[Federal Register Volume 63, Number 17 (Tuesday, January 27, 1998)]
[Notices]
[Pages 3942-3944]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-1853]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-39562; File No. SR-NASD-97-78]
Self-Regulatory Organizations; Order Approving a Proposed Rule
Change by National Association of Securities Dealers, Inc. Relating to
the Amended Interpretation of IM-8310-2 Concerning the Release of
Additional Disciplinary Information
January 20, 1998.
I. Introduction
On October 17, 1997, the National Association of Securities
Dealers, Inc. (``NASD'' or ``Association'') submitted to the Securities
and Exchange Commission (``SEC'' or ``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 which amended the
Interpretation on the Release of Disciplinary Information, IM-8310-2 of
Rule 8310 of the Procedural Rules of the NASD (``Interpretation'' or
``IM-8310-2''). A notice of the proposed rule change was published in
the Federal Register on November 21, 1997.\3\ The Commission has
received no comment letters on the proposed rule change. For the
reasons discussed below, the Commission is approving the proposed rule
change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Securities Exchange Act Rel. No. 39322 (Nov. 13, 1997), 62
FR 62391.
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In its notice, filed on October 17, 1997, the NASD Regulation, Inc.
(``NASDR'') proposed to amend IM-8310-2 to include the phrase
``electronic inquiry'' in the rule language so that it could respond to
electronic inquiries, as well as written or telephonic inquiries. In
the notice, the NASDR also proposed to amend the rule language to
include the additional information required to be reported on the
amended Forms U-4, U-5, and BD.
In November 1997, the NASDR requested that the Commission approve,
on an accelerated basis, that portion of the amended rule language that
would allow it to respond to electronic
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inquiries.\4\ Hence, the Commission partially approved, on an
accelerated basis, that portion of the NASDR's request which gives the
NASD the option of responding to the electronic inquiries of persons or
entities requesting employment and disciplinary history of its members
and their associated persons.\5\ This order approves the amended rule
language that addresses the release of additional disciplinary history
required to be disclosed pursuant to amended Forms U-4, U-5, and BD.
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\4\ Telephone conversation with Alden S. Adkins, General Counsel
and Mary M. Dunbar, Assistant General Counsel, NASDR, and Belinda
Blaine, Associate Director, Katherine A. England, Assistant
Director, and Mignon McLemore, Staff Attorney, Division of Market
Regulation, November 26, 1997.
\5\ See Securities Exchange Act Rel. No. 39442 (December 11,
1997), 62 FR 66706 (December 19, 1997).
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II. Description of Proposal
Under the NASD's Public Disclosure Program (``PDP''),\6\ the NASD,
in response to a written inquiry, electronic inquiry,\7\ or telephonic
inquiry via a toll-free telephone listing, releases certain information
contained in the Central Registration Depository (``CRD'') regarding
the employment and disciplinary history of its members and their
associated persons, including information regarding past and present
employment history with Association members; all final disciplinary
actions taken by federal, state, or foreign securities agencies or
self-regulatory organizations that relate to securities or commodities
transactions; all pending disciplinary actions that have been taken by
federal or state securities agencies or self-regulatory organizations
that relate to securities and commodities transactions and are required
to be reported on Form BD or Form U-4; all foreign government or self-
regulatory organization disciplinary actions that relate to securities
or commodities transactions and are required to be reported on Form BD
or Form U-4; and all criminal indictments, informations or convictions
that are required to be reported on Form BD or Form U-4. The
Association also releases information concerning civil judgments and
arbitration decisions in securities and commodities disputes involving
public customers.
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\6\ See Securities Exchange Act Rel. No. 30629 (April 23, 1992),
57 FR 18535 (April 30, 1992); and Securities Exchange Act Rel. No.
32568 (July 1, 1993), 58 FR 36723 (July 8, 1993).
\7\ See supra note 5.
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On November 25, 1996, as part of its PDP, the NASD filed a proposed
rule change, SR-NASD-96-38, designed to permit the NASD to release
additional information regarding the disciplinary history of its
members and persons associated with a member.\8\ In January 1997,
NASDR's senior management determined that the CRD redesign should be
reassessed in light of changing business needs and rapidly advancing
computer technology. After negotiations and discussions among the
Commission, the NASD, and the North American Securities Administrators
Association, Inc. (``NASAA'') concerning CRD development and
implementation, SR-NASD-96-38 was withdrawn and replaced by this
filing, SR-NASD-97-78.
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\8\ The NASD proposal to release additional disciplinary history
of its members and associated persons was initially filed with the
Commission on November 26, 1996. See Securities Exchange Act Rel.
No. 37994 (November 27, 1996), 61 FR 64549 (December 5, 1996) (SR-
NASD-96-38).
