[Federal Register Volume 60, Number 12 (Thursday, January 19, 1995)]
[Proposed Rules]
[Pages 4040-4063]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-1359]




[[Page 4039]]

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Part IX





Securities and Exchange Commission





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17 CFR Part 249



Form BD Amendments; Proposed Rule

  Federal Register / Vol. 60, No. 12 / Thursday, January 19, 1995 / 
Proposed Rules   

[[Page 4040]]


SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 249

Release No. 34-35224; File No. S7-2-95
RIN 3235-AG25


Form BD Amendments

AGENCY: Securities and Exchange Commission.

ACTION: Proposed amendments to Form BD.

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SUMMARY: The Securities and Exchange Commission is proposing amendments 
to Form BD, the uniform broker-dealer registration form under the 
Securities Exchange Act of 1934. The proposed amendments are to 
implement recommended changes to the Central Registration Depository 
System, a computerized filing and data processing system operated by 
the National Association of Securities Dealers, Inc. that maintains 
registration information regarding broker-dealers and their registered 
personnel. Specifically, the amendments are intended to facilitate 
retrieval of disciplinary information through the redesigned Central 
Registration Depository by eliciting more precise disclosure and 
reorganizing items into categories. The changes to the disclosure 
section of Form BD are consistent with changes to the analogous section 
in Form U-4, the uniform form for registration of associated persons of 
a broker-dealer. Other changes to Form BD are more technical in nature 
and are intended to clarify certain information requests.

DATES: Comments should be submitted on or before February 21, 1995.

ADDRESSES: Comments should be submitted in triplicate to Jonathan G. 
Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street, 
N.W., Washington, D.C. 20549. All comment letters should refer to File 
No. S7-2-95. All comments received will be available for public 
inspection and copying in the Commission's Public Reference Room, 450 
Fifth Street, N.W., Washington, D.C. 20549.

FOR FURTHER INFORMATION CONTACT: Belinda Blaine, Deputy Chief Counsel, 
or Terry R. Young, Attorney, (202) 942-0073, Office of Chief Counsel, 
Division of Market Regulation, Securities and Exchange Commission, 450 
Fifth Street, N.W., Mail Stop 7-10, Washington, D.C. 20549.

SUPPLEMENTARY INFORMATION:

I. Introduction

    The Securities and Exchange Commission (``Commission'') is 
proposing several amendments to Form BD (``Form''),1 the uniform 
application form for broker-dealer registration under the Securities 
Exchange Act of 1934 (``Exchange Act'').2 The proposed amendments 
to Form BD respond to design updates to the Central Registration 
Depository (``CRD'') system operated by the National Association of 
Securities Dealers, Inc. (``NASD''). The CRD is a customized electronic 
database that allows ``one-stop'' filing for broker-dealer registration 
among the various state and federal regulators and that maintains 
information relevant to a registrant's securities business.3 
Applicants for broker-dealer registration file a single Form BD with 
the NASD, which enters the information into the CRD system and then 
electronically forwards the information to the Commission and 
appropriate states for review.

    \1\17 CFR 249.501.
    \2\15 U.S.C. Secs. 78a et seq. Form BD was last amended in 
Securities Exchange Act Release No. 31398 (Nov. 4, 1992), 57 FR 
53261. Form BD also is used by the NASD and all of the states.
    \3\In Securities Exchange Act Release No. 31660 (Dec. 28, 1992), 
58 FR 11 (``1992 Release''), the Commission, as part of its ongoing 
effort to reduce the costs associated with broker-dealer 
registration, joined the CRD system and adopted amendments to the 
broker-dealer registration process. The 1992 amendments required, 
among other things, that all broker-dealers, including government 
securities broker-dealers, applying for registration with the 
Commission on or after January 25, 1993, file Form BD with the CRD.
    Direct participation in the CRD system has improved the 
efficiency of the registration process by creating a comprehensive, 
centralized database of all registrants, and by giving the 
Commission more immediate access to current data in broker-dealer 
filings. In addition, the new system has resulted in cost savings to 
registrants, who no longer are required to make multiple filings 
with the Commission, certain self-regulatory organizations 
(``SROs''), and state regulators. See 1992 Release, at 58 FR 11.
    If the Commission adopts the amendments to Form BD, the 
Commission, at the same time, will adopt technical amendments to the 
registration rules to remove obsolete instructions. For example, 
Commission Rules 15b3-1 (17 CFR 240.15b3-1) and 15b6-1 (17 CFR 
240.15b6-1) currently contain temporary filing instructions for the 
CRD that are obsolete and will be removed.
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    Currently, the CRD system is used primarily as a means to 
facilitate broker-dealer registration with the Commission, certain 
SROs, and all of the states. In order to keep pace with advancements in 
information imaging and transmission, the NASD recently has initiated a 
comprehensive plan to overhaul the CRD system. Under this plan, the CRD 
system will be expanded beyond its principal function of facilitating 
broker-dealer registration to enhance its regulatory use by the 
Commission, SROs, and state securities regulators. Among other things, 
the redesigned CRD system will allow federal and state securities 
regulators to customize regulatory queries and reports. In addition, 
the redesigned CRD system ultimately is intended to enable broker-
dealers and their associated persons to file Form BD and Form U-4 
registration information with the NASD electronically by direct link 
with the CRD through a variety of methods, including computer-to-
computer interface, network access, and standard dial-up access.4

