Self-Regulatory Organizations; Notice of Filing and Immediate Effectiveness of Proposed Rule Changes by the New York Stock Exchange, Inc. and the National Association of Securities Dealers, Inc. Relating to an Exemption from the Research Analyst Qualification Examination for Certain Associated Persons Employed by Non-Member Foreign Affiliates Who Contribute to the Preparation of Member Research Reports, 24148-24154 [E5-2212]
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24148
Federal Register / Vol. 70, No. 87 / Friday, May 6, 2005 / Notices
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.7
J. Lynn Taylor,
Assistant Secretary.
[FR Doc. E5–2203 Filed 5–5–05; 8:45 am]
I. Self-Regulatory Organizations’
Statements of the Terms of Substance of
the Proposed Rule Changes
BILLING CODE 8010–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–51644; File Nos. SR–NYSE–
2005–25; SR–NASD–2005–043]
Self-Regulatory Organizations; Notice
of Filing and Immediate Effectiveness
of Proposed Rule Changes by the New
York Stock Exchange, Inc. and the
National Association of Securities
Dealers, Inc. Relating to an Exemption
from the Research Analyst
Qualification Examination for Certain
Associated Persons Employed by NonMember Foreign Affiliates Who
Contribute to the Preparation of
Member Research Reports
A. NYSE’s Proposed Rule Text
May 2, 2005.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Exchange Act’’ or the ‘‘Act’’) 1 and
Rule 19b–4 thereunder,2 notice is
hereby given that on April 1, 2005, the
New York Stock Exchange, Inc.
(‘‘NYSE’’ or the ‘‘Exchange’’) and the
National Association of Securities
Dealers, Inc. (‘‘NASD’’), filed with the
Securities and Exchange Commission
(‘‘SEC’’ or ‘‘Commission’’) the proposed
rule changes as described in Items I and
II below, which Items have been
prepared by the respective selfregulatory organizations.3 The NYSE
and NASD (the ‘‘SROs’’) have each filed
the proposed rule changes as
constituting a stated policy, practice, or
interpretation with respect to the
meaning, administration, or
enforcement of an existing rule pursuant
to Section 19(b)(3)(A) of the Act 4 and
Rule 19b–4(f)(1) thereunder,5 which
renders the proposed rule changes
effective upon filing with the
Commission. The Commission is
publishing this notice to solicit
comments on the proposed rule changes
from interested persons.
7 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 On May 2, 2005, the NYSE filed with the
Commission Amendment No. 1 to its proposed rule
change which made technical corrections to the
proposed rule text of the proposed rule change.
4 15 U.S.C. 78s(b)(3)(A).
5 17 CFR 240.19b–4(f)(1).
1 15
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The NYSE is filing with the
Commission a proposed interpretation
to NYSE Rule 344 to establish an
exemption from the Research Analyst
Qualification Examination
Requirements for Certain Foreign
Research Analysts.
Pursuant to the provisions of Section
19(b)(3) of the Act,6 the NASD is filing
with the Commission a proposed rule
change to amend NASD Rule 1050 to
create an exemption from the Research
Analyst Qualification Examination
(Series 86 and 87) for certain research
analysts employed by foreign affiliates
of a member who contribute to the
preparation of a member’s research
reports. The proposed rule change also
makes one non-substantive change to
NASD Rule 1050 to correct a spelling
error.
Below is the text of the proposed rule
changes. Brackets indicate deletions;
italics indicate additions.
18:03 May 05, 2005
Jkt 205001
Interpretation
Rule 344 Research Analysts and
Supervisory Analysts
/01 Research Analysts (No Change)
/02 Foreign Research Analysts
Exemption
The requirement that a research
analyst as defined under NYSE Rule
344.10 must be registered with, qualified
by and approved by the Exchange shall
not apply where such analyst is an
associated person of a member or
member organization who is an
employee of a non-member foreign
affiliate of such member or member
organization who contributes to the
preparation of the member’s or member
organization’s research reports (‘‘foreign
research analyst’’), provided the
following conditions are satisfied;
• The foreign research analyst resides
and is employed in a jurisdiction that
the NYSE has determined has
registration and qualification
requirements or other standards that
reflect a recognition of principles that
are consonant with NYSE Rule 344 and
the research analyst conflicts of interest
provisions pursuant to NYSE Rule 472;
• The foreign research analyst has
satisfied all applicable registration and
qualification requirements or other
research-related standards in the
jurisdictions in which the foreign
research analyst resides and is
employed;
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6 15
U.S.C. 78s(b)(3).
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• Members and member
organizations have imposed on affiliates
that employ foreign research analysts,
and the foreign research analysts all
research-related standards that the
member or member organization
imposes on its research reports and
research analysts, including the
provisions of NYSE Rule 472;
• Members, member organizations
and their affiliates that distribute
research reports partially or entirely
prepared by a foreign research analyst
must subject such research reports to
pre-use review and approval by a
supervisory analyst, as required by
NYSE Rule 472;
• The annual attestation required
under NYSE Rule 351(f) must include
the global application of NYSE Rule 472
to foreign affiliates that employ foreign
research analysts;
• In addition to the disclosure
requirements of NYSE Rule 472, each
research report must include a
disclosure on the front page stating that:
• ‘‘This research report has been
prepared in whole or part by foreign
research analysts who may be
associated persons of the member or
member organization. These research
analysts are not registered/qualified as
a research analyst with the NYSE and/
or NASD, but instead have satisfied the
registration/qualification requirements
or other research-related standards of a
foreign jurisdiction that have been
recognized for these purposes by the
NYSE and NASD.’’
Disclosure on the front page of each
research report must identify:
(1) Each affiliate contributing to the
research report;
(2) The location of such affiliate; and
(3) The names of the foreign research
analysts employed by each contributing
affiliate.
The cover page must also contain
general disclosure language describing
the relationship between the
contributing affiliates and the member
or member organization.
The front page of the research report
must also refer to a separate ‘‘Foreign
Affiliate Disclosures’’ section (similar to
the ‘‘Required Disclosure’’ section
currently mandated by the NYSE and
NASD under Rules 472 and 2711
respectively) located in close proximity
to the ‘‘Required Disclosure’’ section.
In this disclosure section, the member
or member organization must disclose
the following:
(1) Information on the nature of the
affiliation with the affiliate;
(2) Each affiliate’s address; and
(3) The primary regulator in the
jurisdiction(s) in which each affiliate is
located.
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Record Keeping
Members and member organizations
must establish and maintain records
that identify those individuals who have
availed themselves of this exemption,
the basis for such exemption, and
evidence of compliance with the
conditions of the exemption.
[/02]/03 Supervisory Analysts
Qualifications
Supervisory Analyst candidates shall
qualify by taking and passing the
Supervisory Analyst (Series 16)
Examination.
Experience
Appropriate experience for a
candidate for Supervisory Analyst
means having at least three years prior
experience within the immediately
preceding six years involving securities
or financial analysis.
Examples of appropriate experience
may include the following:
• Equity or Fixed Income Research
Analyst;
• Credit Analyst for a securities rating
agency;
• Supervising preparation of
materials prepared by financial/
securities analysts;
• Financial analytical experience
gained at banks, insurance companies or
other financial institutions;
• Academic experience relating to the
financial/securities markets/industry.
Director of Research
A person having the title of ‘‘Director
of Research’’ need not be a supervisory
analyst as defined by the Rule so long
as he/she does not approve research
reports. If, however, such a person is in
charge of registered representatives, he/
she must qualify as a supervisory person
under Rule 342.13.
Exemptions
Successful completion of the CFA
Level I Examination administered by the
CFA Institute (in lieu of completion of
Levels, I, II and III for a full CFA
designation) will suffice to allow a
Supervisory Analyst candidate to
qualify by taking Part I of the Series 16
Qualification Examination.
B. NASD’s Proposed Rule Text
1050. Registration of Research Analysts
(a) through (b) No change.
(c) Upon written request pursuant to
the Rule 9600 Series, NASD will grant
a waiver from the analytical portion of
the Research Analyst Qualification
Examination (Series 86) upon
verification that the applicant has
passed:
(1) Levels I and II of the Chartered
Financial Analyst (‘‘CFA’’) Examination;
or
(2) Through (3) No change.
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18:03 May 05, 2005
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(d) Through (e) No change
(f) The requirements of paragraph (a)
shall not apply to an associated person
who is an employee of a non-member
foreign affiliate who contributes to the
preparation of a member’s research
report (‘‘foreign research analyst’’),
provided the following conditions are
met:
(1) The foreign research analyst
resides and is employed in a jurisdiction
that NASD has determined has
registration and qualification
requirements or other standards that
reflect a recognition of principles that
are consonant with this rule and the
research analyst conflict of interest rules
pursuant to Rule 2711;
(2) The foreign research analyst has
satisfied all applicable registration and
qualification requirements or other
research-related standards in the
jurisdiction in which the foreign
research analyst resides and is
employed;
(3) The NASD member (‘‘U.S.
member’’) whose research reports a
foreign research analyst contributes in
the preparation of has imposed on its
affiliates and the foreign research
analysts they employ all of the
provisions of Rule 2711 and all other
research-related standards the member
imposes on its own research reports and
research analysts;
(4) The annual compliance attestation
submitted by the U.S. member pursuant
to Rule 2711(i) must encompass the
global application of Rule 2711 to the
U.S. member’s foreign affiliates that
participate in the preparation of the
U.S. member’s research reports;
(5) All U.S. member research reports
to which a foreign research analyst
contributes in the preparation must be
approved by a properly registered
principal or supervisory analyst
pursuant to Rule 1022; and
(6) In addition to the disclosure
requirements of Rule 2711, each U.S.
member research report to which a
foreign research analyst contributes in
the preparation shall include the
following on the front page:
(A) A statement that:
• This research report has been
prepared in whole or part by foreign
research analysts who may be
associated persons of the member or
member organization. These research
analysts are not registered/qualified as
a research analyst with the NYSE and/
or NASD but instead have satisfied the
registration/qualification requirements
or other research-related standards of a
foreign jurisdiction that have been
recognized for these purposes by the
NYSE and NASD.’’
