[Federal Register Volume 59, Number 74 (Monday, April 18, 1994)] [Unknown Section] [Page 0] From the Federal Register Online via the Government Publishing Office [www.gpo.gov] [FR Doc No: 94-9268] [[Page Unknown]] [Federal Register: April 18, 1994] ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION [Release No. 34-33892; File No. SR-NASD-89-16] Self-Regulatory Organizations; National Association of Securities Dealers, Inc.; Order Approving Proposed Rule Change Relating to Specifications and Study Outline for the Registered Options Limited Representative Examination April 11, 1994. On March 23, 1989, the National Association of Securities Dealers, Inc. (``NASD'') filed with the Securities and Exchange Commission (``Commission''), pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'')\1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to establish examination questions, specifications, and a study outline for a Registered Options Limited Representative Examination (``Series 42'') to be administered by the NASD. --------------------------------------------------------------------------- \1\15 U.S.C. 78s(b)(1) (1988). \2\17 CFR 240.19b-4 (1993). --------------------------------------------------------------------------- The proposed rule change was published for comment in the Federal Register on April 12, 1989.\3\ The Commission received a total of seven comment letters opposing the proposed rule change. The comment letters were submitted by the American Stock Exchange, Inc. (``Amex''),\4\ the New York Stock Exchange, Inc. (``NYSE''),\5\ the Philadelphia Stock Exchange, Inc. (``Phlx''),\6\ and the Chicago Board Options Exchange, Inc. (``CBOE'')\7\ The Commission also received two letters from the NASD in response to those comment letters.\8\ --------------------------------------------------------------------------- \3\See Securities Exchange Act Release No. 26695 (April 4, 1989), 54 FR 14718 (April 12, 1989). \4\See Letter from Ivers W. Riley, Senior Executive Vice President, Amex, to Jonathan G. Katz, Secretary, SEC, dated June 16, 1989 (``Amex Letter''). \5\See Letters from James E. Buck, Senior Vice President and Secretary, NYSE, to Diana Luka-Hopson, Branch Chief, Division of Market Regulation (``Division''), SEC, dated August 16, 1993 (``NYSE August 16 Letter''), and December 31, 1993. \6\See Letter from Nicholas A. Giordano, President, Phlx, to Jonathan G. Katz, Secretary, SEC, dated July 10, 1989 (``Phlx Letter'') \7\See Letters from Charles J. Henry, President and Chief Operating Officer, CBOE, to Jonathan G. Katz, Secretary, SEC, dated June 15, 1989; from Charles J. Henry, President and Chief Operating Officer, CBOE, to Richard Ketchum, Director, Division, SEC, dated September 17, 1990; and from Charles J. Henry, President and Chief Operating Officer, CBOE, to Jonathan Kallman, Associate Director, Division, SEC, dated June 24, 1993 (``CBOE June 24 Letter''). \8\See Letters from Frank J. McAuliffe, Vice President, Qualifications Department, NASD, to Kathy England, Branch Chief, Division, SEC, dated September 27, 1989 (``NASD September 27 Letter''); and from Suzanne Rothwell, Associate General Counsel, NASD, to Thomas Gira, Branch Chief, Division, SEC, dated July 25, 1991 (collectively, ``NASD Response Letters''). --------------------------------------------------------------------------- I. Background Since the inception of the Series 7 General Securities Representative Examination program (``Series 7'') in 1974,\9\ the NASD has continually maintained limited qualification programs for specialized product areas.\10\ The NASD represents that the limited qualification programs provide qualification mechanisms that are appropriate to NASD-only member firms that are involved in limited aspects of the securities industry.\11\ Until 1988, the NASD maintained two limited representative qualification programs: (1) The Series 6, for investment company products and variable contracts; and (2) the Series 22, for direct participation programs.\12\ In 1988, the NASD implemented the Series 62 examination (``Series 62'') which qualifies candidates to sell only stocks, bonds, rights, warrants, closed-end investment company shares, real estate investment trusts, and money market funds.\13\ The NASD has also acted as the administrative agent for the Series 52 Municipal Securities Representative Examination since it became effective in 1978.\14\ --------------------------------------------------------------------------- \9\The Series 7 was jointly developed by the Amex; CBOE; Chicago Stock Exchange, Inc., NYSE, Phlx, NASD, and Pacific Stock Exchange, Inc. The Series 7 qualifies candidates to sell the full range of securities products, including options. \10\See NASD September 27 Letter, supra note 8. \11\Id. \12\Id. \13\See Securities Exchange Act Release No. 25719 (May 20, 1988), 53 FR 19076 (May 26, 1988) (``Exchange Act Release No. 25719''). \14\See NASD September 27 Letter, supra note 8. --------------------------------------------------------------------------- II. Description of the Proposal The NASD is now proposing to establish a Series 42 examination which would be used to qualify persons seeking registration as registered options representatives (``RORs'') for options overlying equity, debt, foreign currency, and index options. The Exchange represents that the Series 42 examination, when combined with the NASD's other limited product examinations and the Series 52 examination would provide an alternate to the Series 7 for full general securities representative registration.