[Federal Register Volume 64, Number 129 (Wednesday, July 7, 1999)]
[Notices]
[Pages 36728-36730]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-17152]
[[Page 36728]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-41575; File No. SR-NASD-99-28]
Self-Regulatory Organizations; Filing and Order Granting
Accelerated Approval of Proposed Rule Change by the National
Association of Securities Dealers, Inc. Relating to Amendments to Rule
1140
June 29, 1999.
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 June 2, 1999, 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'') the
proposed rule change as described in Items I and II below, which Items
have been prepared by NASDR. The Commission is publishing this notice
to solicit comments on the proposed rule change from interested
persons. For the reasons discussed below, the Commission is granting
accelerated approval of the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
NASDR proposes to amend and implement Rule 1140 to require
electronic filing of Form U-4, the Uniform Application for Securities
Industry Registration or Transfer, and the Form U-5, the Uniform
Termination Notice for Securities Industry Termination (collectively
``Forms'') and to make other conforming changes. Additions are
italicized; deletions are bracketed.
1140. Electronic Filing Rules
(a) Filing Requirement.
All forms required to filed by Article IV, Sections 1, 7, and 8,
and Article V, Section 2 and 3, of the NASD By-Laws shall be filed
through an electronic process or such other process the Association may
prescribe to the Central Registration Depository.
(b) Supervisory Requirements
(1) In order to comply with the supervisory procedures requirement
in Rule 3010 [of the Conduct Rules], each member [must] shall identify
a Registered Principal(s) or corporate officer(s) who has a position of
authority over registration functions, to be responsible for
supervising the electronic filing of appropriate forms pursuant to this
Rule.
(2) The Registered Principal(s) or corporate officer(s) who has or
have the responsibility to review and approve the forms filed pursuant
to this Rule [will] shall be required to acknowledge, electronically,
that he is filing this information on behalf of the [firm] member and
the [member firm's] member's associated persons.
(c) Form U-4 Filing Requirements
(1) Initial and transfer electronic application filings [will]
shall be based on a signed Form U-4 provided to the [firm] member by
the applicant. As part of the [member firm's] member's recordkeeping
requirements, it [must] shall retain the applicant's signed Form U-4
and make it available upon regulatory request.
(2) [Amendments to the disclosure information in Item 22 can be
filed electronically without obtaining the associated person's
signature on Form U-4. The member will be required to provide the
associated persons with a copy of the amended disclosure information
that was filed. In providing this material to the associated person,
the firm must obtain the written acknowledgement [sic] that the
information has been received and reviewed. The member must maintain
this acknowledgement in its books and records and must make it
available upon regulatory request.]
Fingerprint Cards
Upon filing an electronic Form U-4 on behalf of an applicant for
registration, a member shall promptly submit a fingerprint card for the
applicant. NASD Regulation may make a registration effective pending
receipt of the fingerprint card. If a member fails to submit a
fingerprint card within 30 days after NASD Regulation receives the
electronic Form U-4, the person's registration shall be deemed
inactive. In such case, NASD Regulation shall notify the member that
the person must immediately cease all activities requiring registration
and is prohibited from performing any duties and functioning in any
capacity requiring registration. NASD Regulation shall administratively
terminate a registration that is inactive for a period of two years. A
person whose registration is administratively terminated may reactivate
the registration only by reapplying for registration and meeting the
qualification requirements of the applicable provisions of the Rule
1020 Services and the Rule 1030 Series. Upon application and a showing
of good cause, the Association may extend the 30-day period.
(d) Form U-5 Filing Requirements
Initial filings and amendments of Form U-5 [will] shall be [done]
submitted electronically. As part of the [member firm's] member's
recordkeeping requirements, it [must] shall make [them] such records
available upon regulatory request.
(e) Third Party Filing
A member may employ a third party to file the required forms
electronically on its behalf[, if the member and the third party have
executed the Association's Broker-Dealer Agent-Filing Addendum to CRD
Subscriber Agreement].