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24149
(B) disclosures identifying each
affiliate contributing to the research
report, the location of such affiliate, and
the names of the research analysts
employed by the affiliate that
contributed to the preparation of the
research report;
(C) a general description of the
relationship between the contributing
affiliates and the U.S. member; and
(D) a reference to the page on which
a separate ‘‘Foreign Affiliate
Disclosures’’ section can be found. Such
section shall disclose information on the
nature of the affiliation between the
entities, the affiliates’ addresses, and
the primary regulator in the
jurisdiction(s) in which each affiliated
entity is located.
(7) Members must establish and
maintain records that identify those
individuals who have availed
themselves of the exemption in
paragraph (f), specify the basis for such
exemption, and evidence compliance
with the conditions of paragraph (f).
II. Self-Regulatory Organizations’
Statements of the Purpose of, and
Statutory Basis for, the Proposed Rule
Changes
In their filings with the Commission,
the NYSE and NASD included
statements concerning the purpose of
and basis for the proposed rule changes
and discussed any comments they
received on the proposed rule changes.
The text of these statements may be
examined at the places specified in Item
IV below. The NYSE and NASD have
prepared summaries, set forth in
Sections A, B, and C below, of the most
significant aspects of such statements.
A. Self-Regulatory Organizations’
Statements of the Purpose of, and
Statutory Basis for, the Proposed Rule
Changes
(1) NYSE’s Purpose
Recent amendments to NYSE Rule
344 (‘‘Research Analysts and
Supervisory Analysts’’) require
‘‘research analysts’’ to be registered
with, qualified by, and approved by the
Exchange. The Exchange is proposing to
adopt a new interpretation to NYSE
Rule 344 to exempt certain foreign
research analysts employed by a nonmember affiliate of a member or member
organization from the Research Analyst
Qualification Examination (Series 86/
87).
Background. Recent amendments to
NYSE Rule 344 require that research
analysts be registered and qualified by
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Federal Register / Vol. 70, No. 87 / Friday, May 6, 2005 / Notices
the NYSE.7 According to the NYSE, the
Research Analyst Qualification
Examination is part of the SRO’s
regulatory efforts to safeguard the
investing public from potential conflicts
of interest relating to research analysts.
The NYSE believes that the purpose of
requiring a qualification examination is
to protect the investing public by
helping to ensure that research analysts
are competent to perform their jobs and
are knowledgeable about the new
regulatory requirements affecting them.
Given the scope and magnitude of these
requirements, the SROs developed an
examination with a part designed
specifically to address the new SRO rule
requirements.
The Research Analyst Qualification
Examination (Series 86/87) is a five-anda-half hour examination, consisting of
150 questions. The exam is divided into
two parts. Part I, the Series 86, consists
of 100 questions, which address
fundamental security analysis and
valuation of equity securities. Part II, the
Series 87, consists of 50 questions,
which primarily address pertinent SRO
and SEC rules and regulations,
including the recent Research Analysts’
Conflicts Rules.
The requirement to take and pass the
Series 86/87 examination applies to all
research analysts, as defined in
Exchange Rule 344.10, which provides
that the term ‘‘research analyst’’
includes a member, allied member,
associated person or employee who is
primarily responsible for the
preparation of the substance of a
research report and/or whose name
appears on such report.8 Research
analysts, must be registered with,
qualified and approved by the
Exchange. The registration and
qualification requirement became
effective March 30, 2004. Candidates
who have been functioning as research
analysts as of the effective date of March
30, 2004, and submitted a registration
application by June 1, 2004, have been
given until April 4, 2005 to meet the
qualification requirements.
Prerequisites to and Exemptions from
the Qualification Examination. In
March 2004, the SEC approved an
interpretation to Exchange Rule 344
establishing certain prerequisites to and
exemptions from the Research Analyst
7 According to the NYSE, the amendments were
the culmination of joint regulatory efforts among
the SROs and the SEC to address potential conflicts
of interest relating to research analysts. The
amendments included, among other things, a new
registration category and qualification examination
for research analysts.
8 See SR–NYSE–2005–24 amending the definition
of ‘‘research analyst’’ in NYSE Rules 344.10 and
472.40 to include ‘‘associated persons.’’
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Qualification Examination.9 The
interpretation to NYSE Rule 344
requires, among other things, that each
candidate pass the General Securities
Registered Representative Examination
(Series 7) prior to taking either Part I or
Part II of the examination. The
interpretation to Exchange Rule 344 also
allows a research analyst candidate who
has passed both Level I and Level II of
the Chartered Financial Analyst
(‘‘CFA’’) Examination administered by
the CFA Institute to request an
exemption from Part I (Series 86) of the
Research Analyst Qualification
Examination.10
Application of Examination
Requirement to Foreign Research
Analysts. In March 2004, the NYSE and
NASD issued a Joint Memo providing
guidance on research analyst issues. In
that memo, the SROs stated that all of
the SRO rule requirements would apply
to any research report to whose
preparation a research analyst employed
or associated with a member or member
organization contributed (e.g., ‘‘globallybranded’’ and ‘‘mixed research team’’ 11
research reports, whether or not issued
by a member or member organization).
In April 2004, the Exchange issued an
Information Memo announcing the
approval of the examination
requirements noted above and
discussing examination-related
requirements.12
In June 2004, the SROs received a
written submission from Goldman
Sachs & Co. (‘‘Goldman’’) requesting
relief under NASD Rule 1050 and NYSE
Rule 344 for equity research analysts
employed by its foreign broker-dealer
9 See Securities Exchange Act Release No. 49464
(March 24, 2004), 69 FR 16628 (March 30, 2004)
(SR–NYSE–2004–03).
10 In February 2005, the SEC provided public
notice of a similar alternative qualification standard
for the Series 86 examination requirement for
research analysts who prepare only technical
research reports and who have passed Levels I and
II of the Chartered Market Technician (‘‘CMT’’)
Program administered by the Market Technicians
Association (‘‘MTA’’). See Securities Exchange Act
Release No. 51240 (February 23, 2005), 70 FR 10451
(March 3, 2005) (SR–NYSE–2005–12).
11 A ‘‘globally-branded’’ research report refers to
the use of a single marketing identity that
encompasses the member firm and its affiliates. A
research report prepared by a ‘‘mixed research
team’’ which includes at least one person who
meets the definition of ‘‘research analyst’’ and is
associated with a member or member organization
would be considered a report prepared by the
member or member organization. See NYSE
Information Memo 04–10, dated March 9, 2004.
12 See NYSE Information Memo 04–16, dated
April 1, 2004. In these memos, the SROs advised
that research analysts employed by foreign brokerdealer affiliates of a member or member
organization are subject to the Series 86/87
examination to the extent that the research analyst
is an ‘‘associated person’’ of the member or member
organization.
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affiliates, and seeking further
clarification as to whether research
analysts employed by a foreign brokerdealer should appropriately be deemed
‘‘associated persons’’ of the NASD/
NYSE member firms in the context of
global businesses.13 In its submission,
Goldman requested that U.S. regulators
should consider the impact that such
views could have on many firms’
businesses, including possible licensing
consequences on the U.S. broker-dealers
in such foreign jurisdictions, and other
issues of international comity.
In July 2004, the Exchange received a
written submission from Smith Barney
Citigroup (‘‘Smith Barney’’) requesting
clarification with respect to treatment of
research analyst employees of foreign
broker-dealer affiliates.14 Citing the
SROs’ memos, Smith Barney advised
that there were widely divergent
approaches and practices developing as
a result of the interpretive guidance. In
this regard, some firms had begun the
process of having foreign research
analysts prepare for the examination,
while other firms, contrary to the
express language in the interpretation,
were applying the examination
requirements only to U.S. research
analysts. In its submission, Smith
Barney requested further clarification of
the interpretive guidance to facilitate
consistent application by member
organizations.
Smith Barney also requested that the
SROs adopt a different approach,
proposing that they recognize non-U.S.
research analysts who (a) are properly
registered and licensed to conduct
securities business in their country of
residence and (b) are subject to policies
that are substantively identical to the
SRO rules, could publish research in the
U.S. under a global-research trademark
without having to be licensed in the
U.S. The term ‘‘substantively identical’’
was defined to include clearance of all
research by a Series 16 supervisory
analyst and supervision by a Series 24
principal. Under the requested relief, a
non-U.S. research analyst would not
have to take either the Series 7
prerequisite or the Series 86/87
examination.
According to the NYSE, in subsequent
meetings and conference calls with
member firms, they expressed their
concern that the determination of
‘‘associated person’’ status can be very
difficult to ascertain in a financial
services enterprise that has a complex
13 Letter dated June 1, 2004 from Pamela Root and
John Curtis of Goldman to the Exchange and NASD.
14 Letter dated July 23, 2004 from Michael Sharp
of Smith Barney to Richard G. Ketchum, Chief
Regulatory Officer of the NYSE.
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structure of supervision and multiple
reporting lines and subsidiaries and/or
affiliated firms that span a multitude of
foreign jurisdictions.
On February 25, 2005, the SROs
received a written submission from an
industry committee 15 requesting SRO
interpretive guidance to establish a safe
harbor pursuant to which non-U.S.
research analysts that are associated
with U.S. member firms would be
permitted to disseminate research in the
U.S., notwithstanding the fact that such
research analysts have not taken the
Series 86/87 examination. According to
the NYSE, the proposed relief sought by
the industry committee, and the
conditions thereto, are substantially
similar to the relief the SROs are
implementing in this filing.16
According to the NYSE, in seeking
this relief, the industry advised that the
safe harbor was appropriate and
reasonable for the following reasons: (1)
It respects the primacy of the laws of
other jurisdictions by avoiding
circumstances under which research
analysts could become subject to
multiple licensing requirements and
taking multiple exams in many different
countries; (2) it makes clear that nonU.S. research analysts associated with a
member firm are held to the principles
enumerated in the SRO rules; and (3)
U.S. investors would have sufficient
notice through the disclosure to the
effect that non-U.S. research analysts
associated with a member firm are not
subject to the SROs’ registration and
qualification standards.
