Self-Regulatory Organizations; Pacific Exchange, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change and Amendment Nos. 1 and 2 Thereto Relating to the Continuing Education Regulatory Element Requirement, 45477-45479 [E5-4224]

Agencies

• SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 70, Number 150 (Friday, August 5, 2005)]
[Notices]
[Pages 45477-45479]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E5-4224]



[[Page 45477]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52165; File No. SR-PCX-2005-80]


Self-Regulatory Organizations; Pacific Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change and 
Amendment Nos. 1 and 2 Thereto Relating to the Continuing Education 
Regulatory Element Requirement

July 29, 2005.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on July 8, 2005, the Pacific Exchange, Inc. (``PCX'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in items I, II 
and III below, which Items have been prepared by the Exchange. On July 
13, 2005, the Exchange filed Amendment No. 1 to the proposed rule 
change.\3\ On July 21, 2005, the Exchange filed Amendment No. 2 to the 
proposed rule change.\4\ The PCX has filed the proposal as a ``non-
controversial'' rule change pursuant to section 19(b)(3)(A) of the Act 
\5\ and Rule 19b-4(f)(6) thereunder,\6\ which renders the proposal 
effective upon filing with the Commission. The Commission is publishing 
this notice to solicit comments on the proposed rule change, as 
amended, from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ In Amendment No. 1, the Exchange added language to its rule 
text to make PCX rules consistent with the rules of the other self-
regulatory organizations (``SROs'') and added clarifying language to 
the purpose section.
    \4\ In Amendment No. 2, the Exchange made minor edits to the 
rule text and withdrew its request to have the Commission waive the 
30 day operative period. The effective date of the original proposed 
rule change is July 8, 2005, the effective date of Amendment No. 1 
is July 13, 2005 and the effective date of Amendment No. 2 is July 
21, 2005. For purposes of calculating the 60-day period within which 
the Commission may summarily abrogate the proposed rule change, as 
amended, under Section 19(b)(3)(C) of the Act, the Commission 
considers such period to commence on July 21, 2005, the date on 
which the Exchange filed Amendment No. 2. See 15 U.S.C. 
78s(b)(3)(C).
    \5\ 15 U.S.C. 78s(b)(3)(A).
    \6\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The PCX proposes to amend PCX Rule 9.27 to eliminate the 
``Grandfather'' exemption to the regulatory element of the Continuing 
Education (``CE'') Program. Below is the text of the proposed rule 
change. Proposed new language is in italics. Deletions are in 
[brackets].

Rules of the Pacific Exchange, Inc.

