Document ID: SEC-2005-0444-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: National Association of Securities Dealers, Inc.
Posted Date: 2005-12-27T05:00Z

[Federal Register: December 27, 2005 (Volume 70, Number 247)]
[Notices]
[Page 76477-76479]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr27de05-72]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52980; File No. SR-NASD-2005-134]

Self-Regulatory Organizations; National Association of Securities
Dealers, Inc.; Notice of Filing and Immediate Effectiveness of Proposed
Rule Change Relating to the Status of Registered Persons and Sole
Proprietors Serving in the Armed Forces of the United States

December 19, 2005.
    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 November 15, 2005, 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, II, and III below, which Items have been prepared by NASD.
NASD has designated the proposed rule change as constituting a stated
policy, practice, or interpretation with respect to the meaning,
administration, or enforcement of an existing rule of the self-
regulatory organization pursuant to Section 19(b)(3)(A)(i) of the Act
\3\ and Rule 19b-4(f)(1) thereunder,\4\ which renders the proposal
effective upon filing with the Commission. The Commission is publishing
this notice to solicit comments on the proposed rule change from
interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A)(i).
    \4\ 17 CFR 240.19b-4(f)(1).
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I. Self-Regulatory Organization's Statement of the Terms of the
Substance of the Proposed Rule Change

    NASD is proposing to amend NASD IM-1000-2 to (1) clarify that the
scope of the relief provided in the IM extends to any registered person
of a firm who volunteers for or is called into active military duty,
not just registered representatives; (2) codify the staff's existing
interpretation with respect to the receipt of transaction-related
compensation by registered persons who volunteer for or are called into
active military duty; (3) clarify that the relief provided to a
registered person of a firm who volunteers for or is called into active
military duty is available to the person during the period that such
person remains registered with the firm, regardless of whether the
person returns to employment at a different firm upon completion of his
or her active military duty; and (4) clarify that the ``inactive''
status designation is available to registered persons and sole
proprietors who volunteer for or are called into active duty in the
Armed Forces of the United States and is available to them only while
they remain on active military duty.
    Below is the text of the proposed rule change. Proposed new
language is in italics; proposed deletions are in [brackets].
* * * * *
B. SCHEDULE A TO NASD BY-LAWS
* * * * *
IM-1000-2. Status of [Sole Proprietors and Registered Representatives]
Persons Serving in the Armed Forces of the United States
    (a) Inactive Status of Currently Registered Persons
    (1) A[ny] [R]registered [Representative] person of a member who
volunteers for or is called into active duty in the Armed Forces of the
United States shall be placed, after proper notification to [the
Executive Office] NASD, upon inactive status and need not be re-
registered by such member upon his or her return to active employment
with the member. Such a person will remain eligible to receive
transaction-related compensation, including continuing commissions,
because he or she remains registered with a member of NASD. The
employing member also may allow such a person to enter into an
arrangement with another registered person of the member to take over
and service the person's accounts and to share transaction-related
compensation based upon the business generated by such accounts.
However, since such persons are inactive, they may not perform any of
the duties performed by a registered person.

[Any member (Sole Proprietor) who temporarily closes his or her
business by reason of volunteering or being called into the Armed
Forces of the United States, shall be placed, after proper notification
to the Executive Office, on inactive status until his or her return to
active participation in the investment banking and securities
business.]

    (2) A [R]registered [Representative] person who is placed on
inactive status [as set forth above] pursuant to this paragraph (a)
shall not be included within the definition of ``Personnel'' for
purposes of the dues or assessments as provided in Article VI of the
NASD By-Laws.
    [Any member placed on inactive status as set forth above shall not
be required to pay dues or assessments during the pendency of such
inactive status and shall not be required to pay an admission fee upon
return to active participation in the investment banking and securities
business.]
    (3) A [R]registered [Representative] person who is placed on
inactive status [as set forth above] pursuant to this paragraph (a)
shall not be required to complete either of the Regulatory or Firm
Elements of the continuing education requirements set forth in Rule
1120 during the pendency of such inactive status.
    (4) The relief provided in subparagraphs (a)(1), (a)(2), and (a)(3)
shall be available to a registered person who is placed on inactive
status pursuant to this paragraph (a) during the period that such a
person remains registered with the member with which he or she was
registered at the beginning of active duty in the Armed Forces of the
United States, regardless of whether the person returns to active
employment with another member upon completion

[[Page 76478]]

of his or her active duty in the Armed Forces of the United States.
    (5) The relief described in this paragraph (a) will be provided
only to a person registered with a member and only while the person
remains on active military duty.

