[Federal Register Volume 62, Number 225 (Friday, November 21, 1997)]
[Notices]
[Pages 62391-62393]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-30623]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-39322; File No. SR-NASD-97-78]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by National Association of Securities Dealers, Inc., Relating to
the Amended Interpretation of IM-8310-2, Release of Disciplinary
Information, and the Implementation of Interim Pages in Forms U-4 and
U-5
November 13, 1997.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4, thereunder,\2\ notice is hereby given
that on October 17, 1997,\3\ the National Association of Securities
Dealers, Inc. (``NASD'' or ``Association'') filed with the Securities
and Exchange Commission (``SEC'' or ``Commission'') the proposed rule
change as described in Items I, II, and III below, which Items have
been prepared by NASD Regulation, Inc. (``NASDR'').\4\ The Commission
is publishing this notice to solicit comments on the proposed rule
change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ On November 6, 1997, the NASD Regulation, Inc. filed an
amendment, which among other things, clarifies the reference to
``associated person'' and explains the absence of the term
``issuer'' in the definition of ``investment-related.'' See letter
from Alden S. Adkins, General Counsel, NASD Regulations, Inc. to
Katherine A. England, Assistant Director, Division of Market
Regulation, SEC, dated November 6, 1997 (``Amendment No. 1''). On
November 12, 1997, the NASD Regulation, Inc. amended its proposal to
clarify the definition of ``appropriate signatory'' and to clarify
the implementation dates of the interim Forms and the disclosure of
additional information. See letter from Alden S. Adkins, General
Counsel, NASD Regulation, Inc., to Katherine A. England, Assistant
Director, Division of Market Regulation, SEC, dated November 12,
1997 (``Amendment No. 2'').
\4\ The Association submitted a similar proposal on November 25,
1996. See Securities Exchange Act Release No. 37994 (November 27,
1996) 61 FR 64549 (December 5, 1996) (SR-NASD-96-38). After several
negotiations among the Commission, the NASD, and the North American
Securities Administrators Association, Inc. (``NASAA''), SR-NASD-96-
38 has been withdrawn and replaced in its entirety by the current
filing. See letter from Joan C. Conley, Corporate Secretary, NASD
Regulation, Inc., to Katherine A. England, Assistant Director,
Division of Market Regulation, SEC, dated October 17, 1997.
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I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
NASDR is proposing to amend the Interpretation on the Release of
Disciplinary Information, IM-8310-2 of Rule 8310 of the Procedural
Rules of the NASD, to include additional information required to be
reported pursuant to the amended Forms U-4, U-5, and BD. Interim pages
for Forms U-4 and U-5 also have been filed to facilitate the immediate
release of this additional information.\5\ Below is the text of the
proposed rule change. Proposed new language is an italics.
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\5\ Copies of Forms U-4 and U-5, containing the interim pages,
were submitted as Attachment A to the NASD's rule proposal. A
complete set of these revised forms is available for inspection and
copying in the Commission's Public Reference Room and is also
available from the NASD.
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IM-8310-2. Release of Disciplinary Information
(a) The Association shall, in response to a written inquiry,
electronic inquiry,\6\ or telephonic inquiry via a toll-free telephone
listing, release certain information contained in its files regarding
the employment and disciplinary history of 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 for Form U-4 and 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 will also release information required to be reported on
Form BD or Form U-4 concerning civil judgments and arbitration
decisions in securities and commodities disputes involving public
customers, pending and settled customer complaints, arbitrations and
civil litigation, current investigations involving criminal or
[[Page 62392]]
regulatory matters, terminations of employment after allegations
involving violations of investment related statutes or rules, theft or
wrongful taking of property, bankruptcies less than ten years old,
outstanding judgments or liens, any bonding company denial, pay out or
revocation, and any suspension or revocation to act as an attorney,
accountant or federal contractor.\7\
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\6\ Upon approval of this proposal, the NASD plans to begin
responding to electronic inquiries via the Internet on or about
January 1, 1998. See Amendment No. 2, p. 1.
\7\ The NASD proposes that the disclosure of this additional
information will become effective on February 17, 1998. Information
released from January 1 to February 17, 1998, would include only
that information that currently is required to be reported on Forms
U-4 and U-5. See Amendment No. 2, pp. 1-2.
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* * * * *
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 NASDR included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The NASD has prepared summaries, set forth in Sections
A, B, and C below, of the most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
Under the NASD's Public Disclosure Program,\8\ the NASD, in
response to a written inquiry 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 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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\8\ 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).
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In 1992, the NASD began developing a replacement for the CRD
system. In conjunction with that effort, the NASD worked with the
NASAA, the Commission, and the New York Stock Exchange to amend Forms
U-4, U-5, and BD to accommodate electronic filing of information with
the new CRD when it became operational. The Commission approved the
amended forms in July 1996.\9\
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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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On November 25, 1996, the NASD filed a proposed rule change
designed to permit the NASD to release additional information regarding
the disciplinary history of its members and persons associated with a
member as part of the Public Disclosure Program.\10\ The proposed rule
change would have allowed 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.
