Document ID: SEC-2006-0400-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: National Association of Securities Dealers, Inc.
Posted Date: 2006-03-27T05:00Z

[Federal Register: March 27, 2006 (Volume 71, Number 58)]
[Notices]               
[Page 15238-15240]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr27mr06-103]                         

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53509; File No. SR-NASD-2006-036]

 
Self Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Notice of Filing and Order Granting Accelerated Approval 
of Proposed Rule Change Relating to Certification by the Chief 
Executive Officer Under NASD Interpretive Material 3013

March 17, 2006.
    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 7, 2006, the National Association of Securities Dealers, Inc. 
(``NASD'') filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission'') the proposed rule change as described in Items I and 
II below, which Items have been prepared by NASD. The Commission is 
publishing this notice to solicit comments on the proposed rule change 
from interested persons. In addition, the Commission is granting 
accelerated approval of the proposed rule change for the reasons 
discussed below.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

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

    NASD is proposing to amend NASD Interpretive Material 3013 (``IM-
3013'') to clearly establish the timing with respect to the requirement 
to submit to the member's board of directors and audit committee a 
report that evidences certain processes that form the basis of a 
certification by the Chief Executive Officer (``CEO'') under Rule 3013. 
Below is the text of the proposed rule change. Proposed new language is 
in italics; proposed deletions are in brackets.
* * * * *

3000. RESPONSIBILITIES RELATING TO ASSOCIATED PERSONS, EMPLOYEES, AND 
OTHERS' EMPLOYEES

* * * * *

IM-3013. Annual Compliance and Supervision Certification

* * * * *

Annual Compliance and Supervision Certification

    The undersigned is the chief executive officer (or equivalent 
officer) of [name of member corporation/partnership/sole 
proprietorship] (the ``Member''). As required by NASD Rule 3013(b), the 
undersigned makes the following certification:
    1. through 2. No change.
    3. The Member's processes, with respect to paragraph 1 above, are 
evidenced in a report reviewed by the chief executive officer (or 
equivalent officer), chief compliance officer, and such other officers 
as the Member may deem necessary to make this certification[[, and]]. 
The final report has been submitted to the Member's board of directors 
and audit committee or will be submitted to the Member's board of 
directors and audit committee (or equivalent bodies) at the earlier of 
their next scheduled meetings or within 45 days of the date of 
execution of this certification.
    4. No change.
* * * * *
    The report required in paragraph 3 of the certification must 
document the member's processes for establishing, maintaining, 
reviewing, testing and modifying compliance policies, that are 
reasonably designed to achieve compliance with applicable NASD rules, 
MSRB rules and federal securities laws and regulations, and any 
principal designated by the member may prepare the report. The report 
must be produced prior to execution of the certification and be 
reviewed by the chief executive

[[Page 15239]]

officer (or equivalent officer), chief compliance officer and any other 
officers the member deems necessary to make the certification and must 
be provided to the member's board of directors and audit committee in 
final form either prior to execution of the certification or at the 
earlier of their next scheduled meetings or within 45 days of execution 
of the certification. The report should include the manner and 
frequency in which the processes are administered, as well as the 
identification of officers and supervisors who have responsibility for 
such administration. The report need not contain any conclusions 
produced as a result of following the processes set forth therein. The 
report may be combined with any other compliance report or other 
similar report required by any other self-regulatory organization 
provided that (1) such report is clearly titled in a manner indicating 
that it is responsive to the requirements of the certification and this 
Interpretive Material; (2) a member that submits a report for review in 
response to an NASD request must submit the report in its entirety; and 
(3) the member makes such report in a timely manner, i.e., annually.
* * * * *

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 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 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
    NASD Rule 3013 requires each member's CEO or equivalent officer to 
certify annually that the member has in place processes to establish, 
maintain, review, modify, and test policies and procedures reasonably 
designed to achieve compliance with applicable NASD rules, MSRB rules 
and the federal securities laws and regulations. The rule is 
accompanied by IM-3013, which sets forth the actual certification 
language and provides additional guidance about the requirements of the 
rule and sets forth certain limitations to its scope. On October 14, 
2005, NASD filed for immediate effectiveness amendments to Rule 3013 to 
extend until April 1, 2006, the date by which members must execute 
their first annual certification pursuant to Rule 3013 and IM-3013.\3\
---------------------------------------------------------------------------

    \3\ Securities Exchange Act Release No. 52727 (Nov. 3, 2005); 70 
FR 68122 (Nov. 9, 2005) (SR-NASD-2005-121).
---------------------------------------------------------------------------

    The certification consists of four attestations, each set forth in 
a separate numbered paragraph within IM-3013. In paragraph 3 of the 
certification, the CEO attests that the member's processes are 
``evidenced in a report reviewed by the chief executive officer (or 
equivalent officer), chief compliance officer, and such other officers 
as the Member may deem necessary to make this certification, and 
submitted to the Member's board of directors and audit committee.''
    IM-3013 does not clearly specify whether a member may submit the 
report to its board of directors and audit committee \4\ after the CEO 
makes the certification, and NASD has interpreted the certification 
language to require a member to submit the report to those entities 
prior to certification. However, it was not NASD's intent to require 
the board of directors or audit committee to review or consider the 
report as a condition to the CEO executing the certification. Rather, 
the requirement that the report be submitted to the member's board of 
directors and audit committee was intended to ensure that those 
governing bodies remain informed of this aspect of the member's 
compliance system in the context of their overall responsibility for 
governance and internal controls of the member for which they serve. 
Accordingly, NASD sees no compelling reason to mandate that the report 
be submitted to the board of directors and audit committee prior to the 
CEO executing the certification, and therefore the proposed rule change 
would permit submission of the final report to these governing bodies 
to take place either before or after the execution of the 
certification, provided that the board of directors and audit committee 
receive the report at the earlier of their next scheduled meeting or 
within 45 days after execution of the certification.\5\ Importantly, 
the board of directors and audit committee must receive the report in 
its final form regardless of whether the member elects to submit it to 
them before or after certification by the CEO.
---------------------------------------------------------------------------