According to the NYSE, while the
SROs do not agree that the difficulty of
the associated person analysis relieves a
member firm from making the
determination of such status, the SROs
are concerned that, absent the safe
harbor provided in this proposal,
members and member organizations
may have a pragmatic incentive,
although not a defensible basis, for
construing associated person status on
an unduly narrow basis.
According to the NYSE, in order to
address these issues while
maintaining—and in fact, extending—
the safeguards in the SRO rules that
ensure objective and quality research,
the SROs are proposing an exemption
from the research analyst qualification
requirements for certain analysts
employed by foreign entities in
jurisdictions that reflect a recognition of
the principles that are consonant with
15 The signatories to the submission were
representatives from Goldman, Morgan Stanley and
Smith Barney.
16 In addition, Commission staff received a copy
of this submission with supporting documentation.
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the SRO qualification standards and
research analyst conflict of interest
rules.
According to the NYSE, the proposed
exemption would, where appropriate,
address: (1) the requirement that foreign
research analysts, when they are
‘‘associated persons,’’ to register and
qualify as research analysts under the
SRO rules; (2) the applicability of the
SRO rules with respect to research
reports where foreign research analysts
have contributed to the preparation; and
(3) provide additional disclosure
requirements related to such research
reports, including but not limited to,
globally branded and mixed research
team reports.
Proposed Exemptive Relief. The NYSE
and NASD are proposing to exempt
from the Series 86 and 87 examination
requirements certain research analysts
employed by foreign affiliates who
contribute to the preparation of a
member or member organization’s
research reports.17
The SROs would recognize as the
basis for exemptive relief from the
Series 86 and 87 exams registration/
qualification requirements, compliance
with other standards in non-US
jurisdictions that reflect recognition of
the principles that are consonant with
the SRO qualification standards and the
research analyst conflict of interest
rules.18 The SROs will identify the
jurisdictions that satisfy the prescribed
criteria.
According to the NYSE, such
principles generally would include a
combination of: (1) Rules that govern
research analysts and firm conflicts of
interest in the preparation and
distribution of research reports; (2) a
requirement that research analysts be
registered or licensed by a regulatory
authority: or (3) a testing or experience
requirement that demonstrates research
analysts’ skills and/or knowledge of
rules and regulations applicable to
research analysts and their firms in the
preparation and distribution of research
reports.
Foreign research analysts who
participate in preparing a member firm’s
17 The proposed rule change would have no
impact on the obligation of any broker-dealer,
including a foreign broker-dealer, to register
pursuant to Section 15(a)(1) of the Securities
Exchange Act of 1934 and the rules promulgated
thereunder.
18 Eligibility for the exemption contemplated by
this proposed rule change in no way bears upon
whether the foreign research analyst is an
‘‘associated person’’ of the member or member
organization. To the extent that a member or
member organization can determine that a foreign
research analyst is not an ‘‘associated person,’’
those individuals need not satisfy the requirements
of the rule or the exemption.
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research reports, including but not
limited to globally-branded and/or
mixed research team reports, and have
met applicable requirements in a
jurisdiction with approved standards,
will not be required to pass the Series
86 and 87 exams, provided the member
or member organization complies with
the other requirements set forth
herein: 19
1. The SROs would require global
application of a member firm’s own
standards, including full compliance
with the SRO research analyst conflict
of interest rules, to a member’s or
member organization’s affiliated entities
and foreign research analysts that
qualify for the use of, and who will rely
upon, these exemptive provisions. Thus,
a member or member organization
would be required to subject any
globally-branded, mixed-team or other
research deemed under the SRO rules
and interpretations to be that of the
member or member organization, to all
of the applicable provisions of the SRO
rules as well as any other regulatory or
supervisory standards applicable to a
member’s or member organization’s
research. Thus, the research provisions
of NYSE Rule 472, e.g., personal trading
restrictions, would be applied to the
specific research reports and the
particular foreign research analysts that
contributed to the preparation of a
member’s or member organization’s
research report. The conditions of this
paragraph shall not apply to research
reports that are wholly produced by a
foreign affiliate and its employee and
are clearly labeled as the product of that
foreign affiliate.20
2. The annual compliance attestation
required by NYSE Rules 472 and 351
would encompass the global application
of the SRO rules to foreign affiliates that
participate in preparing a member’s or
member organization’s research report.
3. Members’ and member
organizations’ research reports must be
approved by a properly registered
supervisory analyst/principal.21
4. In addition to the disclosure
requirements of NYSE Rule 472, each
report would include a disclosure on
the front cover stating that:
This research report has been prepared in
whole or part by foreign research analysts
19 Foreign research analysts in jurisdictions that
do not have approved standards would still be
required to pass the Series 86 and 87 examinations
if they are ‘‘associated persons’’ and participate in
the preparation of a member’s or member
organization’s research report.
20 See Information Memo Nos. 02–26 (June 26,
2002) and 04–10 (March 9, 2004) for a member’s or
member organization’s disclosure requirements
when distributing third party research of an affiliate
or non-affiliate.
21 NYSE Series 16.
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who may be associated persons of the
member or member organization. These
research analysts are not registered/qualified
as research analysts with the NYSE and/or
NASD, but instead have satisfied the
registration/qualification requirements or
other research-related standards of a foreign
jurisdiction that have been recognized for
these purposes by the NYSE and NASD.
In addition, the front page of a
research report must identify:
(1) Each affiliate contributing to the
research report;
(2) The location of such affiliate; and
(3) The names of the research analysts
contributing to the report employed by
each affiliate.
The front page would also contain
general disclosure language describing
the relationship of the contributing
affiliates to the NYSE/NASD member
firm. The front page of the research
report would also refer to a separate
‘‘Foreign Affiliate Disclosures’’ section
(similar to the ‘‘Required Disclosure’’
section currently mandated by the
SROs) located in close proximity to the
Required Disclosure section.
In this disclosure section, the member
or member organization would disclose
the following:
(1) Information on the nature of the
affiliation of the parties;
(2) The affiliates’ addresses; and
(3) The primary regulator in the
jurisdiction(s) in which each affiliate is
located.
Members and member organizations
must establish and maintain records
that identify those individuals who have
availed themselves of the exemption,
the basis for such exemption, and
evidence of compliance with the
conditions of the exemption.
As of the date of this filing, the SROs
have identified the following
jurisdictions that have satisfied the
applicable standards noted above: 22
(1) China.
(2) Hong Kong.
(3) Japan.
(4) Malaysia.
(5) Singapore.
(6) Thailand.
(7) United Kingdom.
A review of jurisdictions named
above revealed that they had in place
registration/qualification requirements
for research analysts and/or imposed
conflict of interest disclosure
requirements, and/or restrictions on
research analysts’ trading that were
acceptable to the SROs. Accordingly,
the proposed amendment seeks an
exemption for foreign research analysts
22 The Exchange will announce these
jurisdictions in an Information Memo and will issue
subsequent Information Memos to update the list of
the approved jurisdictions, as needed.
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employed in these jurisdictions from the
Research Analyst Qualification
Examination requirement.
(2) NYSE’s Statutory Basis
The statutory basis for this proposed
rule change is Section 6(b)(5) 23 and
Section 6(c)(3)(B) 24 of the Exchange
Act. Under Section 6(b)(5), the rules of
the Exchange must be designed to
protect investors and the public interest.
The Exchange believes that the
proposed rule change is consistent with
Section 6(b)(5) in that it will ensure that
those research analysts contributing to
the preparation of a member’s or
member organization’s research reports
are subject to a regulatory scheme that
advances objective and unbiased
research thereby enhancing investors
protection.
Under Section 6(c)(3)(B), it is the
Exchange’s responsibility to prescribe
standards of training, experience and
competence for persons associated with
Exchange members and member
organizations. In addition, the Exchange
may bar a natural person from becoming
a member or person associated with a
member, if such natural person does not
meet such standards of training,
experience and competence as
prescribed by the rules of the Exchange.
Pursuant to this statutory obligation, the
Exchange has developed a competency
qualification examination for research
analysts and is providing relief from this
requirement where foreign research
analysts and their member firms have
demonstrated registration, qualification,
and conflict of interest standards
acceptable to the Exchange.
(3) NASD’s Purpose
NASD Rule 1050 requires an
associated person who functions as a
research analyst to register as such with
NASD and pass a qualification
examination. According to NASD,
NASD Rule 1050 is intended to ensure
that research analysts possess a certain
competency level to perform their jobs
effectively and in accordance with
applicable rules and regulations. In the
context of this requirement, NASD Rule
1050 defines ‘‘research analyst’’ as ‘‘an
associated person who is primarily
responsible for the preparation of the
substance of a research report or whose
name appears on a research report.’’ The
term ‘‘research report’’ in NASD Rule
1050 has the meaning as defined in
NASD Rule 2711(a)(8): ‘‘A written or
electronic communication that includes
an analysis of equity securities of
individual companies or industries, and
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23 15
24 15
U.S.C. 78f(b)(5).
U.S.C. 78f(c)(3)(B).
Frm 00192
Fmt 4703
Sfmt 4703
that provides information reasonably
sufficient upon which to base an
investment decision.’’
Pursuant to NASD Rule 1050, and in
conjunction with the NYSE, NASD has
implemented the Research Analyst
Qualification Examination (Series 86/
87). The examination consists of an
analysis part (Series 86) and a regulatory
part (Series 87). Prior to taking either
the Series 86 or 87, a candidate also
must have passed the General Securities
Registered Representative Examination
(Series 7), the Limited Registered
Representative (Series 17), or the
Canada Module of Series 7 (Series 37 or
38). Persons who were functioning as
research analysts on the effective date of
March 30, 2004 and submitted a
registration application to NASD by
June 1, 2004, have until April 4, 2005
to meet the registration requirements.