* * * * *
Rule 3010. Supervision
* * * * *
(e) Qualifications Investigated
Each member shall have the responsibility and duty to ascertain by
investigation the good character, business repute, qualifications, and
experience of any person prior to making such a certification in the
application of such person for registration with this Association.
Where an applicant for registration has previously been registered with
the Association, the member shall obtain from the [Firm Access Query
System (FAQS)] Central Registration Depository or from the applicant a
copy of the Uniform Termination Notice of Securities Industry
Registration (Form U-5) filed with the Association by such person's
most recent previous NASD member employer, together with any amendments
thereto that may have been filed pursuant to Article IV, Section 3 of
the Association's By-Laws. The member shall obtain the Form U-5 as
required by this Rule no later than sixty (60) days following the
filing of the application for registration or demonstrate to the
Association that it has made reasonable efforts to comply with the
requirement. A member receiving a Form U-5 pursuant to this Rule shall
review the Form U-5 and any amendments thereto and shall take such
action as may be deemed appropriate.
* * * * *
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, 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 III below. NASDR has prepared summaries, set forth in Sections A,
B,
[[Page 36729]]
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
On July 15, 1996, the Commission approved NASD Rule 1140.\3\ The
purpose of this rule was to require members to file Form U-4 and U-5
electronically on a redesigned Central Registration Depository
(``CRD'') system then under development. That system used network-based
architecture and proprietary software developed by the NASD. In 1997,
NASDR determined to proceed with a new approach to the CRD system that
will permit members to submit CRD filings electronically via NASDR's
World Wide Web site (``Web CRD''),\4\ rather than using network-based
architecture and proprietary software to submit such filings.\5\ As a
result, Rule 1140 has never been implemented.
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\3\ Securities Exchange Act Release No. 37439 (July 15, 1996),
61 FR 37950 (July 22, 1996).
\4\ The address for NASDR's website is http://www.nasdr.com.
\5\ Web CRD is designed to support electronic filing of Forms U-
4, U-5, U-6, BD, and BDW via NASD Regulation's World Wide Web site.
Ultimately, NASD Regulation expects that all filings for both
broker-dealers and their associated persons will be submitted
exclusively through electronic means. All Forms U-4 and U-5 (i.e.,
the uniform securities industry applications for registration and
termination, respectively) will be submitted electronically upon
deployment of Web CRD on August 16, 1999. See Securities Exchange
Act Release No. 41326 (April 22, 1999), 64 FR 23366 (April 30, 1999)
(notice of filing of File No. SR-NASD-98-96); Securities Exchange
Act Release No. 41560 (June 25, 1999) (order approving File No. SR-
NASD-98-96, which implemented Web CRD and amended certain disclosure
questions).
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The purpose of the proposed rule change is to amend Rule 1140 to
make it consistent with the newly developed Web CRD and to implement
the Rule on the planned date of deployment of Web CRD, which is August
16, 1999.\6\ First, current paragraph (c)(2) is deleted. As approved in
1996, this provision would have permitted a firm to amend disclosure
information in Item 22 of the Form U-4 without obtaining the registered
person's signature if the firm provided a copy of the filing to the
registered person and obtained and maintained a record of an
acknowledgment by the registered person. NASDR has not provided for
such a practice in the initial release of the Web CRD system in August
1999. NASD may consider providing for such a practice in the future.\7\
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\6\ NASDR also revised Forms U-4 and U-5 that are designed to be
used with the new Web CRD system. These Forms become effective on
August 1, 1999. For a description of the transition period from July
31 to August 16, 1999, see Securities Exchange Act Release No. 41326
(April 22, 1999), 64 FR 23366 (April 30, 1999) (notice of filing of
File No. SR-NASD-98-96) and Securities Exchange Act Release No.
41560 (June 25, 1999) (order approving File No. SR-NASD-98-96, which
implemented Web CRD and amended certain disclosure questions).
\7\ The current practice of permitting administrative
information on pages 1 and 2 of Form U-4 to be amended without
obtaining the registered person's signature will be continued in Web
CRD. This practice was approved in the Commission's 1996 order. See
Securities Exchange Act Release No. 37439 (July 15, 1996); 61 FR
37950 (July 22, 1996).