    \4\ IM-3013 requires that members that do not utilize a board of 
directors or audit committee in the conduct of their business must, 
as a part of their process, have the report reviewed by their 
governing bodies and committees that serve similar functions.
    \5\ New York Stock Exchange (``NYSE'') Rule 342.30 also requires 
that each member (or member organization) file by April 1 of each 
year a report that addresses the member organization's supervision 
and compliance efforts during the preceding calendar year, as well 
as ongoing compliance processes and procedures. NYSE Rule 342.30. 
The report must include, among other things, a certification by the 
member or its Chief Executive Officer (or equivalent officer) that 
the member has processes in place, among other things, to establish 
and maintain policies and procedures reasonably designed to achieve 
compliance with applicable Exchange rules and federal securities 
laws and regulations. NYSE Rule 342.30(e). This certification must 
be submitted to the member's board of directors and audit committee 
(if such a committee exists). NYSE Rule 342.30(e)(iii).
    The NYSE interprets the certification delivery requirement of 
Rule 342.30 more restrictively than NASD has proposed to interpret 
the comparable requirement in NASD Rule 3013. Specifically, Rule 
342.30 requires the submittal of the report to the board and the 
audit committee prior to certification. NYSE Information Memo 06-08 
(March 13, 2006). Firms that are dual members of NASD and the NYSE 
are subject to both NASD 3013 and NYSE Rule 342.30 and must, 
therefore, comply with the more restrictive requirements of NYSE 
Rule 342.30. Telephone conversation between Patrice Gliniecki, 
Deputy General Counsel, NASD, and Richard Strasser, Acting Assistant 
Director, Market Regulation, Commission (March 16, 2006).
---------------------------------------------------------------------------

2. Statutory Basis
    NASD believes that the proposed rule change is consistent with the 
provisions of Section 15A of the Act,\6\ in general, and Section 
15A(b)(6) of the Act,\7\ in particular, 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. NASD believes that the proposed rule change will 
further the investor protection goals of the CEO certification 
requirement by ensuring timely receipt of the Rule 3013 report by a 
member's board of directors and audit committee and by providing 
further clarity to the application of the Rule 3013 in its accompanying 
interpretive material.
---------------------------------------------------------------------------

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

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.

[[Page 15240]]

III. 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. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml.
); or     Send an e-mail to rule-comments@sec.gov. Please include 

File Number SR-NASD-2006-036 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-NASD-2006-036. 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, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml
). 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, 100 F Street, NE., 
Washington, DC 20549. Copies of such filing also will be available for 
inspection and copying at the principal office of NASD.
    All comments received will be posted without change; the Commission 
does not edit personal identifying information from submissions. You 
should submit only information that you wish to make available 
publicly. All submissions should refer to the File Number SR-NASD-2006-
036 and should be submitted on or before April 17, 2006.

IV. Commission's Findings and Order Granting Accelerated Approval of 
Proposed Rule Change

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities association.\8\ 
Specifically, the Commission finds that the proposed rule change is 
consistent with Section 15A(b)(6) of the Act,\9\ which requires, among 
other things, that the rules of a national securities association 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. The Commission finds that 
the proposed rule change is consistent with the Act and, in particular, 
with Section 15A(b)(6) of the Act because the proposal should help to 
provide clarity with respect to the timing for the delivery of the 
report required by Rule 3013 while ensuring that the report is 
delivered to the member's board of directors and audit committee (or 
their equivalents) in a timely manner.
---------------------------------------------------------------------------

    \8\ See supra note 6. In approving this proposal, the Commission 
has considered its impact on efficeincy, competition, and capital 
formation. 15 U.S.C. 78c(f).
    \9\ See supra note 7.
---------------------------------------------------------------------------

    NASD has requested that the Commission find good cause for 
approving the proposed rule change prior to the 30th day after 
publication of notice thereof in the Federal Register. The Commission 
finds good cause, pursuant to Section 19(b)(2) of the Act,\10\ for 
approving the proposed rule change prior to the 30th day after the date 
of publication of notice of filing thereof in the Federal Register 
because it believes accelerated approval will reduce the burden of 
members that are currently in the process of taking the necessary steps 
to execute the first CEO certification, which is required to be made by 
April 1, 2006.\11\ Moreover, the Commission does not believe that the 
proposal will reduce the investor protections that the certification 
requirement is intended to promote.
---------------------------------------------------------------------------

    \10\ 15 U.S.C. 78s(b)(2).
    \11\ See Exchange Act Release No. 52727 (Nov. 3, 2005), 70 FR 
68122 (Nov. 9, 2005) (SR-NASD-2005-121) (which, among other things, 
extended until April 1, 2006 the date by which members must execute 
their first annual certification pursuant to Rule 3013 and IM-3013).
---------------------------------------------------------------------------

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\12\ that the proposed rule change (SR-NASD-2006-036), is hereby 
approved on an accelerated basis.
---------------------------------------------------------------------------

    \12\ See supra note 10.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\
---------------------------------------------------------------------------

    \13\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Nancy M. Morris,
Secretary.
[FR Doc. E6-4346 Filed 3-24-06; 8:45 am]

BILLING CODE 8010-01-P