NASD Rule 1050 currently provides
exemptions from the Series 86
examination for certain applicants who
have passed Levels I and II of the
Chartered Financial Analyst
examination or have passed Levels I and
II of the Chartered Market Technician
Examination and produce only
‘‘technical research reports’’ as that term
is defined in NASD Rule 1050.
NASD has observed that members
with global operations sometimes
produce research reports under a single
global brand name or jointly with a
research analyst employed by a nonmember affiliate, i.e. a ‘‘mixed team’’
research report. NASD and NYSE have
deemed such research reports to be
attributable to the member and therefore
subject to the applicable requirements of
NASD Rule 2711. This interpretation
has raised the question of whether a
research analyst employed by a nonmember foreign affiliate who
contributes to the preparation of such a
research report or whose name appears
on such report must meet the licensing
and examination requirements set forth
in NASD Rule 1050. According to
NASD, the determination turns on
whether the research analyst employed
by the foreign affiliate is an ‘‘associated
person’’ of the NASD member.
According to NASD, several members
have expressed to NASD and NYSE that
the determination of ‘‘associated
person’’ status can be very difficult to
ascertain in a financial services
enterprise that has a complex structure
of supervision and multiple reporting
lines and subsidiaries and/or affiliated
firms that span a multitude of foreign
jurisdictions. While NASD does not
subscribe to the viewpoint that the
difficulty of the associated person
analysis relieves a member from making
the determination of such status, it is
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Federal Register / Vol. 70, No. 87 / Friday, May 6, 2005 / Notices
concerned that absent the safe harbor
provided in this proposal, members may
have a pragmatic incentive, although
not a defensible basis, for construing
associated person status on an unduly
narrow basis.
According to NASD, in order to help
alleviate these issues while
maintaining—and in some cases,
extending—the safeguards in NASD
Rules 1050 and 2711 that ensure
objective and quality research, NASD
and the NYSE are proposing an
exemption from the research analyst
qualification requirements for certain
analysts employed by member foreign
affiliates in jurisdictions that reflect a
recognition of the principles that are
consonant with the SRO qualification
standards and research analyst conflict
of interest rules.
The conditions for eligibility for the
proposed exemption are as follows:
1. The SROs would recognize as the
basis for exemptive relief from the
Series 86 and 87 examinations
compliance with registration and
qualification requirements or other
standards in foreign jurisdictions that
reflect a recognition of the principles
that are consonant with the SRO
qualification standards and the research
analyst conflict of interest rules.
According to NASD, such principles
generally will include a combination of
(1) rules that govern analyst and firm
conflicts of interest in the preparation
and distribution of research, (2) a
requirement that analysts be registered
or licensed by a regulatory authority, or
(3) a testing or experience requirement
that demonstrates analyst skills and/or
knowledge of rules and regulations
applicable to analysts and their firms in
the preparation and distribution of
research.
Foreign analysts who participate in
preparing a member’s research reports
and have met such requirements in an
approved jurisdiction will not be
required to pass the Series 86 and 87
exams, provided the member complies
with the other requirements set forth as
conditions for the exemption. Analysts
in jurisdictions that do not have
approved standards still would be
required to pass the Series 86 and 87
examinations if they are associated
persons and participate in the
preparation of a member’s research
report;
2. The SROs would require global
application of member firm standards,
including full compliance with the SRO
research analyst conflict of interest
rules, to a member’s affiliated entities
and foreign research analysts that
qualify for the use of, and would rely
upon, these exemptive provisions. Thus,
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24153
a member would be required to apply to
any globally-branded, mixed-team or
other research deemed under SRO rules
and interpretations to be that of the
member, all of the applicable provisions
of the SRO rules, as well as any other
regulatory or supervisory standards
applicable to a member’s own research.
The personal trading restrictions and
other SRO rules applicable to the
conduct of a research analyst need only
be applied to the specific research
reports in which a foreign research
analyst contributed to the preparation.
None of the conditions of this paragraph
shall apply to research reports that are
wholly produced by a foreign affiliate
and its employees and are clearly
labeled as the product of that foreign
affiliate.
3. The annual compliance attestation
required by NASD Rule 2711 would
encompass the global application of the
SRO rules to foreign affiliates that
participate in preparing a member’s
research reports.
4. Members must agree to have their
research approved by a properly
registered supervisory analyst or
principal in accordance with NASD
Rule 1022; and
5. In addition to the disclosure
requirements of NASD Rule 2711, each
report would need to include, when
applicable, a disclosure on the front
cover stating that:
affiliates’ addresses; and (3) the primary
regulator in the jurisdiction(s) in which
each affiliate is located.
Eligibility for the exemption
contemplated by this proposed rule
change in no way bears upon whether
the foreign research analyst is an
associated person of the member. And
to the extent that a member can
determine that a foreign research analyst
is not an associated person, those
individuals need not satisfy the
requirements of the exemption.
NASD will identify in a Notice to
Members those jurisdictions that, based
on a review of their regulatory and
qualification requirements, meet the
standard set forth above and shall issue
subsequent Notices to Members to
update the list of approved
jurisdictions, as need.25
Members must establish and maintain
records that identify those individuals
who have availed themselves of the
exemption, the basis for such
exemption, and evidence compliance
with the conditions of the exemption.
The proposed rule change would have
no impact on the obligation of a brokerdealer, including a foreign brokerdealer, to register pursuant to Section
15(a)(1) of the Exchange Act 26 and the
rules promulgated thereunder.
The proposed rule change also makes
one non-substantive change to NASD
Rule 1050 to correct a spelling error.
This research report has been prepared in
whole or part by foreign research analysts
who may be associated persons of the
member or member organization. These
research analysts are not registered/qualified
as a research analyst with the NYSE and/or
NASD, but instead have satisfied the
registration/qualification requirements or
other research-related standards of a foreign
jurisdiction that have been recognized for
these purposes by the NYSE and NASD.
(4) NASD’s Statutory Basis
NASD believes that the proposed rule
change is consistent with the provisions
of Section 15A(b)(6) of the Act,27 which
requires, among other things, that NASD
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 that the proposed
rule change is consistent with the
provisions of the Act noted above in
that it will ensure that those individuals
contributing to the preparation of a
member’s research reports are subject to
a regulatory scheme that advances
objective and quality research, thereby
enhancing investor protection.
In addition, the cover page of a
research report must identify: (1) Each
broker-dealer entity contributing to the
report; (2) its location; and (3) the
research analysts contributing to the
research report from each broker-dealer.
The cover page would also contain
general disclosure language regarding
the relationship of the listed brokerdealers to the NYSE/NASD member
firm.
The front page of the research report
would need to reference to a separate
‘‘Foreign Affiliate Disclosures’’ section
(similar to the ‘‘Required Disclosure’’
section currently mandated by the
SROs) located in close proximity to that
section. In this proposed disclosure
section, the member would be required
to disclose the following: (1)
Information on the nature of the
affiliation of the parties; (2) the
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Fmt 4703
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B. Self-Regulatory Organizations’
Statements on Burden on Competition
The NYSE and NASD do not believe
that the proposed rule changes will
result in any burden on competition that
25 As of the date of this filing, the SROs have
identified the following jurisdictions as having met
the applicable standard: the United Kingdom,
China, Hong Kong, Singapore, Thailand, Malaysia
and Japan.
26 15 U.S.C. 78o(a)(1).
27 15 U.S.C. 78o–3(b)(6).
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Federal Register / Vol. 70, No. 87 / Friday, May 6, 2005 / Notices
is not necessary or appropriate in
furtherance of the purposes of the Act,
as amended.
C. Self-Regulatory Organizations’
Statements on Comments on the
Proposed Rule Changes Received From
Members, Participants, or Others
The NYSE and NASD have neither
solicited nor received written
comments.
III. Date of Effectiveness of the
Proposed Rule Changes and Timing for
Commission Action
The foregoing rule changes have
become effective pursuant to Section
19(b)(3)(A) of the Act 28 and paragraph
(f)(1) of Rule 19b–4 thereunder,29 in that
the proposed rule changes constitute a
stated policy, practice or interpretation
with respect to the meaning,
administration, or enforcement of an
existing rule. At any time within 60
days of the filing of the proposed rule
changes, the Commission may
summarily abrogate such rule changes 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
changes are consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an e-mail to rulecomments@sec.gov. Please include File
Numbers SR–NYSE–2005–25 and/or
SR–NASD–2005–043 on the subject
line.
Paper Comments
• Send paper comments in triplicate
to Jonathan G. Katz, Secretary,
Securities and Exchange Commission,
450 Fifth Street, NW., Washington, DC
20549–0609.
All submissions should refer to File
Numbers SR–NYSE–2005–25 and/or
SR–NASD–2005–043. These file
numbers 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 (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
changes that are filed with the
Commission, and all written
communications relating to the
proposed rule changes 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, 450 Fifth Street, NW.,
Washington, DC 20549. Copies of such
filing also will be available for
inspection and copying at the principal
offices of the NYSE and 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
Numbers SR–NYSE–2005–25 and/or
SR–NASD–2005–043 and should be
submitted on or before May 27, 2005.
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.30
Jill M. Peterson,
Assistant Secretary.
[FR Doc. E5–2212 Filed 5–5–05; 8:45 am]
BILLING CODE 8010–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–51637; File No. SR–PCX–
2004–65]
Self-Regulatory Organizations; Order
Approving Proposed Rule Change and
Amendment Nos. 1 and 2 Thereto by
the Pacific Exchange, Inc. Relating to
the Deletion of Obsolete or
Unnecessary Rules
April 29, 2005.
On July 9, 2004, the Pacific Exchange,
Inc. (‘‘PCX’’ or ‘‘Exchange’’), pursuant to
Section 19(b)(1) of the Securities
Exchange Act of 1934 (‘‘Act’’) 1 and Rule
19b–4 thereunder,2 filed with the
Securities and Exchange Commission
(‘‘Commission’’) a proposed rule change
to delete certain of its rules, or portions
thereof, the Exchange determined to be
obsolete or unnecessary. The Exchange
amended the proposal on February 9,
30 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
28 15
U.S.C. 78s(b)(3)(A).