\15\ --------------------------------------------------------------------------- \15\That is, the combination of the Series 6, 22, 42, 52, and 62 cover the same range of products as the Series 7. Id. --------------------------------------------------------------------------- The examination will be a ninety-minute, 50 question multiple- choice examination, covering all option product areas. A prerequisite to registration as an ROR is registration as a Corporate Securities Limited Representative which requires passing the Series 62, or registration as a General Securities Registered Representative which requires passing the Series 7.\16\ --------------------------------------------------------------------------- \16\According to the NASD, only registered representatives who passed the Series 7 exam prior to the revisions to the Series 7 in 1986 when only equity options were tested, would opt to take the Series 42 exam. Telephone conversation between David Uthe, Assistant Director, Qualifications, NASD, and Brad Ritter, Attorney, Office of Derivatives and Equity Regulation, Division of Market Regulation, Commission, on April 11, 1994 (``Uthe April 11 Conversation''). --------------------------------------------------------------------------- III. Comments Received on the Proposal The Commission received comment letters from the Amex, Phlx, NYSE, and CBOE in opposition to the proposal, and response letters from the NASD.\17\ The commentators raised objections regarding the utility of the Series 42 and believe that the availability of an alternative qualification scheme to the existing Series 7 could result in investor and regulatory confusion, and could limit investors' access to the options markets. --------------------------------------------------------------------------- \17\See supra notes 4 through 8. --------------------------------------------------------------------------- A. Utility of the Series 42 The Amex, Phlx, NYSE, and CBOE argue that the usefulness of the Series 42 is limited because broker-dealers who trade options should understand the entire marketplace, especially instruments which underlie options. The Amex believes that the Series 42 will result in broker-dealers having only a narrow understanding of just one type of product, namely options.\18\ Furthermore, the Amex, CBOE, NYSE, and Phlx each believe that the Series 7 is the most effective way of ensuring that the investing pubic will be served by qualified and informed options representatives because the examination covers virtually every securities product trading on U.S. exchanges and the NASD Automated Quotation System (``NASDAQ'').\19\ --------------------------------------------------------------------------- \18\See Amex Letter, supra note 4. \19\See Amex Letter, supra note 4; CBOE June 24 Letter, supra note 7; NYSE August 16 Letter, supra note 5; and Phlx Letter, supra note 6. --------------------------------------------------------------------------- The Phlx, CBOE, and NYSE believe that except for the Series 62,\20\ the NASD's current limited product examinations can be justified because these examinations are intended to accommodate limited purpose broker-dealers and their representatives whose securities activities are limited to specific, discrete product lines, such as investment company products/variable annuities (Series 6), direct participation programs (Series 22), and municipal securities (Series 52) and, therefore, the potential for investor confusion is minimal.\21\ In this context, the CBOE notes that unlike the Series 42 and 62, the NASD's other limited product exams do not conflict with the current Series 7 test because such non-exchange traded securities are within the regulatory purview of the over-the-counter market.\22\ Further, the Phlx believes that the same economic efficiencies will not be realized from the implementation of the Series 42 because there is not a sufficient number of firms whose business is limited solely to options, or to corporate securities and options, to achieve these efficiencies.\23\ --------------------------------------------------------------------------- \20\The Phlx, CBOE, and NYSE, believe that the introduction of the Series 62 added confusion to the existing regulatory scheme by creating multiple levels of qualification standards for stockbrokers. See Phlx Letter, supra note 6; CBOE June 24 Letter, supra note 7; and NYSE August 16 Letter, supra note 5. The Commission notes, however, that it did not receive any written comments to the NASD proposal for the Series 62 exam prior to its approval. See Exchange Act Release No. 25719, supra note 13. \21\Id. \22\See CBOE June 24 Letter, supra note 7. \23\See Phlx Letter, supra note 6. --------------------------------------------------------------------------- Finally, the CBOE and Phlx argue that the usefulness of the Series 42 is limited because it is likely that no national securities exchange will recognize the examination.