At the time of this filing, the NASD anticipated that the new CRD
system would become operational in the Spring of 1997. The additional
information that the NASD proposes to disclose includes:
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\10\ See supra note 5.
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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. Settlements 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
violations 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.
In January 1997, NASD Regulation senior management determined that
the CRD redesign should be reassessed in light of changing business
needs and rapidly advancing technology. The CRD reassessment reviewed
each of the components of the CRD redesign, developed a revised
Internet-based technology architecture and strategy for going forward
with CRD modernization, and mapped that architecture into a series of
incremental projects that will provide an overall modernization of CRD
before the turn of the century.
As a result of the CRD reassessment and revised technology, the
NASD is withdrawing the previously proposed rule change (SR-NASD-96-38)
to the Public Disclosure Program because it was premised on the
implementation of the redesigned CRD and the use of the amended Form U-
4, Form U-5, and Form BD.
This filing, which replaces SR-NASD-96-38, proposes the same
substantive disclosure, However, to accomplish the release of the
additional information, the NASD has reformatted the questions set
forth on the page 3 of amended Form U-4; questions 13 through 16 on
amended Form U-5; and the Disclosure Reporting Pages for both Forms in
a manner that is compatible with its current CRD technology
architecture. The reformatted, interim forms contain no substantive
changes to any of the questions on those pages.
The Association has clarified the definitions of ``investigation''
and ``sales practice violation'' for purposes of the Forms. For
purposes of Forms U-4 and U-5 reporting, the instructions clarify that
an ``investigation'' includes an NASD investigation after a ``Wells''
notice has been given or after a person associated with a member, as
defined in the NASD By-Laws, has been advised by the staff that it
intends to recommend formal disciplinary action. The instructions
further clarify that a ``sales practice violation'' includes any
conduct directed at or involving a customer that would constitute a
violation of rules for which a person could be disciplined by any self-
regulatory organization.
The Association also proposes a technical correction to the interim
Form U-5. On the amended Form U-4,\11\ the Association defined the term
``investment-related'' as pertaining to ``securities, commodities,
banking, insurance, or real estate investment company, investment
adviser, futures
[[Page 62393]]
sponsor, bank, or savings association.'' The Association intended that
the same definition apply for the Form U-5, but the word ``issuer'' was
inadvertently omitted. Thus, on the interim Form U-5, this omission is
corrected so that both the interim Form U-4 and Form U-5 set forth the
same definition. Similarly, the definition of the term ``appropriate
signatory'' on the interim Form U-5 is corrected to refer to ``issuer''
rather than ``issuer of securities'' because the former term was
intended to be used consistently on the amended Forms U-4 and U-5.
Thus, the interim Forms U-4 and U-5 have been corrected to reflect the
intended reference and its consistent application.
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\11\ See supra note 9.
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The instructions to and reformatted pages of the proposed interim
Forms U-4 and U-5 were submitted with the proposal as Attachment A.\12\
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. 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 the interim Forms are
implemented. The NASD proposes to begin responding to electronic
inquiries for Public Disclosure Program information via the Internet
after this rule filing is approved, on or about January 1, 1998. The
information that would be released from January 1 to February 17, 1998,
would include only that information that currently is required to be
reported on the Forms U-4 and U-5 and is currently released under IM-
8310-2.\13\
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\12\ See supra note 6.
\13\ See supra notes 7 and 8.
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2. Statutory Basis
The NASD believes the proposed rule change is consistent with
Sections 15A(b)(6) \14\ and 15A(i) \15\ of the Act. The NASD believes
the proposed rule change will further the goals of these sections of
the Act inasmuch as the increased disclosure will enhance the access of
members of the public to information that will help them to determine
whether to conduct or continue to conduct business with an NASD member
or any of the member's associated persons.
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\14\ Section 15A(b)(6) requires that the Association amend its
rules to prevent fraudulent and manipulative acts and practices, to
remove impediments to and perfect the mechanism of a free and open
market, and in general, to protect investors and the public
interest.
\15\ Section 15A(i) requires the Association to: (1) Establish
and maintain a toll-free telephone listing to receive inquiries
regarding disciplinary actions involving its members and their
associated persons, and (2) promptly respond to such inquiries in
writing.
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B. Self-Regulatory Organization's Statement on Burden on Competition
The NASD does not believe the proposed rule change will result in
any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Written comments were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing
for Commission Action
Within 35 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
A. By order approve such proposed rule change, or
B. Institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549.
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 at the
principal office of the NASD. All submissions should refer to the file
number in the caption above and should be submitted by December 12,
1997.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\16\
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\16\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-30623 Filed 11-20-97; 8:45 am]
BILLING CODE 8010-01-M