29 17 CFR 240.19b4–4(f)(1).
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18:03 May 05, 2005
1 15
Jkt 205001
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2005,3 and March 10, 2005.4 The
proposed rule change, as amended by
Amendment Nos. 1 and 2, was
published for notice and comment in
the Federal Register on March 24,
2005.5 The Commission did not receive
comments on the proposal. This order
approves the proposed rule change, as
amended.
The Exchange proposes to delete PCX
Rule 4.7, PCX Rule 11.12(b), and PCX
Options Floor Procedure Advice D–10,
as the Exchange determined that such
rules are obsolete or superfluous in the
Exchange’s current market structure.
PCX Rule 4.7 requires OTP Holders
that are exempt from the net capital
requirement filings (Options Market
Makers without proprietary trading and
inactive lessors) to file with the
Exchange a balance sheet and income
statement every calendar quarter. The
Exchange represented that this rule is
obsolete because the Exchange never
implemented this reporting requirement
as unnecessary. According to the
Exchange, pursuant to Rule 17a–10
under the Act,6 exempt OTP Holders are
only required to file an annual FOCUS
Report, which includes a balance sheet
and income statement on an annual
basis.
PCX Rule 11.12(b) relates to PCX Joint
Accounts reporting requirements. The
Exchange proposed to delete this
provision as unnecessary. According to
the Exchange, PCX, by policy, does not
allow the use of joint accounts by OTP
Holders or OTP Firms for which the
Exchange serves as the Designated
Examining Authority, with one
exception. Joint accounts are allowed
for Market Makers who trade on the
floor. The use of these accounts is
controlled by Shareholder and
Registration Services (‘‘SRS’’). SRS
assigns the acronyms for use of these
accounts (e.g., J68). Since these accounts
are assigned by SRS, and all trades are
monitored daily and fed through PCX’s
existing surveillance systems, the
Exchange does not require a separate
weekly reporting requirement.
PCX Options Floor Procedure Advice
D–10 (Imprinting the Name of OTP
Holder or OTP Firm on Trade Tickets)
requires that the name of the OTP
Holder or OTP Firm be imprinted on the
trade tickets. The Exchange represented
that it no longer imposes such
requirement. The required ticket
3 Amendment No. 1 replaced and superseded the
original proposal.
4 Amendment No. 2 partially amended the
proposed rule change.
5 See Securities Exchange Act Release No. 51392
(March 17, 2005), 70 FR 15139.
6 17 CFR 240.17a–10.
E:\FR\FM\06MYN1.SGM
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]]>Agencies
[Federal Register Volume 70, Number 87 (Friday, May 6, 2005)]
[Notices]
[Pages 24148-24154]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E5-2212]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-51644; File Nos. SR-NYSE-2005-25; SR-NASD-2005-043]
Self-Regulatory Organizations; Notice of Filing and Immediate
Effectiveness of Proposed Rule Changes by the New York Stock Exchange,
Inc. and the National Association of Securities Dealers, Inc. Relating
to an Exemption from the Research Analyst Qualification Examination for
Certain Associated Persons Employed by Non-Member Foreign Affiliates
Who Contribute to the Preparation of Member Research Reports
May 2, 2005.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Exchange Act'' or the ``Act'') \1\ and Rule 19b-4 thereunder,\2\
notice is hereby given that on April 1, 2005, the New York Stock
Exchange, Inc. (``NYSE'' or the ``Exchange'') and the National
Association of Securities Dealers, Inc. (``NASD''), filed with the
Securities and Exchange Commission (``SEC'' or ``Commission'') the
proposed rule changes as described in Items I and II below, which Items
have been prepared by the respective self-regulatory organizations.\3\
The NYSE and NASD (the ``SROs'') have each filed the proposed rule
changes as constituting a stated policy, practice, or interpretation
with respect to the meaning, administration, or enforcement of an
existing rule pursuant to Section 19(b)(3)(A) of the Act \4\ and Rule
19b-4(f)(1) thereunder,\5\ which renders the proposed rule changes
effective upon filing with the Commission. The Commission is publishing
this notice to solicit comments on the proposed rule changes from
interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ On May 2, 2005, the NYSE filed with the Commission Amendment
No. 1 to its proposed rule change which made technical corrections
to the proposed rule text of the proposed rule change.
\4\ 15 U.S.C. 78s(b)(3)(A).
\5\ 17 CFR 240.19b-4(f)(1).
---------------------------------------------------------------------------
I. Self-Regulatory Organizations' Statements of the Terms of Substance
of the Proposed Rule Changes
The NYSE is filing with the Commission a proposed interpretation to
NYSE Rule 344 to establish an exemption from the Research Analyst
Qualification Examination Requirements for Certain Foreign Research
Analysts.
Pursuant to the provisions of Section 19(b)(3) of the Act,\6\ the
NASD is filing with the Commission a proposed rule change to amend NASD
Rule 1050 to create an exemption from the Research Analyst
Qualification Examination (Series 86 and 87) for certain research
analysts employed by foreign affiliates of a member who contribute to
the preparation of a member's research reports. The proposed rule
change also makes one non-substantive change to NASD Rule 1050 to
correct a spelling error.
---------------------------------------------------------------------------
\6\ 15 U.S.C. 78s(b)(3).
---------------------------------------------------------------------------
Below is the text of the proposed rule changes. Brackets indicate
deletions; italics indicate additions.
A. NYSE's Proposed Rule Text
Interpretation
Rule 344 Research Analysts and Supervisory Analysts
/01 Research Analysts (No Change)
/02 Foreign Research Analysts
Exemption
The requirement that a research analyst as defined under NYSE Rule
344.10 must be registered with, qualified by and approved by the
Exchange shall not apply where such analyst is an associated person of
a member or member organization who is an employee of a non-member
foreign affiliate of such member or member organization who contributes
to the preparation of the member's or member organization's research
reports (``foreign research analyst''), provided the following
conditions are satisfied;
The foreign research analyst resides and is employed in a
jurisdiction that the NYSE has determined has registration and
qualification requirements or other standards that reflect a
recognition of principles that are consonant with NYSE Rule 344 and the
research analyst conflicts of interest provisions pursuant to NYSE Rule
472;
The foreign research analyst has satisfied all applicable
registration and qualification requirements or other research-related
standards in the jurisdictions in which the foreign research analyst
resides and is employed;
Members and member organizations have imposed on
affiliates that employ foreign research analysts, and the foreign
research analysts all research-related standards that the member or
member organization imposes on its research reports and research
analysts, including the provisions of NYSE Rule 472;
Members, member organizations and their affiliates that
distribute research reports partially or entirely prepared by a foreign
research analyst must subject such research reports to pre-use review
and approval by a supervisory analyst, as required by NYSE Rule 472;
The annual attestation required under NYSE Rule 351(f)
must include the global application of NYSE Rule 472 to foreign
affiliates that employ foreign research analysts;
In addition to the disclosure requirements of NYSE Rule
472, each research report must include a disclosure on the front page
stating that:
``This research report has been prepared in whole or part
by foreign research analysts who may be associated persons of the
member or member organization. These research analysts are not
registered/qualified as a research analyst with the NYSE and/or NASD,
but instead have satisfied the registration/qualification requirements
or other research-related standards of a foreign jurisdiction that have
been recognized for these purposes by the NYSE and NASD.''
Disclosure on the front page of each research report must identify:
(1) Each affiliate contributing to the research report;
(2) The location of such affiliate; and
(3) The names of the foreign research analysts employed by each
contributing affiliate.
The cover page must also contain general disclosure language
describing the relationship between the contributing affiliates and the
member or member organization.
The front page of the research report must also refer to a separate
``Foreign Affiliate Disclosures'' section (similar to the ``Required
Disclosure'' section currently mandated by the NYSE and NASD under
Rules 472 and 2711 respectively) located in close proximity to the
``Required Disclosure'' section.
In this disclosure section, the member or member organization must
disclose the following:
(1) Information on the nature of the affiliation with the
affiliate;
(2) Each affiliate's address; and
(3) The primary regulator in the jurisdiction(s) in which each
affiliate is located.
[[Page 24149]]
Record Keeping
Members and member organizations must establish and maintain
records that identify those individuals who have availed themselves of
this exemption, the basis for such exemption, and evidence of
compliance with the conditions of the exemption.
[/02]/03 Supervisory Analysts
Qualifications
Supervisory Analyst candidates shall qualify by taking and passing
the
Supervisory Analyst (Series 16) Examination.
Experience
Appropriate experience for a candidate for Supervisory Analyst
means having at least three years prior experience within the
immediately preceding six years involving securities or financial
analysis.
Examples of appropriate experience may include the following:
Equity or Fixed Income Research Analyst;
Credit Analyst for a securities rating agency;
Supervising preparation of materials prepared by
financial/securities analysts;
Financial analytical experience gained at banks, insurance
companies or other financial institutions;
Academic experience relating to the financial/securities
markets/industry.
Director of Research
A person having the title of ``Director of Research'' need not be a
supervisory analyst as defined by the Rule so long as he/she does not
approve research reports. If, however, such a person is in charge of
registered representatives, he/she must qualify as a supervisory person
under Rule 342.13.
Exemptions
Successful completion of the CFA Level I Examination administered
by the CFA Institute (in lieu of completion of Levels, I, II and III
for a full CFA designation) will suffice to allow a Supervisory Analyst
candidate to qualify by taking Part I of the Series 16 Qualification
Examination.
B. NASD's Proposed Rule Text
1050. Registration of Research Analysts
(a) through (b) No change.
(c) Upon written request pursuant to the Rule 9600 Series, NASD
will grant a waiver from the analytical portion of the Research Analyst
Qualification Examination (Series 86) upon verification that the
applicant has passed:
(1) Levels I and II of the Chartered Financial Analyst (``CFA'')
Examination; or
(2) Through (3) No change.