\24\ --------------------------------------------------------------------------- \24\See CBOE June 24 Letter, supra note 7; and Phlx Letter, supra note 6. --------------------------------------------------------------------------- B. Investor Confusion The CBOE and NYSE argue that the Series 42 will confuse investors by fragmenting the elements of qualification for the offering of listed securities options contracts, thus requiring an investor to determine whether or not his stockbroker is qualified to accept his orders in certain products.\25\ The CBOE and NYSE also believe that the knowledge and capabilities of a limited product stockbroker may not be as sound as those of a stockbroker who is qualified for all products in the securities markets. For this reason, the CBOE and NYSE recommend that limited product representatives be required to disclose limited qualifications in writing.\26\ --------------------------------------------------------------------------- \25\See CBOE June 24 Letter, supra note 7; and NYSE August 16 Letter, supra note 5. \26\Id. --------------------------------------------------------------------------- Further, the Phlx argues that use of the Series 42 could confuse and mislead public investors by creating specialized representatives within general purpose firms.\27\ The Phlx believes that it is possible that a representative qualified under the Series 42 and Series 62 examinations would be unqualified to make recommendations on the range of available investment products suitable to a particular customer, or might seek to dissuade an investor from pursuing certain otherwise appropriate investment products because the representative is not qualified to recommend them.\28\ Further, the Phlx believes that because there is no requirement for disclosing the capacities in which a representative is qualified, a customer would not know whether a representative was fully qualified, nor be able to assess any possible ``extraneous motives'' for a representative's advice.\29\ --------------------------------------------------------------------------- \27\See Phlx Letter, supra note 6. \28\Id. \29\Id. --------------------------------------------------------------------------- C. Regulatory Confusion The Phlx argues that because the Series 42 covers a product traded almost exclusively on the nations options exchanges, those exchanges should have substantial input in determining the qualifications of representatives who market exchange-traded options.\30\ The Phlx states that it is unclear whether the Series 42 is sufficient to qualify a representative to trade certain products, such as non-equity options and whether the examination will be updated to encompass new exchange- traded products.\31\ --------------------------------------------------------------------------- \30\Id. \31\Id. --------------------------------------------------------------------------- The Phlx argues that regulatory confusion is also created because it does not appear likely that any exchange will recognize the validity of the Series 42.\32\ The Phlx believes that regulatory concern is raised by Phlx products, such as foreign currency options being marketed to customers by representatives who have not passed the Series 7, which is one of the Exchange's qualification requirements.\33\ --------------------------------------------------------------------------- \32\Id. See also, CBOE June 24 Letter, supra note 7. \33\See Phlx Letter, supra note 6. --------------------------------------------------------------------------- Further, the Phlx and CBOE believe that the Series 42 raises concerns for their member firms because the Phlx and CBOE believe that they will have to notify their members that they may incur liability by accepting orders from broker-dealers whose representatives are not Series 7 qualified if the exchanges determine that successful completion of the Series 42 (and Series 62) is inadequate for entry into their markets.\34\ --------------------------------------------------------------------------- \34\See Phlx Letter, supra note 6; and CBOE June 24 Letter, supra note 7. --------------------------------------------------------------------------- The CBOE believes that regulatory concern is raised by the Series 42 because individuals registered with organizations which are members solely of the NASD may have the ability to recommend listed options trading on an exchange without any assurance that such individuals have the requisite knowledge to do so.\35\ --------------------------------------------------------------------------- \35\See CBOE June 24 Letter, supra note 7. --------------------------------------------------------------------------- D. Limited Access to Options Markets The CBOE argues that the introduction of the Series 62 represented the first time since options were integrated into the Series 7 exam that individuals have been permitted to qualify to trade the underlying securities without being qualified to trade the derivative product.\36\ As a result, the CBOE believes the Series 62 permits individuals to deal with the public concerning products with option-like characteristics (e.g., index warrants) without being qualified to deal in options.\37\ While these concerns apply to the Series 62, the CBOE believes the NASD should be required to amend that exam to test for options products rather than introducing the Series 42 as a separate exam.