(b) Inactive Status of Sole Proprietorships

    (1) A member that is a sole proprietor who temporarily closes his
or her business by reason of volunteering for or being called into
active duty in the Armed Forces of the United States, shall be placed,
after proper notification to NASD, on inactive status while the member
remains on active military duty.
    (2) A sole proprietor member placed on inactive status as set forth
in this paragraph (b) shall not be required to pay dues or assessments
during the pendency of such inactive status and shall not be required
to pay an admission fee upon return to active participation in the
investment banking and securities business.
    (3) The relief described in this paragraph (b) will be provided
only to a sole proprietor member and only while the person remains on
active military duty.
* * * * *

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
    Since the September 11, 2001 attacks, NASD has provided tailored
regulatory relief to securities industry professionals who volunteer
for or are called into active military duty. Most notably, in January
2002, NASD filed with the SEC for immediate effectiveness a rule change
that amended NASD IM-1000-2 to codify the staff's position regarding
the relief from NASD Rule 1120 (Continuing Education Requirements) for
securities industry professionals who volunteer for or are called into
active military duty.\5\
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    \5\ See Securities Exchange Act Release No. 45259 (January 9,
2002), 67 FR 2256 (January 16, 2002) (Notice of Filing and Immediate
Effectiveness of Proposed Rule Change to Relieve Registered
Representatives Serving in the Armed Forces From Continuing
Education Requirements) (SR-NASD-2002-03).
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    NASD IM-1000-2 currently permits a firm to place a registered
representative on ``inactive'' status while serving in the Armed Forces
of the United States. Such ``inactive'' status excuses a registered
representative from continuing education obligations, waives dues and
assessments, and ensures that he or she is not subject to the two-year
expiration period for securities licenses of persons who cease to be
registered with a member (``two-year licensing expiration
provisions'').\6\
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    \6\ NASD Rules 1021(c), 1031(c), and 1041(c) provide that if a
person does not register with a member within two years of his or
her last registration, his or her qualification as a principal,
representative, or assistant representative will lapse and the
person must then retest to function as a principal, representative,
or assistant representative. In the case of a person on ``inactive''
status due to active military duty, because he or she is considered
registered for purposes of NASD Rules, the ``two-year licensing
expiration provisions'' do not apply.
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    Additionally, following discussions with the SEC staff, NASD
published on its Web site guidance that provides that ``inactive''
registered persons serving in the Armed Forces of the United States may
receive transaction-related compensation, provided that they do not
perform any functions of a registered person while on ``inactive''
status.\7\
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    \7\ See Registered Persons on Active Military Duty (available
at: http://www.nasd.com/ web/idcplg?IdcService=SS-- GET--

PAGE&ssDocName =NASDW--014635&ssSourceNodeId= 1091). The NASD
staff's interpretation with respect to the receipt of transaction-
related compensation by registered persons serving in the Armed
Forces of the United States is consistent with the New York Stock
Exchange, Inc.'s (``NYSE'') interpretation to NYSE Rule 345(a),
which the NYSE codified in June 2002. See NYSE Interpretation
Handbook, NYSE Rule 345(a)/03. Telephone conversation between Mia
Zur, Attorney, Jan Woo, Attorney, Division, Commission, and Afshin
Atabaki, Counsel, NASD, dated December 8, 2005.
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    NASD has recently received requests for further clarification on
the scope of NASD IM-1000-2 and the accompanying guidance. In
particular, members have questioned whether the IM applies to
registered persons other than registered representatives and whether
registered persons can receive commissions on accounts that have been
temporarily re-assigned in their absence. Members also have questioned
the manner in which the relief applies if a registered person seeks
employment with a different member upon completing active military
duty.\8\
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    \8\ Some members have questioned whether the return of a
registered person who volunteers for or is called into active
military duty to employment at a different member would negate or
invalidate the relief the person has received while being deemed
``inactive'' at his original employing member.
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    In response, NASD is proposing the following amendments to NASD IM-
1000-2 to clarify its scope and codify NASD's existing guidance with
respect to the receipt of transaction-related compensation by
registered persons actively serving in the Armed Forces of the United
States.
    First, NASD is proposing to amend NASD IM-1000-2 to clarify that
the scope of the relief provided in the IM extends to any registered
person of a member who volunteers for or is called into active military
duty, not just registered representatives.
    Second, NASD is proposing to amend NASD IM-1000-2 to expressly
state that a registered person of a member who volunteers for or is
called into active duty in the Armed Forces of the United States and
who is placed on ``inactive'' status will remain eligible to receive
transaction-related compensation, including continuing commissions,
because he or she remains registered with a member of NASD. In
addition, NASD is proposing to amend NASD IM-1000-2 to provide that an
employing member may allow such a person to enter into an arrangement
with another registered person of the member to take over and service
the person's accounts and to share transaction-related compensation
based upon the business generated by such accounts. NASD also is
proposing to amend NASD IM-1000-2 to state that such ``inactive''
persons may not perform any of the duties performed by a registered
person. As noted above, the proposed amendments are consistent with
NASD's existing interpretation with respect to the receipt of
transaction-related compensation by registered persons actively serving
in the Armed Forces of the United States, as well as the NYSE's
interpretation to NYSE Rule 345(a).\9\
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    \9\ The relief regarding the ongoing receipt of transaction-
based compensation does not extend to a sole proprietor member
placed on ``inactive'' status pursuant to NASD IM-1000-2. Rather,
consistent with current practice, NASD staff, in consultation with
SEC staff, will address such issues in the context of a sole
proprietor member placed on ``inactive'' status on a case-by-case
basis. See NYSE Interpretation Handbook, NYSE Rule 345(a)/03.
Telephone conversation between Mia Zur, Attorney, Jan Woo, Attorney,
Division, Commission, and Afshin Atabaki, Counsel, NASD, dated
December 8, 2005.
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    Third, NASD is proposing to amend NASD IM-1000-2 to clarify that
the