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Second, a new paragraph (c)(2) would be added to the Rule to
address the continued submission of paper fingerprint cards in the Web
CRD electronic filing environment. This amendment is necessary because
it is not feasible at this time to implement electronic filing of
fingerprint cards. In Web CRD, firms will: (1) include a barcode number
from the fingerprint card in an electronic Form U-4 filing; and (2)
undertake to submit the fingerprint card by mail or delivery
service.\8\ The amended rule would authorize NASDR to make a
registration effective pending receipt of the fingerprint card. The
rule also would be amended to authorize NASDR to place a person in an
inactive status if NASDR does not receive the fingerprint card within
30 days of the filing of a Form U-4. This will enable NASDR to address
those instances in which fingerprint cards (which are required by NASD
and SEC rules \9\) are not submitted in a timely fashion.\10\
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\8\ A person submitting the electronic Form U-4 filing will be
asked to enter the barcode on the fingerprint cards into a
designated field on the screen; the screen will also contain
language indicating that, by entering the barcode, the filer is
representing that he is or will be submitting the hard copy
fingerprint cards by mail or delivery service.
\9\ See NASD Rule 1013(a)(1)(C) and 17 CFR 240.17f-2.
\10\ Web CRD will have a mechanism that will enable firms to
identify individuals whose paper fingerprint cards have not been
delivered to NASDR within the 30-day period.
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Paragraph (e) of Rule 1140 also is amended. This paragraph permits
members to use a service bureau for filing the Forms if the member and
the service bureau have executed a Filing Addendum to the CRD
Subscriber Agreement. The reference to the Agreement is deleted because
such agreements, which were necessary to protect the NASD's proprietary
software, are not necessary in the Web CRD environment because
proprietary software is not used. As with other electronic filings
required under the NASD Rules, members may use a service bureau to
submit electronic filings, but the member will remain ultimately
responsible for the timeliness and content of the filings. NASDR is
working with service bureaus to make sure they are prepared to provide
this service to members. Other grammatical changes have been made to
the Rule.
In 1996, the NASD Board had intended to provide a one-year
transition during which the NASD would continue to process paper
filings for firms with 50 or fewer registered representatives. The
NASDR Board has reconsidered this issue and determined that a
transition period is not necessary. Web CRD, unlike the earlier system,
does not require a firm to purchase any special hardware or software;
members will have low-cost access to the system through NASDR's Web
site.\11\ NASDR also has been working closely with end-users (i.e.,
broker-dealers, states, self-regulatory organizations, and the
Commission) to prepare them for Web CRD. To familiarize end-users with
the system and how it will operate, NASDR has conducted several
successful pilot programs during 1998 and early 1999 in preparation for
the deployment of Web CRD in August 1999. In addition, NASDR has
conducted conferences nationwide to provide end-users with an
opportunity to familiarize themselves with Web CRD.\12\ NASDR also is
providing current CRD users with periodic updates discussing the
features and functionality of Web CRD through the CRD/PD Bulletin and
Web CRD Update, publications that are available in hard copy and on
NASDR's Web site. Also, beginning in February 1999, NASDR began
providing current CRD users with Web CRD user accounts and passwords.
End-users will have an opportunity to practice accessing and working in
the Web CRD system in July 1999 prior to deployment the following
month. Furthermore, NASDR has prepared Web-base tutorials (accessible
through NASDR's Web site) for all end-
[[Page 36730]]
users that explain how to navigate and use the system.
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\11\ Electronic filing in Web CRD will be simpler for broker-
dealers because it requires only that a broker-dealer have access to
an Internet browser (e.g., Internet Explorer, Netscape) and to the
Internet through an account with an Internet Service Provider (e.g.,
Microsoft Network, MCI WorldCom, America OnLine). Accordingly,
electronic filing can be accomplished with significantly less
difficulty and at a lower cost than possible under the earlier CRD
redesign approach, which required that firms subscribe to
proprietary software and, in most cases, upgrade their computer
hardware. In addition, members are already required to have an
electronic mail account and to be able to access NASDR's Web site
for the purpose of updating their Firm Contact Questionnaire. See
NASD By-Laws Article IV, Section 3.