\38\ --------------------------------------------------------------------------- \36\Id. \37\Id. \38\Id. --------------------------------------------------------------------------- Similarly, the NYSE and the Phlx argue that the implementation of the Series 42 could result in limiting investor access to the options markets by erecting artificial barriers that could impede or deny access by customers to closely interrelated products because their representatives had not been qualified to trade those products.\39\ --------------------------------------------------------------------------- \39\See Phlx Letter, supra note 6; and NYSE August 16 Letter, supra note 5. --------------------------------------------------------------------------- E. NASD Response to Commentators The NASD does not agree that the usefulness of the Series 42 is limited.\40\ The NASD believes that the Series 42 would raise qualification standards in the options regulatory area and provide a modular alternative route for NASD-only members to achieve a general securities representative status.\41\ Additionally, the NASD believes that the Series 42 would improve qualification standards by replacing the Put and Call Questionnaire, which is given ``in-house'' by the member firms, as a method of testing the qualifications of representatives to trade equity options who have not previously been options qualified.\42\ The NASD believes the Series 42 would, accordingly, raise qualification standards by eliminating the use of this questionnaire which is administered by the firms and not by the NASD under test conditions,\43\ and provide the NASD with a means of maintaining a permanent record of its registered representatives who have taken the exam and are options qualified.\44\ --------------------------------------------------------------------------- \40\See NASD September 27 Letter, supra note 8. \41\Id. \42\According to the NASD, the Put & Call Questionnaire was developed at the inception of the options markets in 1973 to qualify existing representatives to trade equity options. Id. With the development of additional options products, a registered representative who wants to trade a full range of options products and who has only passed the Series 62, would currently have to either (i) complete the Series 7 exam, or (ii) complete the Put & Call Questionnaire as well as the Series 5 (interest rate options) and the Series 15 (foreign currency options). See the April 11 Conversation, supra note 16. \43\See NASD September 27 Letter, supra note 8. \44\Currently, records as to the qualifications of representatives to trade various options products are maintained by the member firms, not by the NASD. See the April 11 Conversation, supra note 16. --------------------------------------------------------------------------- The NASD further argues that implementation of the Series 42 will not result in investor confusion. The NASD states that there is no evidence that the introduction of the Series 62 has caused investor confusion.\45\ The NASD further states that it has not received any inquiries from the investing public which suggest confusion over broker registration regarding the limited registration categories and that the routine examination of their member firms by its surveillance staff shows no particular problems in supervising or controlling marketing staffs with limited registrations, even within general securities firms.\46\ The NASD believes that the investing public is more concerned with the fact that a representative is registered and properly qualified with the NASD or a national securities exchange than with the specific examination taken by the representative.\47\ --------------------------------------------------------------------------- \45\See NASD September 27 Letter, supra note 8. \46\Id. \47\Id. --------------------------------------------------------------------------- Finally, the NASD argues that the Series 42 is a substantively adequate examination which will not result in regulatory confusion. The NASD states that the Series 42 was developed by the same industry participants responsible for the development and maintenance of the Series 4 Registered Options Principal (``ROP'') Examination. The NASD represents that these individuals are ROPs at general securities firms which are members of all the option exchanges.\48\ --------------------------------------------------------------------------- \48\Id. --------------------------------------------------------------------------- The NASD believes that its modular qualification program is fully comparable to the Series 7 and that it provides needed flexibility in meeting appropriate qualification standards for the NASD's diverse membership.\49\ The NASD states that candidates electing the NASD modular approach are subject to five tests totaling 450 questions compared to the 250-question Series 7 examination.\50\ The NASD further believes that requiring candidates to take the Series 62 prior to taking the Series 42 adequately addresses the derivative nature of the options markets.