    \4\According to the NASD, software will be developed to support 
off-line personal computer or firm system entry of application 
information. The new CRD system will include commentary screens that 
can be attached to specific items to provide information to 
applicants relating to the type or nature of the information being 
requested. Clarification of disclosure information also may be 
included with these commentary screens, including explanations of 
certain terms.
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    To allow the NASD sufficient time to redesign the CRD to permit 
securities regulators to efficiently retrieve relevant information 
through searches by subject category, the Commission is proposing 
several amendments to Form BD. The proposed amendments are intended to 
elicit more precise information from applicants by asking more specific 
questions about an applicant's business. While the proposed amendments 
would increase the number of questions on the Form, the Form will be 
easier for applicants to complete because the specificity of the 
questions will lessen the need for descriptive textual information.
    For instance, as discussed further below, the proposed amendments 
to the disclosure section, where most of the changes are proposed to be 
made, would provide the Commission, SROs, and state securities 
regulators with better information about a registrant's disciplinary 
history by: (1) grouping disciplinary information into related 
categories (e.g., criminal charges and convictions); and (2) 
customizing the accompanying Disclosure Reporting Pages (``DRPs'') used 
to disclose details of the disciplinary history. The changes to the 
disciplinary section of the Form are consistent with changes to the 
analogous section in Form U-4, the uniform form for registration of 
associated persons of a broker-dealer, which have been approved by the 
North American Securities Administrators Association, Inc. (``NASAA'') 
and will be considered by the NASD's Board of Governors.5

    \5\NASAA approved amendments to Form U-4 at the 1994 NASAA 
Spring Conference. After the NASD Board of Governors adopts proposed 
amendments to Form U-4, they will be filed with the Commission 
pursuant to Section 19(b)(2) of the Exchange Act (15 U.S.C. 
Sec. 78s(b)(2)) and Rule 19b-4 thereunder (17 CFR 240.19b-4). 

[[Page 4041]]

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    In addition, the Commission is proposing new items to Form BD to 
enhance the disclosure with respect to U.S. broker-dealers that have 
foreign owners, broker-dealers that are affiliated with U.S. or foreign 
banks, and broker-dealers that conduct securities activities on the 
premises of financial institutions. Finally, the Commission is 
proposing several technical amendments to Form BD.
    The amendments proposed by the Commission are the culmination of 
discussions between the staff of the Commission, NASAA's Forms Revision 
Committee, the NASD, the New York Stock Exchange, and representatives 
of the securities industry. The proposed amendments are discussed below 
in the order of significance.

II. Proposed Amendments to Form BD

A. Disciplinary History

    The principal changes to Form BD concern proposed amendments to 
current Item 7. This item requests information about the disciplinary 
history of the applicant and its control affiliates, including 
information relating to statutory disqualifications,6 other 
relevant history, and the applicant's financial soundness. Under the 
proposed amendments, Item 7 will be renumbered as Item 11. Consistent 
with proposed changes to Form U-4, new Item 11 will be reorganized to 
group related information under four broad disclosure categories: 
criminal, civil, regulatory, and financial. For example, in the 
criminal disclosure section, the proposed amendments group pending 
charges and final convictions, and separate the questions relating to 
felonies and misdemeanors in order to elicit more precise information 
from applicants and to facilitate the retrieval of such information 
from the CRD.7 Moreover, in order to make the criminal history 
disclosure more comprehensive and complete, military court convictions, 
perjury, and conspiracy to commit certain misdemeanor offenses will be 
added to Items 11A and B. At the suggestion of NASAA, settlement 
agreements in investment-related civil actions brought against the 
applicant or control affiliate by a state or foreign financial 
regulatory authority will be added to Item 11H(1).