[[Page 76479]]

relief provided to a registered person of a member who volunteers for
or is called into active military duty is available to the person
during the period that such person remains registered with the member,
regardless of whether the person returns to employment at a different
member upon completion of his or her active military duty. Accordingly,
under the proposal, NASD will not rescind the relief provided to such a
person simply because he or she decides to register with another member
upon completion of his or her active military duty. For instance, if a
registered person of Firm Y who volunteers for or is called into active
military duty and who is placed on ``inactive'' status with Firm Y
decides to register with Firm Z upon completion of her active military
duty, NASD will not invalidate the relief that was provided to the
person while on ``inactive'' status with Firm Y.
    Fourth, NASD is proposing to amend NASD IM-1000-2 to clarify that
the ``inactive'' status designation is available to registered persons
and sole proprietors who volunteer for or are called into active duty
in the Armed Forces of the United States and is available to them only
while they remain on active military duty. Therefore, under the
proposal, a registered person who is placed on ``inactive'' status
pursuant to NASD IM-1000-2 will be removed from ``inactive'' status if
the person ceases to be registered with a member while serving in the
Armed Forces of the United States.\10\ If he or she re-registers with a
member while still serving in the Armed Forces of the United States, he
or she will again be eligible for ``inactive'' status pursuant to the
IM. Further, under the proposal, a registered person or sole proprietor
who is placed on ``inactive'' status pursuant to NASD IM-1000-2 will be
removed from ``inactive'' status if the registered person or sole
proprietor is no longer on active military duty.
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    \10\ In conjunction with this filing, NASD is filing a proposed
rule change with the Commission to address the status of persons who
terminate their registration with a member while on active military
duty and persons who commence their active military duty within two
years after they have ceased to be registered with a member,
including the application of the ``two-year licensing expiration
provisions'' to such persons. See SR-NASD-2005-135.
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    NASD is proposing to implement the proposed rule change immediately
upon filing with the Commission.
2. Statutory Basis
    NASD believes that the proposed rule change is consistent with the
provisions of Section 15A(b)(6) of the Act,\11\ 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 provides
appropriate tailored relief to persons actively serving in the Armed
Forces of the United States in a manner consistent with NASD's goals of
investor protection and market integrity.
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    \11\ 15 U.S.C. 78o-3(b)(6).
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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.

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

    The proposed rule change has become effective pursuant to Section
19(b)(3)(A)(i) of the Act \12\ and Rule 19b-4(f)(1) thereunder,\13\ in
that the proposed rule change constitutes a stated policy, practice, or
interpretation with respect to the meaning, administration, or
enforcement of an existing rule of the self-regulatory organization.
NASD has proposed to implement the rule change immediately upon filing
with the Commission. NASD will announce the proposed rule change in a
Notice to Members to be published no later than 60 days after SEC
Notice of this filing.
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    \12\ 15 U.S.C. 78s(b)(3)(A)(i).
    \13\ 17 CFR 240.19b-4(f)(1).
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    At any time within 60 days of the filing of the proposed rule
change, the Commission may summarily abrogate such rule change if it
appears to the Commission that such action is necessary or appropriate
in the public interest, for the protection of investors, or otherwise
in furtherance of the purposes of the Act.

IV. 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-2005-134 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-9303.
    All submissions should refer to File Number SR-NASD-2005-134. 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. Copies of such
filing also will be available for inspection and copying at the
principal office of the 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
File Number SR-NASD-2005-134 and should be submitted on or before
January 17, 2006.

    For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. E5-7839 Filed 12-23-05; 8:45 am]

BILLING CODE 8010-01-P