\12\ 1999 Conferences have been held in Los Angeles, CA (April
7-8); Atlanta, GA (April 14-15); Washington, DC (April 20-21); New
York, NY (April 29-30 and May 21); and Chicago, IL (May 4-5).
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Rule 3010 also is amended to remove a reference to the Firm Access
Query System (FAQS), a system that currently permits members to view
certain information in the CRD for the purpose of investigating
applicants for employment. Upon deployment of Web CRD, FAQS will be
obsolete; members will use Web CRD to conduct qualifications
investigations and will have access to all of the same information that
was available to them under FAQS.
NASDR proposes to make Rule 1140, as amended, effective for all
members on August 16, 1999. The effective date will be announced at
least 30 days in advance in a Notice To Members.
2. Statutory Basis
NASDR believes that the proposed rule change is consistent with the
provisions of Section 15A(b)(6) \13\ of the Act, which requires, among
other things, that the Association's rules must be designed to prevent
fraudulent and manipulative acts and practices, to promote just and
equitable principles of trade, and, in general, to protect investors
and the public interest. NASDR believes that the proposed rule change
will make processing of Forms U-4 and U-5 more efficient, will allow
members and regulators to have quicker access to information contained
in those filings, and facilitate oversight of securities industry firms
and their personnel.
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\13\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition
NASDR does not believe that 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. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
is consistent with the Act. Persons making written submissions should
file six copies thereof with the Secretary, Securities and Exchange
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549-0609. 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 such filing will also be
available for inspection and copying at the principal office of the
NASD. All submissions should refer to File No. SR-NASD-99-28 and should
be submitted by July 28, 1999.
IV. Commission's Findings and Order Granting Accelerated Approval
of Proposed Rule Change
The Commission finds that the proposed rule change is consistent
with the requirements of the Act\14\ and the rules and regulations
thereunder applicable to the NASD.\15\ Specifically, the Commission
finds that the proposed rule change is consistent with Section
15A(b)(6)\16\ 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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\14\ In reviewing this proposal, the Commission has considered
its impact on efficiency, competition, and capital formation. The
Commission notes that electronic filing provides SROs and states
with an efficient means of receiving and maintaining information on
associated persons. Moreover, the impact on competition is
negligible because all NASD member firms will be subject to the
electronic filing requirement. 15 U.S.C. 78c(f).
\15\ 15 U.S.C. 78o-3.
\16\15 U.S.C. 78o3(b)(6).
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The Commission has determined to approve the changes to the NASD
rules that would require electronic filing. The Commission believes
that electronic filing will streamline the registration and termination
process for individuals and firms. Under the NASDR's proposal, an
individual 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.
In addition, 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.
The Commission finds good cause for approving the proposed rule
change prior to the thirtieth day after the date of publication of
notice thereof in the Federal Register. The Commission notes that NASD
Rule 1140, in substantive form, was approved by the Commission in
1996.\17\ The Commission also notes that the rule is currently in the
NASD Manual, but is not in effect. Further, this proposal's companion
filing,\18\ which implemented Web CRD and amended disclosure questions
on Forms U-4 and U-5, received no comments when it was submitted for
the requisite notice and comment period. The NASD will implement this
proposal simultaneously with the companion filing . Accelerated
approval will provide the NASD lead time to issue a Notice to Members
explaining how the process will work. Thus, the Commissions finds no
reason to delay the effectiveness of a rule that has been previously
approved and will serve to facilitate an important investor benefit--
Web CRD. The Commission finds, therefore, that granting accelerated
approval to the proposed rule change is appropriate and consistent with
Section 15A\19\ of the Act.
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\17\ See supra note 3.
\18\ See supra note 5.
\19\ 15 U.S.C. 78o-3.
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It is therefore ordered, pursuant to Section 19(b)(2) of the Act,
that the proposed rule change (SR-NASD-99-28)--is hereby approved on an
accelerated basis.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\20\
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\20\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-17152 Filed 7-6-99; 8:45 am]
BILLING CODE 8010-01-M
