[Federal Register Volume 64, Number 127 (Friday, July 2, 1999)]
[Notices]
[Pages 36059-36062]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-16865]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-41560; File No. SR-NASD-98-96]
Self-Regulatory Organizations; Order Granting Approval to
Proposed Rule Change by the National Association of Securities Dealers,
Inc. Relating to Amendments to Forms U-4 and U-5
June 25, 1999.
I. Introduction
On December 18, 1998, the National Association of Securities
Dealers, Inc. (``NASD'' or ``Association''), through its wholly owned
subsidiary NASD Regulation, Inc. (``NASD Regulation'' or ``NASDR''),
filed with the Securities and Exchange Commission (``SEC'' or
``Commission'') a proposed rule change pursuant to Section 19(b)(1) of
the Securities Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4
thereunder.\2\ In its proposal, NASD Regulation seeks to amend
disclosure question on Form U-4, The Uniform Application for Securities
Industry Registration or Transfer, and Form U-5, The Uniform
Termination Notice for Securities Industry Registration, (collectively
``Proposed Forms'') and to implement the World Wide Web-based Central
Registration Depository (``Web CRD''). Notice of the proposal, as
amended by Amendment No. 1, Amendment No. 2, and Amendment No. 3, was
published in the Federal Register on April 30, 1999 (``Notice'').\3\
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 41326 (April 22,
1999), 64 FR 23366 (File No. SR-NASD-98-96).
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[[Page 36060]]
On April 28, 1999, NASDR filed Amendment No. 4 to the proposed rule
change (``Amendment No. 4''). Notice of Amendment No. 4 was published
in the Federal Register on May 13, 1999.\4\ Amendment No. 4 clarifies
the processing of Forms U-4 and U-5 during and after the period Web CRD
becomes effective. On June 8, 1999, NASDR submitted Amendment No. 5 to
the proposal. Amendment No. 5 makes technical, non-substantive, changes
to the proposal.\5\ On June 18, 1999, NASDR filed Amendment No. 6 to
the proposal. Amendment No. 6 also makes technical, non-substantive,
changes to the proposal.\6\ The Commission received no comment letters
on the filing. This order approves the proposal, as amended.
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\4\ See Securities Exchange Act Release No. 41371 (May 5, 1999),
64 FR 25945 (File No. SR-NASD-98-96).
\5\ See letter from Alden S. Adkins, Senior Vice President and
General Counsel, NASD Regulation, to Katherine A. England, Assistant
Director, Division of Market Regulation, Commission, dated June 7,
1999. In Amendment No. 5, NASD Regulation changed the abbreviations
of the American Stock Exchange from ``ASE'' to ``AMEX'' and the
Pacific Stock Exchange from ``PSE'' to ``PCX'' on the Proposed Forms
U-4 and U-5. Because this is a technical change, it does not need to
be published for comment.
\6\ See letter from John M. Ramsay, Vice President and Deputy
General Counsel, NASD Regulation, to Katherine A. England, Assistant
Director, Division of Market Regulation, Commission, dated June 18,
1999. In Amendment No. 6, NASDR further clarifies the processing of
Forms U-4 and U-5 during the period Web CRD becomes effective.
Because this is a technical change, it does not need to be published
for comment.
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II. Description of the Proposal
As part of NASDR's efforts to modernize the Central Registration
Depository (``CRD''), NASDR seeks to streamline the registration and
termination process for individuals. NASDR proposes to amend Forms U-4
and U-5 so that these forms can be electronically submitted through the
World Wide Web. Under the NASDR's proposal, an individual seeking
registration will be required to fill out and submit an electronic Form
U-4, which will be available on NASDR's website (``Proposed Form U-
4'').\7\ Further, when an associated person terminates his association
with a broker-dealer, the broker-dealer will be required to fill out
and submit an electronic Form U-5, which will also be available on the
NASDR's website (``Proposed Form U-5'') \8\ In addition, the NASD seeks
to amend certain disclosure questions on Forms U-4 and U-5.
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\7\ The address for NASDR's website is http://www.nasdr.com.
\8\ Id.
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Background
The NASD originally planned to implement a redesigned CRD in 1996.