Rule 9

    Rule 9.27(a)-(b)--No Change.
    Rule 9.27(c)--No OTP Firm or OTP Holder shall permit any registered 
person to continue to, and no registered person shall continue to, 
perform duties as a registered person, unless such person has complied 
with the continuing education requirements of this Rule 9.27(c).
    Each registered person shall complete the Regulatory Element of the 
continuing education program beginning with the occurrence of their 
second registration anniversary date, and every three years thereafter, 
or as otherwise prescribed by the Exchange. On each occasion, the 
Regulatory Element must be completed within one hundred twenty days 
after the person's registration anniversary date. A person's initial 
registration date, also known as the ``base date'', shall establish the 
cycle anniversary dates for purposes of this Rule. The content of the 
Regulatory Element of the program shall be determined by the Exchange 
for each registration category of persons subject to the Rule.
    (1) Reserved. [Persons who have been continuously registered for 
more than ten years as of the effective date of this Rule are exempt 
from the requirements of this rule relative to participation in the 
Regulatory Element of the continuing education program, provided such 
persons have not been subject to any disciplinary action within the 
last ten years as enumerated in subsection (c)(3)(i)-(ii) of this Rule. 
However, persons delegated supervisory responsibility or authority 
pursuant to Rule 9.8 and registered in such supervisory capacity are 
exempt from participation in the Regulatory Element under this 
provision only if they have been continuously registered in a 
supervisory capacity for more than 10 years as of the effective date of 
this Rule and provided that such supervisory person has not been 
subject to any disciplinary action under subsection (c)(3)(i)-(ii) of 
this Rule.
    In the Event that a registered person who is exempt from 
participation in the Regulatory Element subsequently becomes the 
subject of a disciplinary action as enumerated in subsection (c)(3)(i)-
(ii), such person shall be required to satisfy the requirements of the 
Regulatory Element as if the date the disciplinary action becomes final 
is the person's initial registration anniversary date.]
    (2) Failure to Complete--Unless otherwise determined by the 
Exchange, any registered persons who have not completed the Regulatory 
Element of the program within the prescribed time frames will have 
their registration deemed inactive until such time as the requirements 
of the program have been satisfied. Any person whose registration has 
been deemed inactive under this Rule shall cease all activities as a 
registered person and shall be prohibited from performing any duties 
and functioning in any capacity requiring registration.
    The Exchange may, upon application and a showing of good cause, 
allow for additional time for a registered person to satisfy the 
program requirements.
    (3) Disciplinary Actions [Re-entry into Program]--Unless otherwise 
determined by the SRO, a registered person will be required to [re-
enter] re-take the Regulatory Element and satisfy all of its 
requirements in the event such person:
    (A) becomes subject to any statutory disqualification as defined in 
Section (3)(a)(39) of the Securities Exchange Act of 1934;
    (B) becomes subject to suspension or to the imposition of a fine of 
$5,000 or more for violation of any provision of any securities law or 
regulation, or any agreement with or rule of standard of conduct of any 
securities governmental agency, securities self-regulatory 
organization, or as imposed by any such regulatory or self-regulatory 
organization in connection with a disciplinary proceeding; or
    (C) is ordered as a sanction in a disciplinary action to [re-enter] 
re-take the [continuing education program] Regulatory Element by any 
securities governmental agency or securities self-regulatory 
organization.
    [Re-entry into the program] A re-taking of the Regulatory Element 
shall commence with [the initial] participation within 120 days of the 
registered person becoming subject to the statutory disqualification, 
in the case of ([i]A) above, or the disciplinary action becoming final, 
in the case of ([ii]B) or ([iii]C) above. The date that the 
disciplinary action becomes final will be deemed the person's new base 
date for purposes of this Rule.
    Rule 9.27(d)--Commentary .02--No Change.
    Commentary .03--Any registered person who has terminated 
association with a registered broker or dealer and who has, within two 
years of the date of termination, become reassociated in a registered 
capacity with a registered broker or dealer shall participate in the 
Regulatory Element of the continuing education program at such 
intervals that

[[Page 45478]]