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This filing proposes the same substantive disclosure as SR-NASD-96-
38. Specifically, the proposed rule change allows the NASD to release
all information on any question on page 3 (Question 22) of the amended
Form U-4 and Question 11 of the amended Form BD, as approved by the
Commission in July 1996.\9\ The additional information that the NASD
proposes to disclose includes:
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\9\ See Securities Exchange Act Rel. No. 37407 (July 5, 1996),
61 FR 36595 (July 11, 1996); and Securities Exchange Act Rel. No.
37431 (July 12, 1996), 61 FR 37357 (July 18, 1996); See also
Securities Exchange Act Rel. No. 37632 (September 4, 1996), 61 FR
47412 (September 9, 1996).
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1. All pending arbitrations and civil proceedings that relate to
securities or commodities transactions;
2. Pending written customer complaints alleging sales practice
violations and compensatory damages of $5,000 or more;
3. Settlement's of $10,000 or more of arbitrations, civil suits,
and customer complaints involving securities or commodities
transactions:
4. Current investigations involving criminal or regulatory matters;
5. Terminations of employment after allegations involving violation
of investment-related statutes or rules, fraud, theft, or failure to
supervise investment-related activities;
6. Bankruptcies less than 10 years old and outstanding liens or
judgments;
7. Bonding company denials, pay outs, or revocations; and
8. Any suspension or revocation to act as an attorney, accountant,
or federal contractor.
To accomplish the release of this additional information, however,
the NASD has reformatted the questions set forth on page 3 of amended
Form U-4; questions 13 through 16 on amended Form U-5; and the
Disclosure Reporting Pages (``DRPs'') for both forms in a manner that
is compatible with its current CRD technology protocol. The
reformatted, interim forms and DRPs contain no substantive changes to
any of the questions.
The NASD proposes to make the interim forms and the disclosure of
the additional information set forth in this rule filing effective on
February 17, 1998.\10\ This effective date will permit members and the
NASD to complete annual registration renewals and permit the NASD to
train members on the use of the interim forms before they are
implemented. The information that would be released from January 1 \11\
to February 17, 1998, would include only that information that
currently is required to be reported on the Forms U-4 and U-5.
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\10\ See supra note 3, at p. 62391. See also letter from Joan
Conley, Secretary, NASD to Katherine A. England, Assistant Director,
Division of Market Regulation, SEC, dated November 13, 1997,
(correcting Amendment No. 2 to reflect this effective date).
\11\ Upon approval of the electronic inquiry portion of its
proposal, the NASD had planned to begin responding to electronic
inquiries for PDP information, via the Internet, on or about January
1, 1998. See supra note 3 at p. 62391. However, hardware problems
and system capacity have hampered implementation. Telephone
conversation between Alden S. Adkins, General Counsel, NASDR. and
Katherine A. England, Assistant Director, Division of Market
Regulation, SEC, December 29, 1997.
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III. Discussion
The Commission finds that the proposed rule change is consistent
with the requirements of the Act\12\ and the rules and regulations
promulgated thereunder applicable to the NASD. Specifically, the
Commission believes that approval of the proposed rule change is
consistent with Section 15A(b)(6) of the Act. Section 15A(b)(6)
provides in relevant part that the rules of the Association be designed
to foster cooperation and coordination with persons engaged in
regulating and processing information with respect to securities and
not to permit unfair discrimination among customers, issuers, brokers
or dealers.
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\12\ In approving this rule, the Commission notes that it has
considered the proposed rule's impact on efficiency, competition,
and capital formation. The release of additional disciplinary
history of the NASD's members and associated persons should result
in competition for brokerage business among those broker-dealers
with impeccable disciplinary histories. Efficiency should improve in
the marketplace as members and their associated persons become more
conscious of compliance and the potential ramifications of this
increased disclosure. 15 U.S.C. 78c(f).
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Pursuant to Section 15A(b)(6), the proposed rule change benefits
the public because, by releasing this additional disciplinary
information, the
[[Page 3944]]
NASD is providing investors with a resource to aid them in choosing a
broker-dealer for their investment needs. Moreover, increasing
disclosure of members' and their associated persons' relevant
disciplinary history could help investors determine whether to conduct
or continue to conduct business with a particular broker-dealer or
associated person. The Commission notes that disclosure of this
additional information may serve as a deterrent to fraudulent activity
as well.
According to the NASD, the Forms U-4 and U-5 had to be redesigned
to facilitate compliance with this disclosure requirement at this time.
Thus, the forms were redesigned to be compatible with the current CRD
protocol (i.e., the answers on the interim forms now match the location
of questions in the CRD system). Upon completion of the CRD redesign,
the forms as originally designed will be implemented. The Commission,
therefore, approves the use of these interim forms, recognizing their
necessity in disseminating this additional disciplinary history to the
public.
For the above reasons, the Commission believes that the proposed
rule change is consistent with the provisions of the Act, and in
particular, with Section 15A(b)(6).
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\13\ that the remaining portion of proposed rule change, SR-NASD-
97-78, concerning the release of additional disciplinary information
be, and hereby is, approved.
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\13\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\14\
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\14\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-1853 Filed 1-26-98; 8:45 am]
BILLING CODE 8010-01-M