At that time, the NASD proposed a network-based system in which
individuals and firms would electronically submit Forms U-4 and U-5
directly to the CRD. To accomplish this change, the NASD redesigned
Forms U-4 and U-5. The Commission approved these forms in 1996 (``1996
Forms)''.\9\
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\9\ See Securities Exchange Act Release No. 37407 (July 5,
1996), 61 FR 36595 (July 11, 1996) (File No. SR-NASD-96-19).
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However, following a technological reassessment in 1997, the NASD
decided to abandon the network-based system. Instead, the NASD decided
to create a web-based system where individuals and firms could
electronically submit Forms U-4 and U-5 through the NASDR's World Wide
Website. Because the network-based system was abandoned, the 1996 Forms
could not be used. As a result, the NASD received Commission approval
for Interim Forms U-4 and U-5 while Web CRD was being developed
(``Interim Forms'').\10\ The Interim Forms, which are submitted on
paper, included all of the substantive changes to the disclosure
questions and some of the changes to instructions that were approved in
the 1996 Forms. The Interim Forms are currently in effect.
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\10\ See Securities Exchange Act Release No. 39322 (Nov. 13,
1997), 62 FR 62391 (Nov. 21, 1997) (File No. SR-NASD-97-98).
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Changes to the 1996 Forms
To accomplish the transition to Web CRD, the NASD now proposes
certain formatting and technical changes to the 1996 Forms, which were
the original proposed electronic forms. First, the Disclosure Reporting
Pages (``DRPs'') were reformatted. Due to the complexity of the data
structure of the 1996 DRPs, NASDR felt that Web CRD would not be able
to efficiently process the 1996 Forms without revisions.\11\
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\11\ For a detailed history of the development of Web CRD, Forms
U-4 and U-5, and the procedures associated with filing the forms,
refer to the Notice and Amendment No. 4. See supra Notes 3, 4.
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Second, the ``other business activities'' DRP on the 1996 Form U-4
was replaced with a separate attachment sheet, which also can be used
to provide additional information about residential, employment or
personal history. The other business activity section of Question 20B
on the 1996 Form U-4 renumbered as Question 21. (All subsequent
questions are likewise renumbered.) Correspondingly, the instructions
to Question 21 on the Proposed Form U-4 list the types of information
that must be provided on the attachment sheet, and request the
information that would be reportable on the ``other business
activities'' DRP.
Third, Sections 11 and 12 on the 1996 Form U-4 and Section 11 on
the 1996 Form U-5 have been reformatted to ensure more accurate
selections of registration categories. The Proposed Forms were
reformatted to reduce erroneous requests for registrations that are not
available for a particular self-regulatory organization (``SRO''). In
addition, the instructions on the Proposed Forms clarify that CRD does
not process Investment Adviser Representative and Agent of the Issuer
registrations, even though the paper versions of the Proposed Forms
contain boxes for such registrations. When an individual views the
electronic version of the Proposed Forms on the Web CRD system, the
boxes for these registrations will be shaded and the individual will
not be allowed to select these options. The boxes for these
registrations are included on the paper versions of the Proposed Forms
solely for the convenience of states that wish to use the paper
Proposed Forms for these registrations.
Fourth, the General Instructions on the Proposed Forms were
changed. The General Instructions regarding the submission of documents
on the 1996 Forms provide that documents are not required to be
submitted, but that the individual may submit them because documents
may be requested as part of the review process. The Proposed Forms
amend this instruction slightly to conform to the current practice of
the states and SROs by stating that, although documents are not
generally required to be filed with the Forms, it may be necessary to
provide them to clarify or support responses on the Forms.
Finally, the proposed Forms retain the definitions of
``investigation'' and ``sales practice violations'' that were adopted
in the Interim Forms, with slight changes to function. The NASD
believes these definitions are more precise than the corresponding
definitions used in the 1996 Forms and generally have worked will in
practice.
The Proposed Forms also contain DRP ``pick lists'' that will appear
for users filing the forms electronically. The pick lists, which only
appear in the DRP portions of the Proposed Forms, provide choices that
an individual or firm must select when answering a question. For
example, on the Proposed U-5 Customer Complaint DRP, when a firm clicks
on the field for ``Litigation Disposition,'' the following choices will
appear on the screen: Decision for
[[Page 36061]]
Applicant , Decision for Customer, Denied, Dismissed, Judgment (other
than monetary), Monetary Judgment to Applicant, Monetary Judgment to
Customer, No Action, Other, Settled, Withdrawn. Like every pick list on
the Proposed Forms, the firm submitting the electronic DRP will be
limited to one of the choices on the list. In all pick lists (except
states of residence and types of judgments/liens), a firm or individual
may select ``Other'' if none of the choices presented in the pick list
is applicable.