    \6\Sections 15(b)(4) and 15(b)(6) of the Exchange Act authorize 
the Commission to deny registration to a broker-dealer if the 
broker-dealer or an associated person of the broker-dealer has 
engaged in the activities listed in those sections. 15 U.S.C. 
Secs. 78o(b)(4) and (b)(6).
    Section 3(a)(39) of the Exchange Act cross-references the 
activities enumerated in Section 15(b)(4) (B), (C), (D), (E), and 
(G). Section 3(a)(39) generally provides that a person is subject to 
a ``statutory disqualification'' if, among other things, that 
person: has been expelled or suspended from membership in an SRO or 
barred or suspended from association with an SRO member; has had his 
or her registration or association denied or suspended by the 
Commission or other appropriate regulatory agency; has willfully 
violated the federal securities laws or aided, abetted, or 
counselled others to do so; is permanently or temporarily enjoined 
by a court from acting in any capacity within the securities 
industry; has willfully made or caused to be made a false or 
misleading statement of material fact in filings required by the 
SROs; or has been convicted of any felony within the past ten years. 
15 U.S.C. Sec. 78c(a)(39).
    \7\Current Item 7A(1) asks ``in the past ten years, has the 
applicant or a control affiliate been convicted of or plead guilty 
or nolo contendere (``no contest'') in a domestic or foreign court 
to: (1) a felony or misdemeanor involving: investment or an 
investment-related business; fraud, false statements, or omissions; 
wrongful taking of property; or bribery, forgery, counterfeiting, or 
extortion.'' Current Item 7G asks about pending proceedings. New 
Item 11A would ask ``in the past ten years has the applicant or a 
control affiliate: (1) been convicted of or plead guilty or nolo 
contendere (``no contest'') in a domestic, foreign or military court 
to any felony?; and (2) been charged with any felony?'' New Item 11B 
would ask ``in the past ten years, has the applicant or a control 
affiliate: (1) been convicted of or plead guilty or nolo contendere 
(``no contest'') in a domestic, foreign or military court to a 
misdemeanor involving: investments or an investment-related 
business, or any fraud, false statements or omissions, wrongful 
taking of property, bribery, perjury, forgery, counterfeiting, 
extortion, or a conspiracy to commit any of these offenses?; and (2) 
been charged with a misdemeanor specified in 11B(1)?''
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    Currently, disclosure of bankruptcy proceedings has no time 
limitation. Because bankruptcy is not a basis for statutory 
disqualification under Sections 3(a)(39) and 15(b)(4) of the Exchange 
Act,8 the Commission is proposing to require disclosure of 
bankruptcy proceedings in Item 11I(1) only for those occurring in the 
past ten years. Finally, technical amendments, such as revising the 
instructions and renumbering several questions, are proposed.9

    \8\See supra note 6.
    \9\Under the amendments, current Items 7B (1) and (2) are 
proposed Items 11H1 (a) and (b), respectively. Also, current Item 
7D(6) will be renumbered as proposed Item 11F. Item 7D(6) currently 
requests information about whether the applicant or control 
affiliate's authorization to act as an attorney or accountant has 
been revoked or suspended. New Item 11F will add federal contractor 
licenses to this question. In addition, information requested in 
current Item 7F, relating to whether a foreign government, court, 
regulatory agency, or exchange has ever entered an order against the 
applicant or control affiliate related to investments or fraud not 
previously reported in other Item 7 questions, has been incorporated 
into other questions in proposed Item 11. Finally, current Items 7H, 
7I, and 7J are proposed as Items 11J, 11K, and 11I, respectively.
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    The Commission also is proposing amendments to the corresponding 
DRPs, which are required to be completed when an applicant answers in 
the affirmative one of the disciplinary questions. Currently, Form BD 
includes one generic DRP for all disciplinary history questions. The 
proposed amendments would replace the single generic DRP with several 
customized DRPs to reflect more accurately the different 
classifications of disclosures that are required to be reported under 
proposed Item 11. For example, the proposed Regulatory DRP will contain 
specific sections that inquire into whether the applicant is or has 
been suspended or barred. If the applicant answers in the affirmative, 
the proposed DRP requires the applicant to specify the duration and 
capacity affected (e.g., general securities principal, financial and 
operations principal, or options trading) by the suspension or bar. 
Moreover, the proposed Regulatory DRP, as well as the proposed Criminal 
and Civil Judicial DRPs, group together, under the same part and on the 
same page, final and pending disciplinary actions.
    Although these amendments may increase the number of DRPs to be 
provided, they should not increase the cost and burden of filing Form 
BD, unless an applicant has an extensive disciplinary history. As 
discussed above, federal and state securities regulators will have 
greater access to enhanced regulatory information maintained in the CRD 
system and will be able to sort and retrieve disciplinary information 
by category on a more timely and specialized, ad hoc basis. In 
addition, the proposed new DRPs are largely the same as those recently 
proposed to be added to Form U-4 by NASAA.