(d) Through (e) No change
(f) The requirements of paragraph (a) shall not apply to an
associated person who is an employee of a non-member foreign affiliate
who contributes to the preparation of a member's research report
(``foreign research analyst''), provided the following conditions are
met:
(1) The foreign research analyst resides and is employed in a
jurisdiction that NASD has determined has registration and
qualification requirements or other standards that reflect a
recognition of principles that are consonant with this rule and the
research analyst conflict of interest rules pursuant to Rule 2711;
(2) The foreign research analyst has satisfied all applicable
registration and qualification requirements or other research-related
standards in the jurisdiction in which the foreign research analyst
resides and is employed;
(3) The NASD member (``U.S. member'') whose research reports a
foreign research analyst contributes in the preparation of has imposed
on its affiliates and the foreign research analysts they employ all of
the provisions of Rule 2711 and all other research-related standards
the member imposes on its own research reports and research analysts;
(4) The annual compliance attestation submitted by the U.S. member
pursuant to Rule 2711(i) must encompass the global application of Rule
2711 to the U.S. member's foreign affiliates that participate in the
preparation of the U.S. member's research reports;
(5) All U.S. member research reports to which a foreign research
analyst contributes in the preparation must be approved by a properly
registered principal or supervisory analyst pursuant to Rule 1022; and
(6) In addition to the disclosure requirements of Rule 2711, each
U.S. member research report to which a foreign research analyst
contributes in the preparation shall include the following on the front
page:
(A) A statement that:
This research report has been prepared in whole or part by
foreign research analysts who may be associated persons of the member
or member organization. These research analysts are not registered/
qualified as a research analyst with the NYSE and/or NASD but instead
have satisfied the registration/qualification requirements or other
research-related standards of a foreign jurisdiction that have been
recognized for these purposes by the NYSE and NASD.''
(B) disclosures identifying each affiliate contributing to the
research report, the location of such affiliate, and the names of the
research analysts employed by the affiliate that contributed to the
preparation of the research report;
(C) a general description of the relationship between the
contributing affiliates and the U.S. member; and
(D) a reference to the page on which a separate ``Foreign Affiliate
Disclosures'' section can be found. Such section shall disclose
information on the nature of the affiliation between the entities, the
affiliates' addresses, and the primary regulator in the jurisdiction(s)
in which each affiliated entity is located.
(7) Members must establish and maintain records that identify those
individuals who have availed themselves of the exemption in paragraph
(f), specify the basis for such exemption, and evidence compliance with
the conditions of paragraph (f).
II. Self-Regulatory Organizations' Statements of the Purpose of, and
Statutory Basis for, the Proposed Rule Changes
In their filings with the Commission, the NYSE and NASD included
statements concerning the purpose of and basis for the proposed rule
changes and discussed any comments they received on the proposed rule
changes. The text of these statements may be examined at the places
specified in Item IV below. The NYSE and NASD have prepared summaries,
set forth in Sections A, B, and C below, of the most significant
aspects of such statements.
A. Self-Regulatory Organizations' Statements of the Purpose of, and
Statutory Basis for, the Proposed Rule Changes
(1) NYSE's Purpose
Recent amendments to NYSE Rule 344 (``Research Analysts and
Supervisory Analysts'') require ``research analysts'' to be registered
with, qualified by, and approved by the Exchange. The Exchange is
proposing to adopt a new interpretation to NYSE Rule 344 to exempt
certain foreign research analysts employed by a non-member affiliate of
a member or member organization from the Research Analyst Qualification
Examination (Series 86/87).
Background. Recent amendments to NYSE Rule 344 require that
research analysts be registered and qualified by
[[Page 24150]]
the NYSE.\7\ According to the NYSE, the Research Analyst Qualification
Examination is part of the SRO's regulatory efforts to safeguard the
investing public from potential conflicts of interest relating to
research analysts. The NYSE believes that the purpose of requiring a
qualification examination is to protect the investing public by helping
to ensure that research analysts are competent to perform their jobs
and are knowledgeable about the new regulatory requirements affecting
them. Given the scope and magnitude of these requirements, the SROs
developed an examination with a part designed specifically to address
the new SRO rule requirements.
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\7\ According to the NYSE, the amendments were the culmination
of joint regulatory efforts among the SROs and the SEC to address
potential conflicts of interest relating to research analysts. The
amendments included, among other things, a new registration category
and qualification examination for research analysts.
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The Research Analyst Qualification Examination (Series 86/87) is a
five-and-a-half hour examination, consisting of 150 questions. The exam
is divided into two parts. Part I, the Series 86, consists of 100
questions, which address fundamental security analysis and valuation of
equity securities. Part II, the Series 87, consists of 50 questions,
which primarily address pertinent SRO and SEC rules and regulations,
including the recent Research Analysts' Conflicts Rules.
The requirement to take and pass the Series 86/87 examination
applies to all research analysts, as defined in Exchange Rule 344.10,
which provides that the term ``research analyst'' includes a member,
allied member, associated person or employee who is primarily
responsible for the preparation of the substance of a research report
and/or whose name appears on such report.\8\ Research analysts, must be
registered with, qualified and approved by the Exchange. The
registration and qualification requirement became effective March 30,
2004. Candidates who have been functioning as research analysts as of
the effective date of March 30, 2004, and submitted a registration
application by June 1, 2004, have been given until April 4, 2005 to
meet the qualification requirements.
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\8\ See SR-NYSE-2005-24 amending the definition of ``research
analyst'' in NYSE Rules 344.10 and 472.40 to include ``associated
persons.''
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Prerequisites to and Exemptions from the Qualification Examination.
In March 2004, the SEC approved an interpretation to Exchange Rule 344
establishing certain prerequisites to and exemptions from the Research
Analyst Qualification Examination.\9\ The interpretation to NYSE Rule
344 requires, among other things, that each candidate pass the General
Securities Registered Representative Examination (Series 7) prior to
taking either Part I or Part II of the examination. The interpretation
to Exchange Rule 344 also allows a research analyst candidate who has
passed both Level I and Level II of the Chartered Financial Analyst
(``CFA'') Examination administered by the CFA Institute to request an
exemption from Part I (Series 86) of the Research Analyst Qualification
Examination.\10\
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\9\ See Securities Exchange Act Release No. 49464 (March 24,
2004), 69 FR 16628 (March 30, 2004) (SR-NYSE-2004-03).
\10\ In February 2005, the SEC provided public notice of a
similar alternative qualification standard for the Series 86
examination requirement for research analysts who prepare only
technical research reports and who have passed Levels I and II of
the Chartered Market Technician (``CMT'') Program administered by
the Market Technicians Association (``MTA''). See Securities
Exchange Act Release No. 51240 (February 23, 2005), 70 FR 10451
(March 3, 2005) (SR-NYSE-2005-12).
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Application of Examination Requirement to Foreign Research
Analysts. In March 2004, the NYSE and NASD issued a Joint Memo
providing guidance on research analyst issues. In that memo, the SROs
stated that all of the SRO rule requirements would apply to any
research report to whose preparation a research analyst employed or
associated with a member or member organization contributed (e.g.,
``globally-branded'' and ``mixed research team'' \11\ research reports,
whether or not issued by a member or member organization).
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\11\ A ``globally-branded'' research report refers to the use of
a single marketing identity that encompasses the member firm and its
affiliates. A research report prepared by a ``mixed research team''
which includes at least one person who meets the definition of
``research analyst'' and is associated with a member or member
organization would be considered a report prepared by the member or
member organization. See NYSE Information Memo 04-10, dated March 9,
2004.
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In April 2004, the Exchange issued an Information Memo announcing
the approval of the examination requirements noted above and discussing
examination-related requirements.\12\
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\12\ See NYSE Information Memo 04-16, dated April 1, 2004. In
these memos, the SROs advised that research analysts employed by
foreign broker-dealer affiliates of a member or member organization
are subject to the Series 86/87 examination to the extent that the
research analyst is an ``associated person'' of the member or member
organization.
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In June 2004, the SROs received a written submission from Goldman
Sachs & Co. (``Goldman'') requesting relief under NASD Rule 1050 and
NYSE Rule 344 for equity research analysts employed by its foreign
broker-dealer affiliates, and seeking further clarification as to
whether research analysts employed by a foreign broker-dealer should
appropriately be deemed ``associated persons'' of the NASD/NYSE member
firms in the context of global businesses.\13\ In its submission,
Goldman requested that U.S. regulators should consider the impact that
such views could have on many firms' businesses, including possible
licensing consequences on the U.S. broker-dealers in such foreign
jurisdictions, and other issues of international comity.
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\13\ Letter dated June 1, 2004 from Pamela Root and John Curtis
of Goldman to the Exchange and NASD.
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In July 2004, the Exchange received a written submission from Smith
Barney Citigroup (``Smith Barney'') requesting clarification with
respect to treatment of research analyst employees of foreign broker-
dealer affiliates.\14\ Citing the SROs' memos, Smith Barney advised
that there were widely divergent approaches and practices developing as
a result of the interpretive guidance. In this regard, some firms had
begun the process of having foreign research analysts prepare for the
examination, while other firms, contrary to the express language in the
interpretation, were applying the examination requirements only to U.S.
research analysts. In its submission, Smith Barney requested further
clarification of the interpretive guidance to facilitate consistent
application by member organizations.
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\14\ Letter dated July 23, 2004 from Michael Sharp of Smith
Barney to Richard G. Ketchum, Chief Regulatory Officer of the NYSE.
---------------------------------------------------------------------------
Smith Barney also requested that the SROs adopt a different
approach, proposing that they recognize non-U.S. research analysts who
(a) are properly registered and licensed to conduct securities business
in their country of residence and (b) are subject to policies that are
substantively identical to the SRO rules, could publish research in the
U.S. under a global-research trademark without having to be licensed in
the U.S. The term ``substantively identical'' was defined to include
clearance of all research by a Series 16 supervisory analyst and
supervision by a Series 24 principal. Under the requested relief, a
non-U.S. research analyst would not have to take either the Series 7
prerequisite or the Series 86/87 examination.