Changes to the Disclosure Questions
In addition, four disclosure questions from the 1996 Forms are
amended on the Proposed Forms. These substantive amendments involve:
(1) An expansion of the Form U-4 question eliciting information on
settled customer complaints to include those oral complaints involving
sales practice allegations that are settled for $10,000 or more;\12\
(2) a modification of the Form U-5 question eliciting information on
customer complaints to make that reporting requirement consistent with
the parallel question on the Form U-4 (effectively eliminating the
reporting requirement for and permitting the archiving of customer
complaints that are over 24 months old and are not otherwise
reportable);\13\ and (3) an expansion of the reporting requirement on
the Form U-5 to include criminal or regulatory actions initiated on the
basis of events that occurred while and individual was employed by the
firm, even if the actions were initiated after the individual had been
terminated.\14\
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\12\ Question 22i(2) on the Proposed U-4,
\13\ Question 17 on the Proposed U-5.
\14\ Questions 14 and 15 on the Proposed U-5.
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Transition Period and Afterward
From July 31 to August 15, 1999, the CRD system will not process
Forms U-4 and U-5. This two week period (termed the ``System Transition
Period'') is needed to complete the final data conversions from the
current CRD system to the Web CRD system.\15\ NASDR requests that
August 1, 1999 be the effective date for the Proposed Forms.
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\15\ NASDR's Public Disclosure Program, which provides
disciplinary and other information about NASD members and their
associated persons, will continue to be available to the public and
regulators during the System Transition Period. Regulators also will
continue to have query access (i.e., read only access) to the
current CRD system during the System Transition Period.
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Based on this effective date, NASDR WILL NOT accept paper Interim
Forms U-4 and U-5 after July 29, 1999. However, firms that use the Firm
Access Query System and firms that use the Electronic Filing Transfer
system will be able to electronically submit pages one and two a forms
U-4 and U-5 to NASDR through July 30, 1999.\16\ In addition, NASDR WILL
NOT accept Proposed Form U-4 until August 16, 1999, which is when the
CRD system will again be operational. In practice, this means that
NASDR WILL NOT accept new applications for registration from July 30 to
August 16, 1999.
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\16\ See supra Note 6.
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However, during the System Transition Period, NASDR WILL accept
paper versions of the Proposed From U-5 provided these forms are
submitted to report full termination (i.e., a termination of an
individual's registration with all SROs and jurisdictions).
Additionally, during this period, NASDR will review all paper Proposed
Forms U-5 reporting full termination and will provide notice to the
appropriate regulators/jurisdictions if these forms contain disclosure
information.
In addition, NASDR has developed a plan, which is based on the
current Temporary Agent Transfer (``TAT'') program, to allow registered
representatives to transfer their registrations during the System
Transition Period. During this period, NASDR will accept Transition TAT
Requests for registered representatives who have left their previous
employer within the last seven days and who have no reportable
disclosure information. NASDR will only accept Transition TAT Requests
for participating jurisdictions.\17\
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\17\ See CRD/PD Bulletin, June 1999, Volume 7, No. 2. This
Bulletin contains detailed information about the transition to Web
CRD.
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After August 1, 1999 and continuing after the System Transition
Period, NASDR also WILL accept paper versions of Part II of the
``Internal Review DRP'' in the Proposed Form U-5. The 1996 Form U-5
``Internal Review DRP'' contains a Part II that allows a registered
representative who has been terminated to provide a summary of the
circumstances relating to an internal review disclosure submitted by
the individual's former employer on the Form U-5. Once the Proposed
Forms become effective, NASDR WILL accept paper submissions of this
Part II information by a terminated registered representative and NASDR
staff will enter the information on to the Web CRD system on behalf of
the terminated registered representative.
After the System Transition Period (i.e., August 16, 1999), when a
firm amends a Form U-4 filing on Web CRD for the first time for an
individual with disclosure information, a blank Page 3 of the Proposed
Form U-4 will appear on the screen. A firm then will be required to
fill out the entire Page 3 to reflect all currently reportable
disclosure information, some or all of which may already have been
reported to CRD.\18\ Thereafter, a member will be able to retrieve the
most recently filed electronic Page 3 of the Form U-4 and edit for
submission, rather than filling out the blank Page 3 for each
subsequent filing.