apply (second registration anniversary and every three years 
thereafter) based on the [initial registration anniversary] new base 
date, rather than based on the date of reassociation in a registered 
capacity. Any former registered person who becomes reassociated in a 
registered capacity with a registered broker or dealer more than two 
years after termination as such will be required to satisfy the 
program's requirements in their entirety based on the most recent 
registration date.
* * * * *
    Commentary .05--Reserved. [The effective date of this Rule, for the 
purposes of determining whether a registered person is exempt from 
participation in the Regulatory Element is September 14, 2000.]
    Commentary .06--Any registered member who is an OTP Holder who is 
also a member of another self-regulatory organization (``SRO'') shall 
be subject to the other SRO's implementation date for the elimination 
of the exceptions to the Regulatory Element section of the continuing 
education program, if that date is earlier than September 30, 2005.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change, as 
amended, and discussed any comments it received on the proposed rule 
change, as amended. The text of these statements may be examined at the 
places specified in item IV below. The PCX has prepared summaries, set 
forth in sections A, B, and C below, of the most significant parts of 
such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to amend PCX Rule 9.27 to eliminate all 
exemptions from the Exchange Continuing Education Regulatory Element 
Program for registered representatives to conform its PCX Rule 9.27 
with applicable rules of other SROs. Currently PCX Rule 9.27 sets forth 
the rules governing the requirements for registered representatives to 
participate in the Continuing Education Regulatory Element Program (the 
``Regulatory Element'').\7\ The Regulatory Element is a computer-based 
education program administered by the National Association of 
Securities Dealers (``NASD'') to help ensure that registered persons 
are kept up-to-date on regulatory, compliance and sales practices in 
the industry. PCX Rule 9.27 specifies the Continuing Education (``CE'') 
requirements for registered persons subsequent to their initial 
qualification and registration with the PCX. Unless exempt, each 
registered person is required to complete the Regulatory Element within 
120 days after the person's second anniversary date and, thereafter 
within 120 days after every third registration anniversary date. There 
are three Regulatory Element programs: the S201 Supervisor Program for 
registered principals and supervisors, the S106 Series 6 Program for 
Series 6 representatives, and the S101 General Program for Series 7 and 
all other registrations.
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    \7\ The Continuing Education Program also has a ``Firm 
Element.'' See PCX Rule 9.27(d). The Exchange Firm Element of the 
Continuing Education Program applies to any person registered with 
an NASD member firm who has direct contact with customers in the 
conduct of the member's securities sales, trading and investment 
banking activities, any person registered as a research analyst 
pursuant to NASD Rule 1050, and to the immediate supervisors of such 
persons (collectively called ``covered registered persons''). The 
requirement stipulates that each member firm must maintain a 
continuing and current education program for its covered registered 
persons to enhance their securities knowledge, skill and 
professionalism. Each firm has the requirement to annually conduct a 
training needs analysis, develop a written training plan, and 
implement the plan.
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    According to the NASD, approximately 135,000 registered persons are 
exempt from the Regulatory Element. These include registered persons 
who, when the Continuing Education Program was adopted in 1995, had 
been registered for at least ten years and who did not have a 
significant disciplinary action \8\ in the CRD record for the previous 
ten years (so-called ``grandfathered'' persons). These also include 
those persons who had ``graduated'' from the Regulatory Element by 
satisfying their tenth anniversary requirement before July 1998, when 
PCX Rule 9.27 was amended and the graduation provision eliminated, and 
who did not have a significant disciplinary action in their CRD record 
for the previous ten years.\9\
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    \8\ For purposes of PCX Rule 9.27(c), a significant disciplinary 
action generally means a statutory disqualification, a suspension or 
imposition of a fine of $5,000 or more, or being subject to an order 
from a securities regulator to re-take the Regulatory Element. See 
PCX Rule 9.27(c)(3).
    \9\ When PCX Rule 9.27 was first adopted in 1995, the Regulatory 
Element required registered persons to satisfy the Regulatory 
Element on the second, fifth, and tenth anniversary of their initial 
securities registration. After satisfying the tenth anniversary 
requirement, a person was ``graduated'' from the Regulatory Element. 
A graduated person who was not a principal re-entered if he or she 
acquired a principal registration or incurred a significant 
disciplinary action.
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    At its December 2003 meeting, the Securities Industry/Regulatory 
Council on Continuing Education (``Council'') discussed the current 
exemptions from the Regulatory Element and agreed unanimously to 
recommend that the SROs repeal the exemptions and require all 
registered persons to participate in the Regulatory Element. In 
reaching this conclusion, the Council was of the view that there is 
great value in exposing all industry participants to the benefits of 
the Regulatory Element, in part because of the significant regulatory 
issues that have emerged over the past few years. The Regulatory 
Element programs include teaching and training content that is 
continuously updated to address current regulatory concerns as well as 
new products and trading strategies. Exempt persons presently do not 
have the benefit of this material.
    In addition, the Council will introduce a new content module to the 
Regulatory Element programs that will specifically address ethics and 
will require participants to recognize ethical issues in given 
situations. Participants will be required to make decisions in the 
context of, for example, peer pressure, the temptation to rationalize, 
or a lack of clear-cut guidelines from existing rules or regulations. 
The Council strongly believes that all registered persons, regardless 
of their years of experience in the industry, should have the benefit 
of this training.
    Consistent with the Council's recommendation, the proposed rule 
change, as amended, would eliminate the current Regulatory Element 
exemptions. The other SRO members of the Council also support 
eliminating the exemptions and either have already or are pursuing 
amendments to their respective rules.
    The effective date of the proposed rule change, as amended, will be 
September 30, 2005.\10\ PCX will announce the effective date of the 
proposed rule change in the PCX Weekly Bulletin following the effective 
date of the proposed rule, as amended.
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    \10\ To eliminate any confusion, the Exchange has confirmed in 
the proposed rule change that an Exchange participant who is also a 
member of another SRO must comply with the rules of the other SRO 
which eliminated these exceptions as of an earlier date. See 
Securities Exchange Act Release Nos. 50404 (September 16, 2004), 69 
FR 57126 (September 23, 2004); 50456 (September 27, 2004), 69 FR 
59285 (October 4, 2004); 50630 (November 3, 2004), 69 FR 65232 
(November 10, 2004); and 50651 (November 10, 2004) 69 FR 67374 
(November 17, 2004).
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    Moreover, following the effective date of the proposed rule change, 
as