According to the NYSE, in subsequent meetings and conference calls
with member firms, they expressed their concern that the determination
of ``associated person'' status can be very difficult to ascertain in a
financial services enterprise that has a complex
[[Page 24151]]
structure of supervision and multiple reporting lines and subsidiaries
and/or affiliated firms that span a multitude of foreign jurisdictions.
On February 25, 2005, the SROs received a written submission from
an industry committee \15\ requesting SRO interpretive guidance to
establish a safe harbor pursuant to which non-U.S. research analysts
that are associated with U.S. member firms would be permitted to
disseminate research in the U.S., notwithstanding the fact that such
research analysts have not taken the Series 86/87 examination.
According to the NYSE, the proposed relief sought by the industry
committee, and the conditions thereto, are substantially similar to the
relief the SROs are implementing in this filing.\16\
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\15\ The signatories to the submission were representatives from
Goldman, Morgan Stanley and Smith Barney.
\16\ In addition, Commission staff received a copy of this
submission with supporting documentation.
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According to the NYSE, in seeking this relief, the industry advised
that the safe harbor was appropriate and reasonable for the following
reasons: (1) It respects the primacy of the laws of other jurisdictions
by avoiding circumstances under which research analysts could become
subject to multiple licensing requirements and taking multiple exams in
many different countries; (2) it makes clear that non-U.S. research
analysts associated with a member firm are held to the principles
enumerated in the SRO rules; and (3) U.S. investors would have
sufficient notice through the disclosure to the effect that non-U.S.
research analysts associated with a member firm are not subject to the
SROs' registration and qualification standards.
According to the NYSE, while the SROs do not agree that the
difficulty of the associated person analysis relieves a member firm
from making the determination of such status, the SROs are concerned
that, absent the safe harbor provided in this proposal, members and
member organizations may have a pragmatic incentive, although not a
defensible basis, for construing associated person status on an unduly
narrow basis.
According to the NYSE, in order to address these issues while
maintaining--and in fact, extending--the safeguards in the SRO rules
that ensure objective and quality research, the SROs are proposing an
exemption from the research analyst qualification requirements for
certain analysts employed by foreign entities in jurisdictions that
reflect a recognition of the principles that are consonant with the SRO
qualification standards and research analyst conflict of interest
rules.
According to the NYSE, the proposed exemption would, where
appropriate, address: (1) the requirement that foreign research
analysts, when they are ``associated persons,'' to register and qualify
as research analysts under the SRO rules; (2) the applicability of the
SRO rules with respect to research reports where foreign research
analysts have contributed to the preparation; and (3) provide
additional disclosure requirements related to such research reports,
including but not limited to, globally branded and mixed research team
reports.
Proposed Exemptive Relief. The NYSE and NASD are proposing to
exempt from the Series 86 and 87 examination requirements certain
research analysts employed by foreign affiliates who contribute to the
preparation of a member or member organization's research reports.\17\
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\17\ The proposed rule change would have no impact on the
obligation of any broker-dealer, including a foreign broker-dealer,
to register pursuant to Section 15(a)(1) of the Securities Exchange
Act of 1934 and the rules promulgated thereunder.
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The SROs would recognize as the basis for exemptive relief from the
Series 86 and 87 exams registration/qualification requirements,
compliance with other standards in non-US jurisdictions that reflect
recognition of the principles that are consonant with the SRO
qualification standards and the research analyst conflict of interest
rules.\18\ The SROs will identify the jurisdictions that satisfy the
prescribed criteria.
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\18\ Eligibility for the exemption contemplated by this proposed
rule change in no way bears upon whether the foreign research
analyst is an ``associated person'' of the member or member
organization. To the extent that a member or member organization can
determine that a foreign research analyst is not an ``associated
person,'' those individuals need not satisfy the requirements of the
rule or the exemption.
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According to the NYSE, such principles generally would include a
combination of: (1) Rules that govern research analysts and firm
conflicts of interest in the preparation and distribution of research
reports; (2) a requirement that research analysts be registered or
licensed by a regulatory authority: or (3) a testing or experience
requirement that demonstrates research analysts' skills and/or
knowledge of rules and regulations applicable to research analysts and
their firms in the preparation and distribution of research reports.
Foreign research analysts who participate in preparing a member
firm's research reports, including but not limited to globally-branded
and/or mixed research team reports, and have met applicable
requirements in a jurisdiction with approved standards, will not be
required to pass the Series 86 and 87 exams, provided the member or
member organization complies with the other requirements set forth
herein: \19\
---------------------------------------------------------------------------
\19\ Foreign research analysts in jurisdictions that do not have
approved standards would still be required to pass the Series 86 and
87 examinations if they are ``associated persons'' and participate
in the preparation of a member's or member organization's research
report.
---------------------------------------------------------------------------
1. The SROs would require global application of a member firm's own
standards, including full compliance with the SRO research analyst
conflict of interest rules, to a member's or member organization's
affiliated entities and foreign research analysts that qualify for the
use of, and who will rely upon, these exemptive provisions. Thus, a
member or member organization would be required to subject any
globally-branded, mixed-team or other research deemed under the SRO
rules and interpretations to be that of the member or member
organization, to all of the applicable provisions of the SRO rules as
well as any other regulatory or supervisory standards applicable to a
member's or member organization's research. Thus, the research
provisions of NYSE Rule 472, e.g., personal trading restrictions, would
be applied to the specific research reports and the particular foreign
research analysts that contributed to the preparation of a member's or
member organization's research report. The conditions of this paragraph
shall not apply to research reports that are wholly produced by a
foreign affiliate and its employee and are clearly labeled as the
product of that foreign affiliate.\20\
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\20\ See Information Memo Nos. 02-26 (June 26, 2002) and 04-10
(March 9, 2004) for a member's or member organization's disclosure
requirements when distributing third party research of an affiliate
or non-affiliate.
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2. The annual compliance attestation required by NYSE Rules 472 and
351 would encompass the global application of the SRO rules to foreign
affiliates that participate in preparing a member's or member
organization's research report.
3. Members' and member organizations' research reports must be
approved by a properly registered supervisory analyst/principal.\21\
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\21\ NYSE Series 16.
---------------------------------------------------------------------------
4. In addition to the disclosure requirements of NYSE Rule 472,
each report would include a disclosure on the front cover stating that:
This research report has been prepared in whole or part by
foreign research analysts
[[Page 24152]]
who may be associated persons of the member or member organization.
These research analysts are not registered/qualified as research
analysts with the NYSE and/or NASD, but instead have satisfied the
registration/qualification requirements or other research-related
standards of a foreign jurisdiction that have been recognized for
these purposes by the NYSE and NASD.
In addition, the front page of a research report must identify:
(1) Each affiliate contributing to the research report;
(2) The location of such affiliate; and
(3) The names of the research analysts contributing to the report
employed by each affiliate.
The front page would also contain general disclosure language
describing the relationship of the contributing affiliates to the NYSE/
NASD member firm. The front page of the research report would also
refer to a separate ``Foreign Affiliate Disclosures'' section (similar
to the ``Required Disclosure'' section currently mandated by the SROs)
located in close proximity to the Required Disclosure section.
In this disclosure section, the member or member organization would
disclose the following:
(1) Information on the nature of the affiliation of the parties;
(2) The affiliates' addresses; and
(3) The primary regulator in the jurisdiction(s) in which each
affiliate is located.
Members and member organizations must establish and maintain
records that identify those individuals who have availed themselves of
the exemption, the basis for such exemption, and evidence of compliance
with the conditions of the exemption.
As of the date of this filing, the SROs have identified the
following jurisdictions that have satisfied the applicable standards
noted above: \22\
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\22\ The Exchange will announce these jurisdictions in an
Information Memo and will issue subsequent Information Memos to
update the list of the approved jurisdictions, as needed.
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(1) China.
(2) Hong Kong.
(3) Japan.
(4) Malaysia.
(5) Singapore.
(6) Thailand.
(7) United Kingdom.
A review of jurisdictions named above revealed that they had in
place registration/qualification requirements for research analysts
and/or imposed conflict of interest disclosure requirements, and/or
restrictions on research analysts' trading that were acceptable to the
SROs. Accordingly, the proposed amendment seeks an exemption for
foreign research analysts employed in these jurisdictions from the
Research Analyst Qualification Examination requirement.
(2) NYSE's Statutory Basis
The statutory basis for this proposed rule change is Section
6(b)(5) \23\ and Section 6(c)(3)(B) \24\ of the Exchange Act. Under
Section 6(b)(5), the rules of the Exchange must be designed to protect
investors and the public interest. The Exchange believes that the
proposed rule change is consistent with Section 6(b)(5) in that it will
ensure that those research analysts contributing to the preparation of
a member's or member organization's research reports are subject to a
regulatory scheme that advances objective and unbiased research thereby
enhancing investors protection.
---------------------------------------------------------------------------
\23\ 15 U.S.C. 78f(b)(5).
\24\ 15 U.S.C. 78f(c)(3)(B).
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Under Section 6(c)(3)(B), it is the Exchange's responsibility to
prescribe standards of training, experience and competence for persons
associated with Exchange members and member organizations. In addition,
the Exchange may bar a natural person from becoming a member or person
associated with a member, if such natural person does not meet such
standards of training, experience and competence as prescribed by the
rules of the Exchange. Pursuant to this statutory obligation, the
Exchange has developed a competency qualification examination for
research analysts and is providing relief from this requirement where
foreign research analysts and their member firms have demonstrated
registration, qualification, and conflict of interest standards
acceptable to the Exchange.