\51\ The NASD, for these reasons, does not believe that implementation of the Series 42 will lessen the basic qualification standards for registered representatives. --------------------------------------------------------------------------- \49\Id. \50\Id. \51\Id. --------------------------------------------------------------------------- IV. Discussion A. General After a careful review of the proposal, the comment letters received, and the NASD's responses to these comment letters, the Commission believes that the proposed rule change is consistent with the requirements of the Act. Specifically, the Commission believes that implementation of the Series 42 examination is a proper exercise of the NASD's responsibility under section 15A(g)(3) of the Act\52\ to prescribe standards of training, experience, and competence for persons associated with NASD members. --------------------------------------------------------------------------- \52\15 U.S.C. 78o-3(g)(3) (1988). --------------------------------------------------------------------------- The Commission notes that Article III, section 33 of the NASD Rules of Fair Practice grants NASD members or persons associated with NASD members the authority to effect transactions in options contracts if those transactions are effected in accordance with the rules, regulations, and procedures adopted by the NASD's Board of Governors. Further, each person associated with an NASD member whose activities in the investment banking or securities business include the solicitation and/or sale of options contracts is required, by paragraph 1785(2)(d) of Schedule C to the NASD By-Laws, to be certified as a registered options representative and pass an appropriate certification examination. For these reasons, the NASD has the responsibility, under section 15A(g)(3) of the Act, to prescribe standards of competence for persons associated with NASD member firms who effect transactions in options. The Commission believes that the Series 42, in conjunction with the Series 62, satisfies the NASD's responsibility for prescribing these standards for competence. As described below, the Series 42 has been reviewed by the Commission's Division of Market Regulation and found to be substantively adequate.\53\ As also discussed below, the Commission does not agree with the commentator's assertions that the usefulness of the Series 42 is limited or that implementation of the examination will cause regulatory or investor confusion, or will limit access to the options markets. --------------------------------------------------------------------------- \53\The Commission notes, however, that due to the length of time since the submission of this proposal, the SEC's approval of the use of the Series 42 is contingent upon the NASD updating the Series 42, and review by the Commission staff of such changes in the exam, to ensure that it covers all types of options products currently listed and trading on the options exchanges. --------------------------------------------------------------------------- B. Utility of the Series 42 The Series 42 will complete the NASD's modular examination program and provide an alternative route to the Series 7 examination for NASD- only members to achieve a general securities representative status. As such, the Series 42 is within the NASD's discretion for providing adequate qualification mechanisms for persons associated with its members. The Commission staff has reviewed the Series 42 as proposed and found it to be substantively adequate.\54\ Furthermore, the NASD has represented that the Series 42 was developed by the same industry participants responsible for the development and maintenance of the Series 4 ROP examination and that these individuals are ROPs at general securities firms which are members of all the options exchanges. In addition, the NASD has a written agreement with the NYSE pursuant to which selected questions from the Series 7 exam are reviewed for use in its limited product examinations and questions from NASD's limited product exam question banks are sent to the NYSE for possible inclusion in the Series 7.\55\ The Commission believes that the sharing of this information ensures the comparability of the general and limited examination programs and the Commission expects this sharing agreement to continue for the NASD's Series 42 examination. Finally, by requiring successful completion of the Series 62 as a prerequisite for the Series 42, the Commission finds that the NASD has provided an examination structure which will adequately test a candidate's knowledge of the instrument that underlie options.\56\ The requirement that the Series 42 be taken in conjunction with the Series 62 adequately addresses the derivative nature of the options markets. Successful completion of the Series 62 ensures that a representative will be knowledgeable about equity securities and their regulation. The knowledge required by the Series 62 exam, combined with the knowledge required by the Series 42, together would be sufficient to ensure that representatives understand the relationship between options and the markets that underlie most options transactions.