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\18\ In Amendment No. 4, the NASDR stated that firms were
already subject to this requirement. The Commission notes that under
the Interim Form U-4, forms did not need to file a new Page 3 every
time a firm amended an individual's U-4. While the Interim U-4 was
effective, the instructions stated, ``Information contained on Form
U-4 must be kept current. As changes occur, the CRD should be
updated by an amendment filing. Amendments are accomplished by
filing the appropriate page(s) containing only the information in
need of revision.'' See instructions under the section titled. ``How
to Use Form U-4.''
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Beginning August 16, 1999, All Forms U-4 and U-5 Must Be Submitted
Electronically
II. Discussion
The Commission finds that the proposal is consistent with the
requirements of Section 15A \19\ of the Act \20\ and the rules and
regulations thereunder that govern the NASD.\21\ In particular, the
Commission finds that the proposed rule change is consistent with
Section 15A(b)(6) \22\ which requires, among other things, that the
rules of an association be designed to foster cooperation and
coordination with persons engaged in regulating, clearing, settling,
processing information with respect to, and facilitating transactions
in securities, and, in general, to protect investors and the public
interest; and are not designed to permit unfair discrimination among
customers, issuers, brokers, or dealers.
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\19\ 15 U.S.C. 78o-3.
\20\ Pursuant to Section 3(f) of the Act, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. The Commission notes that the forms provide
SROs and states with a centralized, cost-effective, and efficient
means of maintaining information on associated persons. Moreover,
the impact on competition is negligible because all SROs currently
use a version of Forms U-4 and U-5. 15 U.S.C. 78c(f).
\21\ 15 U.S.C. 78s(b).
\22\ 15 U.S.C. 78o-3(b)(6).
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The Commission has determined to approve the Association's proposal
implementing Web CRD and amending certain disclosure questions on Forms
U-4 and U-5. The Commission believes that Web CRD will streamline the
registration and termination process for individuals and firms. Under
the NASDR's proposal, an individual
[[Page 36062]]
seeking registration will be required to fill out an electronic Form U-
4, which will be available on NASDR's website, and submit it
electronically. Further, when an associated person ends his association
with a broker-dealer, the broker-dealer will be required to fill out an
electronic Form U-5, which will also be available on the NASDR's
website, and submit it electronically.
Further, the Commission believes that Web CRD will expedite the
registration and termination process for individuals and firms. Under
the proposal, firms and individuals will no longer rely on the mail
system to transmit the forms to NASDR. Now, individuals and firms will
electronically submit Forms U-4 and U-5 through the World Wide Web,
which means NASDR should receive the forms more quickly. The Commission
also believes that investors will benefit from the expedited
registration and termination process because the faster NASDR receives
the forms, the faster information on the forms can be disclosed to
investors through the NASD's Public Disclosure Program (``PDP'').
In addition, based on demonstrations of Web CRD, the Commission
believes that the CRD system will be easier for regulators and SROs to
use. For example, Form U-4 disclosure information will be in a format
that is easier to understand than what is currently displayed in CRD.
With Web CRD, regulators and SROs will be able to quickly access
relevant information in an easy-to-read format.
Additionally, the Commission believes that the amended disclosure
questions, coupled with the NASD's PDP, will provide the public with
more information about an associated person's disciplinary history. The
Commission believes that this information will help investors determine
whether to conduct or continue to conduct business with particular
associated persons. The Commission notes that disclosure of this
additional information may serve as a deterrent to fraudulent activity
as well.
Lastly, the Commission notes that the pick lists, even with the
``Other'' choice, will standardize individuals' and firms' responses to
DRP questions. Previously, when an individual or firm responded to DRP
questions on the Interim Forms U-4 and U-5, the individual or firm had
the ability to write whatever he thought was appropriate. Now, when
responding to a DRP question, an individual or firm is limited to the
choices provided in the pick lists. Because future changes to the lists
might affect individuals and firms' ability to respond to DRP
questions, the Commission expects NASDR to file substantive changes to
the pick lists.
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\23\ that the proposed rule change (SR-NASD-98-96), as amended, is
hereby approved.
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\23\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\24\
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\24\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-16865 Filed 7-1-99; 8:45 am]
BILLING CODE 8010-01-M