[[Page 45479]]

amended, implementation will be based on the application of the 
existing requirements of the Regulatory Element to all registered 
persons. The way in which the Web Central Registration Depository 
(``Web CRD''), which is administered by the NASD, applies these 
requirements is as follows. Web CRD establishes a ``base date'' for 
each registered person and calculates anniversaries from that date. 
Usually, the base date is the person's initial securities registration. 
However, the base date may be revised to be the effective date of a 
significant disciplinary action in accordance with PCX Rule 9.27 or the 
date on which a formerly registered person re-qualifies for association 
with a PCX OTP Holder or OTP Firm by qualification exam. Using the base 
date, Web CRD creates a Regulatory Element requirement on the second 
anniversary of the base date and then every three years thereafter. 
Registered persons formerly exempt from the Regulatory Element 
requirement must satisfy this requirement that occurs on an anniversary 
on or after the effective date of the proposed rule change, as amended.
    It is noted that a person's base date may be revised to be the 
effective date of a significant disciplinary action in accordance with 
PCX Rule 9.27. The Exchange proposes to amend PCX Rule 9.27 to clarify 
that a person subject to a significant disciplinary action would be 
required to ``re-take'' rather than ``re-enter'' the Regulatory 
Element.\11\ A person's base date may also be revised to be the date on 
which a formerly registered person re-qualifies for association with an 
OTP Holder or OTP Firm.
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    \11\ This requirement would apply to all registered persons that 
are subject of a significant disciplinary action, and not only to 
currently exempt persons.
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2. Statutory Basis
    The Exchange believes that the proposed rule change, as amended, is 
consistent with section 6(b) \12\ of the Act, in general, and furthers 
the objectives of section 6(b)(5),\13\ in particular, in that it is 
designed to facilitate transactions in securities, to promote just and 
equitable principles of trade, to foster competition, and to protect 
investors and the public interest. The Exchange believes that the 
proposed rule change is designed to accomplish these ends by ensuring 
that all registered persons are kept up-to-date on industry rules, 
regulations, and practices.
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    \12\ 15 U.S.C. 78f(b).
    \13\ 15 U.S.C. 78f(b)(5).
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    Additionally, under section 6(c)(3)(B) of the Act,\14\ 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 is 
rescinding all exemptions from the requirement to complete the 
Regulatory Element of the Continuing Education Program as prescribed by 
Exchange Rule 9.27.
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    \14\ 15 U.S.C. 78f(c)(3)(B).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Written comments on the proposed rule change were neither solicited 
nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Because the foregoing proposed rule change, as amended: (1) Does 
not significantly affect the protection of investors or the public 
interest; (2) does not impose any significant burden on competition; 
and (3) does not become operative for 30 days from the date on which it 
was filed, or such shorter time as the Commission may designate if 
consistent with the protection of investors and the public interest, 
the proposed rule change has become effective pursuant to section 
19(b)(3)(A) of the Act \15\ and Rule 19b-4(f)(6) thereunder.\16\
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    \15\15 U.S.C. 78s(b)(3)(A).
    \16\ 17 CFR 240.19b-4(f)(6). Rule 19b-4(f)(6) also requires that 
the exchange give the Commission written notice of its intent to 
file the proposed rule change along with a brief description and 
text of the proposed rule change, at least five business days prior 
to the date of filing the proposed rule change. The Exchange 
satisfied this requirement.
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    At any time within 60 days of the filing of such proposed rule 
change, the Commission may summarily abrogate such rule change if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protection of investors, or otherwise 
in furtherance of the purposes of the Act.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change, as amended, is 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 Number SR-PCX-2005-80 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, Station Place, 100 F 
Street, NE., Washington, DC 20549-9303.
    All submissions should refer to File Number SR-PCX-2005-80. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the submission, all subsequent amendments, 
all written statements with respect to the proposed rule change that 
are filed with the Commission, and all written communications relating 
to the proposed rule change between the Commission and any person, 
other than those that may be withheld from the public in accordance 
with the provisions of 5 U.S.C. 552, will be available for inspection 
and copying in the Commission's Public Reference Room. Copies of the 
filing also will be available for inspection and copying at the 
principal offices of the PCX. All comments received will be posted 
without change; the Commission does not edit personal identifying 
information from submissions. You should submit only information that 
you wish to make available publicly. All submissions should refer to 
File Number SR-PCX-2005-80 and should be submitted on or before August 
26, 2005.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. E5-4224 Filed 8-4-05; 8:45 am]
BILLING CODE 8010-01-P