\57\ --------------------------------------------------------------------------- \54\Id. \55\See NASD September 27, Letter, supra note 8. \56\In response to assertions that certain subjects should be covered by options qualifications examinations, the NASD represents that ``interest rate theory'' is covered by the Series 62 and the ``fundamentals of currency markets'' are covered by the Series 42. See NASD September 27 Letter, supra note 8. The NASD further represents that all options related areas covered on the Series 7 are tested on the Series 42 exam. See the April 11 Conversation, supra note 16. \57\To the extent that some options overlie assets other than equities or equity indexes (e.g., currency options and interest rate options), the Series 62 and/or the Series 42 will contain questions designed to ensure that representatives understand the characteristics and risks pertaining to non-equity options. Id. --------------------------------------------------------------------------- The Commission does not believe that the options exchanges' failure to recognize the Series 42 will impair the examination's usefulness to NASD member firms. To the Commission's knowledge, the U.S. securities exchanges do not recognize completion of the Series 62 as being an adequate demonstration of requisite knowledge for purposes of testing the knowledge and competence of their members or the registered representatives of their member firms. Exchange members, however, are permitted, and do, provide clearing and execution services for non- exchange NASD member firms even though some of the registered representatives at these firms have only completed the Series 62. Implementation of the Series 42 should not alter this situation even if the exchanges do not recognize the Series 42. Additionally, the Series 42 should provide benefits to the NASD, and by extension, NASD members. NASD-only members are currently tested and qualified to trade options through use of the Put & Call Questionnaire which is administered in- house by member firms. Therefore, even if the exchanges do not recognize the Series 42, the Commission believes that by replacing the in-house Put & Call Questionnaire with an options specific exam administered under established testing procedures, the NASD will be better able to ensure that its members have the requisite knowledge to engage in options transitions. This may also benefit NASD-only members because the Series 42 may be viewed as being a more accurate and therefore more credible reflection of a member's knowledge of options products than the Put & Call Questionnaire. C. Investor Confusion The Commission does not believe that implementation of the Series 42 will result in investor confusion. Since the introduction of the Series 62, the NASD has not received inquiries which suggest that investors are confused by the limited registration categories.\58\ Further, the Commission notes that the routine examination of NASD member firms by the NASD surveillance staff has not uncovered any particular problems in supervising or controlling marketing staffs with limited registrations, even within general securities firms. Accordingly, separate qualification standards for a limited product stockbroker should not confuse investors or result in the knowledge and capabilities of the broker being less sound than those of a stockbroker who has qualified for all products in the securities markets. For these reasons, the Commission believes that there is no factual basis at this time for supporting a requirement that limited product representatives disclose in writing that their registration is limited. --------------------------------------------------------------------------- \58\See supra note 46. --------------------------------------------------------------------------- With respect to the possibility of a limited representative dissuading an investor from certain investment products because the representative was not qualified to trade those products, such conduct could violate the representative's fiduciary obligations to his or her customer.\59\ Further, the NASD's member firm compliance examinations will check for any abuses which could occur as a result of the NASD's limited registration program. In addition, customers are free to change brokers. If a customer wants to trade a product that the representative is not qualified to handle, and tries to steer the client from, the customer can switch to a different representative. Sufficient client demand for uncovered products should force a representative to broaden his or her qualifications to cover a wider product base. --------------------------------------------------------------------------- \59\The Series 42 is intended to enable representatives to handle options orders and not restrict them from recommending options. --------------------------------------------------------------------------- D. Regulatory Confusion The Commission does not believe that implementation of the Series 42 will result in regulatory confusion. As a preliminary matter, neither the Act nor the NASD Rules require the NASD to develop jointly an options examination with the options exchanges. Although uniformity of tests across self-regulatory organizations (``SROs'') would be the most efficient means of ensuring industry competency, an SRO is still capable of developing an exam to cover its particular membership. In this regard, the Act permits the NASD to develop an examination that tests the qualifications of individuals associated with NASD members to trade options.