(3) NASD's Purpose
NASD Rule 1050 requires an associated person who functions as a
research analyst to register as such with NASD and pass a qualification
examination. According to NASD, NASD Rule 1050 is intended to ensure
that research analysts possess a certain competency level to perform
their jobs effectively and in accordance with applicable rules and
regulations. In the context of this requirement, NASD Rule 1050 defines
``research analyst'' as ``an associated person who is primarily
responsible for the preparation of the substance of a research report
or whose name appears on a research report.'' The term ``research
report'' in NASD Rule 1050 has the meaning as defined in NASD Rule
2711(a)(8): ``A written or electronic communication that includes an
analysis of equity securities of individual companies or industries,
and that provides information reasonably sufficient upon which to base
an investment decision.''
Pursuant to NASD Rule 1050, and in conjunction with the NYSE, NASD
has implemented the Research Analyst Qualification Examination (Series
86/87). The examination consists of an analysis part (Series 86) and a
regulatory part (Series 87). Prior to taking either the Series 86 or
87, a candidate also must have passed the General Securities Registered
Representative Examination (Series 7), the Limited Registered
Representative (Series 17), or the Canada Module of Series 7 (Series 37
or 38). Persons who were functioning as research analysts on the
effective date of March 30, 2004 and submitted a registration
application to NASD by June 1, 2004, have until April 4, 2005 to meet
the registration requirements.
NASD Rule 1050 currently provides exemptions from the Series 86
examination for certain applicants who have passed Levels I and II of
the Chartered Financial Analyst examination or have passed Levels I and
II of the Chartered Market Technician Examination and produce only
``technical research reports'' as that term is defined in NASD Rule
1050.
NASD has observed that members with global operations sometimes
produce research reports under a single global brand name or jointly
with a research analyst employed by a non-member affiliate, i.e. a
``mixed team'' research report. NASD and NYSE have deemed such research
reports to be attributable to the member and therefore subject to the
applicable requirements of NASD Rule 2711. This interpretation has
raised the question of whether a research analyst employed by a non-
member foreign affiliate who contributes to the preparation of such a
research report or whose name appears on such report must meet the
licensing and examination requirements set forth in NASD Rule 1050.
According to NASD, the determination turns on whether the research
analyst employed by the foreign affiliate is an ``associated person''
of the NASD member.
According to NASD, several members have expressed to NASD and NYSE
that the determination of ``associated person'' status can be very
difficult to ascertain in a financial services enterprise that has a
complex structure of supervision and multiple reporting lines and
subsidiaries and/or affiliated firms that span a multitude of foreign
jurisdictions. While NASD does not subscribe to the viewpoint that the
difficulty of the associated person analysis relieves a member from
making the determination of such status, it is
[[Page 24153]]
concerned that absent the safe harbor provided in this proposal,
members may have a pragmatic incentive, although not a defensible
basis, for construing associated person status on an unduly narrow
basis.
According to NASD, in order to help alleviate these issues while
maintaining--and in some cases, extending--the safeguards in NASD Rules
1050 and 2711 that ensure objective and quality research, NASD and the
NYSE are proposing an exemption from the research analyst qualification
requirements for certain analysts employed by member foreign affiliates
in jurisdictions that reflect a recognition of the principles that are
consonant with the SRO qualification standards and research analyst
conflict of interest rules.
The conditions for eligibility for the proposed exemption are as
follows:
1. The SROs would recognize as the basis for exemptive relief from
the Series 86 and 87 examinations compliance with registration and
qualification requirements or other standards in foreign jurisdictions
that reflect a recognition of the principles that are consonant with
the SRO qualification standards and the research analyst conflict of
interest rules. According to NASD, such principles generally will
include a combination of (1) rules that govern analyst and firm
conflicts of interest in the preparation and distribution of research,
(2) a requirement that analysts be registered or licensed by a
regulatory authority, or (3) a testing or experience requirement that
demonstrates analyst skills and/or knowledge of rules and regulations
applicable to analysts and their firms in the preparation and
distribution of research.
Foreign analysts who participate in preparing a member's research
reports and have met such requirements in an approved jurisdiction will
not be required to pass the Series 86 and 87 exams, provided the member
complies with the other requirements set forth as conditions for the
exemption. Analysts in jurisdictions that do not have approved
standards still would be required to pass the Series 86 and 87
examinations if they are associated persons and participate in the
preparation of a member's research report;
2. The SROs would require global application of member firm
standards, including full compliance with the SRO research analyst
conflict of interest rules, to a member's affiliated entities and
foreign research analysts that qualify for the use of, and would rely
upon, these exemptive provisions. Thus, a member would be required to
apply to any globally-branded, mixed-team or other research deemed
under SRO rules and interpretations to be that of the member, all of
the applicable provisions of the SRO rules, as well as any other
regulatory or supervisory standards applicable to a member's own
research. The personal trading restrictions and other SRO rules
applicable to the conduct of a research analyst need only be applied to
the specific research reports in which a foreign research analyst
contributed to the preparation. None of the conditions of this
paragraph shall apply to research reports that are wholly produced by a
foreign affiliate and its employees and are clearly labeled as the
product of that foreign affiliate.
3. The annual compliance attestation required by NASD Rule 2711
would encompass the global application of the SRO rules to foreign
affiliates that participate in preparing a member's research reports.
4. Members must agree to have their research approved by a properly
registered supervisory analyst or principal in accordance with NASD
Rule 1022; and
5. In addition to the disclosure requirements of NASD Rule 2711,
each report would need to include, when applicable, a disclosure on the
front cover stating that:
This research report has been prepared in whole or part by
foreign research analysts who may be associated persons of the
member or member organization. These research analysts are not
registered/qualified as a research analyst with the NYSE and/or
NASD, but instead have satisfied the registration/qualification
requirements or other research-related standards of a foreign
jurisdiction that have been recognized for these purposes by the
NYSE and NASD.
In addition, the cover page of a research report must identify: (1)
Each broker-dealer entity contributing to the report; (2) its location;
and (3) the research analysts contributing to the research report from
each broker-dealer. The cover page would also contain general
disclosure language regarding the relationship of the listed broker-
dealers to the NYSE/NASD member firm.
The front page of the research report would need to reference to a
separate ``Foreign Affiliate Disclosures'' section (similar to the
``Required Disclosure'' section currently mandated by the SROs) located
in close proximity to that section. In this proposed disclosure
section, the member would be required to disclose the following: (1)
Information on the nature of the affiliation of the parties; (2) the
affiliates' addresses; and (3) the primary regulator in the
jurisdiction(s) in which each affiliate is located.
Eligibility for the exemption contemplated by this proposed rule
change in no way bears upon whether the foreign research analyst is an
associated person of the member. And to the extent that a member can
determine that a foreign research analyst is not an associated person,
those individuals need not satisfy the requirements of the exemption.
NASD will identify in a Notice to Members those jurisdictions that,
based on a review of their regulatory and qualification requirements,
meet the standard set forth above and shall issue subsequent Notices to
Members to update the list of approved jurisdictions, as need.\25\
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\25\ As of the date of this filing, the SROs have identified the
following jurisdictions as having met the applicable standard: the
United Kingdom, China, Hong Kong, Singapore, Thailand, Malaysia and
Japan.
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Members must establish and maintain records that identify those
individuals who have availed themselves of the exemption, the basis for
such exemption, and evidence compliance with the conditions of the
exemption.
The proposed rule change would have no impact on the obligation of
a broker-dealer, including a foreign broker-dealer, to register
pursuant to Section 15(a)(1) of the Exchange Act \26\ and the rules
promulgated thereunder.
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\26\ 15 U.S.C. 78o(a)(1).
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The proposed rule change also makes one non-substantive change to
NASD Rule 1050 to correct a spelling error.
(4) NASD's Statutory Basis
NASD believes that the proposed rule change is consistent with the
provisions of Section 15A(b)(6) of the Act,\27\ which requires, among
other things, that NASD 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 that the proposed rule change is
consistent with the provisions of the Act noted above in that it will
ensure that those individuals contributing to the preparation of a
member's research reports are subject to a regulatory scheme that
advances objective and quality research, thereby enhancing investor
protection.
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\27\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organizations' Statements on Burden on Competition
The NYSE and NASD do not believe that the proposed rule changes
will result in any burden on competition that
[[Page 24154]]
is not necessary or appropriate in furtherance of the purposes of the
Act, as amended.
C. Self-Regulatory Organizations' Statements on Comments on the
Proposed Rule Changes Received From Members, Participants, or Others
The NYSE and NASD have neither solicited nor received written
comments.
III. Date of Effectiveness of the Proposed Rule Changes and Timing for
Commission Action
The foregoing rule changes have become effective pursuant to
Section 19(b)(3)(A) of the Act \28\ and paragraph (f)(1) of Rule 19b-4
thereunder,\29\ in that the proposed rule changes constitute a stated
policy, practice or interpretation with respect to the meaning,
administration, or enforcement of an existing rule. At any time within
60 days of the filing of the proposed rule changes, the Commission may
summarily abrogate such rule changes 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.
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\28\ 15 U.S.C. 78s(b)(3)(A).
\29\ 17 CFR 240.19b4-4(f)(1).
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
changes are consistent with the Act. Comments may be submitted by any
of the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://
www.sec.gov/rules/sro.shtml); or
Send an e-mail to rule-comments@sec.gov. Please include
File Numbers SR-NYSE-2005-25 and/or SR-NASD-2005-043 on the subject
line.
Paper Comments
Send paper comments in triplicate to Jonathan G. Katz,
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW.,
Washington, DC 20549-0609.
All submissions should refer to File Numbers SR-NYSE-2005-25 and/or
SR-NASD-2005-043. These file numbers 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 (https://
www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent
amendments, all written statements with respect to the proposed rule
changes that are filed with the Commission, and all written
communications relating to the proposed rule changes 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, 450 Fifth Street, NW., Washington, DC 20549. Copies of
such filing also will be available for inspection and copying at the
principal offices of the NYSE and 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 Numbers SR-NYSE-2005-25 and/or SR-NASD-2005-
043 and should be submitted on or before May 27, 2005.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\30\
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\30\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. E5-2212 Filed 5-5-05; 8:45 am]
BILLING CODE 8010-01-P
