts, 30 days between the second and third attempts, and six months after the third and all subsequent attempts.

EXAMINATION WAIVER POLICY

Part VI, Section (5) of Schedule C to the By-Laws permits the waiver of a qualification examination and reads as follows:

"(5) The President of the Corporation may, in exceptional cases and where good cause is shown, waive the applicable Qualification Examination upon written request by the member and accept other standards as evidence of an applicant's qualifications for registration. Advanced age, physical infirmity or experience in fields ancillary to the investment banking or securities business will not individually of themselves constitute sufficient grounds to waive a Qualification Examination."

The number of waiver requests has increased significantly in recent years at a time when the securities business and, consequently, the NASD's qualification program have become more complex. Waiver requests now are reviewed under guidelines, developed by the Qualifications Committee and approved by the Board, which focus primarily upon the applicant's experience in fields related to the securities business. The NASD has become concerned that this process no longer is consistent with the best interests of the securities industry or the investing public. The purpose of the qualification examinations is to provide an objective and quantifiable measure of minimum applicant competency.

The NASD believes the examinations do not pose an unreasonable barrier to registration to any class of applicants. Thus, the NASD has determined that the examination should be a prerequisite for all applicants, with exceptions granted only in highly unusual circumstances. As a consequence, waiver requests based only on ancillary experience, such as investment management, or advisory services, will be routinely denied. This policy will be applied to both initial examination waiver requests and requests to waive the re-examination requirements of Part II, Section l(c) and Part III, Section l(c) of Schedule C.

It should be noted that this policy would not affect a person whose registration in a particular capacity may be wrongly terminated due, for example, to an incorrectly completed Form U-4, provided that such person's continuous activity in the registrable function can be documented by a member.

The NASD encourages all members and interested parties to comment on the proposed amendments. Comments should be directed to:

Mr. Lynn Nellius, Secretary
National Association of Securities Dealers, Inc.
1735 K Street, NW
Washington, DC 20006-1506

Comments must be received no later than December 1,1988. Comments received by this date will be considered by the NASD Qualifications Committee and by the NASD Board of Governors. Any changes to the NASD Rules of Fair Practice must be voted on by the membership and filed with, and approved by, the Securities and Exchange Commission before becoming effective.Any changes to Schedule C to the By-Laws must be filed with, and approved by, the SEC before becoming effective.

Questions concerning this notice can be directed to Frank McAuliffe, Vice President, NASD Qualifications, at (301) 590-6694, or Jacqueline D. Whelan, Senior Attorney, NASD Office of General Counsel, at (202) 728-8270.

PROPOSED AMENDMENTS TO ARTICLE III, SECTION 27 OF THE NASD RULES OF FAIR PRACTICE

(Note: Proposed additional language is underlined.)

Section 27

Supervisory System

(a) Each member shall establish and maintain a system to supervise the activities of each registered representative and associated person that is reasonably designed to achieve compliance with applicable securities laws and regulations and with the rules of this Association. Final responsibility for proper supervision shall rest with the member. A member's supervisory system shall provide, at a minimum, for the following:
(7) The training of persons applying for general or limited registration consistent with the qualification requirements of the NASD and other applicable securities self-regulatory organizations and reasonable steps to maintain levels of knowledge of registered persons with respect to the products and services such persons offer to the public.

(Subsequent sections to be renumbered consecutively.)

PROPOSED AMENDMENTS TO SCHEDULE C OF THE BY-LAWS

(Note: New language is underlined; deleted language is in brackets.)

II

REGISTRATION OF PRINCIPALS

(1) Registration Requirements
(a) All Principals Must be Registered — All persons [associated] engaged or to be engaged in the investment banking or securities business of a member who are to function as principals shall be registered as such with the Corporation in the category of registration appropriate to the function to be performed as specified in Part II, Section (2) hereof. Before their registrations can become effective, they shall pass a Qualification Examination for Principals appropriate to thecategory of registration as specified by the Board of Governors. A member shall not maintain a principal registration with the Corporation for any person who is no longer active in the member's investment banking or securities business in a principal capacity or for any person where the sole purpose of the registration is to avoid the examination requirement prescribed in Section (l)(c) hereof. A member shall make application for the registration of any person as principal where there is no intent to employ such person in the member's investment banking or securities business after the examination.

III

REGISTRATION OF REPRESENTATIVES

(1) Registration Requirement
(a) All Representatives Must be Registered — All persons [associated] engaged or to be engaged in the investment banking or securities business of a member who are to function as representatives shall be registered as such with the Corporation in the category of registration appropriate to the function to be performed as specified in Part III, Section (2) hereof. Before their registrations can become effective, they shall pass a Qualification Examination for Representatives appropriate to the category of registration as specified by the Board of Governors. A member shall not maintain a representative registration with the Corporation for any person who is no longer active in the member's investment banking or securities business in a representative capacity or for any person where the sole purpose of the registration is to avoid the examination requirement prescribed in Section (l)(c) hereof. A member shall not make application for the registration of any person as a representative where there is no intent to employ such person in the member's investment banking or securities business after the examination.

VI

QUALIFICATION EXAMINATIONS AND WAIVER OF REQUIREMENTS

(6) Any person associated with a member who fails to pass a qualification examination prescribed by the Corporation shall be permitted to take the examination again after a period of 30 calendar days has elapsed from the date of the prior examination, except that any person who fails to pass an examination three or more times in succession shall be prohibited from again taking such examination until a period of six months has elapsed from the date of such person's last attempt to pass the examination.

1 On August 1,1988, the NASD membership approved substantial changes in the provisions of Article III, Section 27. These changes, which were approved by the Securities and Exchange Commission on October 13, 1988, will become effective April 13,1989. See Notice to Members 88-84, dated November 1,1988. The proposals set forth herein would amend Article III, Section 27 as it will be in effect as of April 13,1989, and would take effect at that time.



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