\60\ --------------------------------------------------------------------------- \60\If the NASD determines that it is unable to maintain the quality of the Series 42 so that the examination adequately tests the competency of representatives to effect transactions in options, the NASD should discontinue using the examination. --------------------------------------------------------------------------- The Commission also disagrees with the assertion that regulatory concerns are raised by the fact that the options exchanges may not recognize the validity of the Series 42. The Commission believes that implementing the Series 42 is not inconsistent with the options exchanges retaining the Series 7 as their basic qualification requirement for exchange member firms.\61\ Use of the Series 42 by the NASD to test the qualifications of its members to trade options does not diminish the options exchanges' authority to determine the qualifications of their own members to trade options. The exchanges can continue to require exchange members to take and pass the Series 7 examination. --------------------------------------------------------------------------- \61\As the NASD notes, it is likely that most full service firms will continue to opt for the Series 7 examination for their representatives. See NASD September 27 Letter, supra note 8. --------------------------------------------------------------------------- The Commission further disagrees with the assertion that individuals registered with NASD member organizations could recommend listed options transactions trading on an exchange without the exchange knowing that such individuals have the requisite knowledge to do so. As discussed above, the Commission believes that the Series 42 is adequate to test the training, experience, and competence of representatives regarding all types of options transactions. Finally, the Commission does not believe that there will be increased legal liability on options exchange members because they accepted orders from representatives of NASD-only members who, although not Series 7 qualified, had passed the Series 42 exam. Implementation of the Series 42 will not alter the status quo as far as these options exchange members are concerned. These services are currently provided to NASD-only members who have completed only the Series 62 and the Put & Call Questionnaire. The Commission has not been aware of any case in which an exchange member has incurred liability based solely on the fact that the exchange member provided clearing and execution services to a non-Series 7 registered NASD member broker-dealer. The Commission, therefore, does not believe that replacing the Put & Call Questionnaire with the Series 42 will increase the potential for exchange member liability in this regard. E. Limited Access to Options Markets The Commission disagrees with the assertion that implementation of the Series 42 would result in limiting investor access to the options markets by erecting artificial barriers that could impede or deny access by customers to closely inter-related products because their representatives had not been qualified to trade them. The Commission believes that the Series 42 increases investor access to the options markets because it provides representatives that are only Series 62 qualified with a procedure for becoming qualified to affect transactions in options without having to take the Series 7 exam. Further, the Commission believes that the Series 42 provides better testing for qualified representatives than the current Put & Call Questionnaire administered by firms. In summary, the Commission believes that the Series 42 exam is an appropriate exercise of the NASD's statutory authority to ensure qualification of its members. The exam itself is sound and tests options knowledge in depth. Despite the objections of the options exchanges, the Commission does not believe there is a regulatory reason to disapprove the Series 42 exam as proposed. For the reasons set forth above, the Commission finds that the proposed rule changes is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a registered securities association, and, in particular the requirements of section 15A,\62\ and the rules and regulations thereunder. --------------------------------------------------------------------------- \62\15 U.S.C. 78o-3 (1988). --------------------------------------------------------------------------- It is therefore ordered, pursuant to Section 19(b)(2) of the Act,\63\ that the proposed rule change (SR-NASD-89-16) is approved contingent upon the NASD's updating of the exam as necessary to reflect the changes that have occurred in the options markets since the time that the Series 42 was originally proposed (e.g., new products) and the Commission's review of the revised examination. \63\15 U.S.C. 78s(b)(2) (1988). --------------------------------------------------------------------------- For the Commission, by the Division of Market Regulation, pursuant to delegated authority.\64\ --------------------------------------------------------------------------- \64\17 CFR 200.30-3(a)(12) (1993). --------------------------------------------------------------------------- Margaret H. McFarland, Deputy Secretary. [FR Doc. 94-9268 Filed 4-15-94; 8:45 am] BILLING CODE 8010-01-M