B. Bank Securities Activities

    In recent years, banks have become increasingly active in selling 
securities to the public.10 The Commission believes that most bank 
sales of securities are being conducted through registered broker-
dealers that are subsidiaries or affiliates of banks.11 The 

[[Page 4042]]
Commission, however, currently does not have the means to identify 
accurately broker-dealers affiliated with U.S. or foreign banks. 
Accordingly, in order to gather information that may be useful, for 
example, in evaluating the scope and nature of bank securities 
activities, and in conducting an effective inspection program of 
broker-dealers selling securities on behalf of banks, the amendments 
propose adding Item 10B. Proposed Item 10B will elicit information 
concerning all financial institutions or organizations, including bank 
holding companies, that control the applicant. Specifically, proposed 
Item 10B asks whether the applicant is controlled, directly or 
indirectly, by a bank holding company, national bank, state member bank 
of the Federal Reserve System, state non-member bank, savings bank or 
association, credit union, or foreign bank. If the applicant answers in 
the affirmative, the applicant will be required to complete Section II 
of proposed Schedule D,12 which requests general information about 
the financial institution, such as name, type (e.g., bank holding 
company), and business address.

    \10\See Testimony of Arthur Levitt, Chairman, U.S. Securities 
and Exchange Commission, Concerning H.R. 3447 and Related Functional 
Regulation Issues, Before the Subcommittee on Telecommunications and 
Finance Committee on Energy and Commerce, U.S. House of 
Representatives, April 14, 1994.
    \11\Presently, banks can structure their securities sales 
operations in a number of different ways. First, banks may engage 
directly in selling activities, outside the regulatory framework 
established for broker-dealers under the federal securities laws. 
Second, banks may conduct sales activities through subsidiaries or 
affiliates registered with the Commission. Finally, banks may enter 
into contractual arrangements with unaffiliated broker-dealers 
(i.e., ``networking'' or ``kiosk'' arrangements), whereby the 
registered broker-dealer sells securities and provides brokerage 
services to bank customers on (and off) the bank's premises in 
exchange for a percentage of the commissions earned.
    \12\See discussion infra part III.B.1.
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    If the proposed amendments to Form BD are adopted, the Commission 
proposes to delete these questions from Schedule I of Form X-17A-5, the 
FOCUS report.13 Disclosure on Schedule I is required only at the 
end of each calendar year, and, unlike the redesigned CRD system, is 
incapable of being queried and sorted by special category.

    \13\In Securities Exchange Act Release No. 31398 (Nov. 4, 1992), 
57 FR 53261, the Commission adopted an amendment to Schedule I of 
Form X-17A-5 (the ``FOCUS'' report) to require registered broker-
dealers to disclose their affiliations, if any, with U.S. banks. 
Broker-dealers already were required to disclose their affiliations 
with foreign banks.
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    In addition to identifying bank affiliated broker-dealers, the 
amendments propose adding Item 12Y(1), which is intended to elicit 
information concerning securities activities conducted on bank premises 
by third-party broker-dealers.14 Specifically, proposed Item 
12Y(1) will require an applicant to indicate whether it is involved (or 
will be involved) in any networking, kiosk, or similar arrangement with 
a bank, savings bank or association, or credit union.

    \14\See supra note 11. Revised Item 12Y(2) also would ask 
whether the applicant has entered into a networking arrangement with 
an insurance company or agency. Insurance companies increasingly are 
selling securities without registering as broker-dealers under 
Section 15(a) of the Exchange Act through networking arrangements. 
New Item 12Y(2) is proposed to assist the Commission, SROs, and 
state securities regulators in conducting an effective examination 
program to ensure that broker-dealers involved in networking 
arrangements with an insurance company or agency are complying with 
the federal securities laws, including certain conditions set forth 
in staff no-action letters. See, e.g., Letters regarding: FIMCO 
Securities Group, Inc. (July 16, 1993); Delta First Financial (Sept. 
21, 1992); and The Wolper Ross Corporation (Oct. 16, 1991).
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C. Broker-Dealer Arrangements

    The Commission is proposing revisions to Item 8 in order to 
simplify and clarify the question. Item 8A currently asks, in pertinent 
part, ``does applicant have any arrangements with any other person, 
firm or organization under which: (1) any of the accounts or records of 
applicant are kept or maintained by such person, firm or organization; 
or (2) the funds or securities of applicant or any of its customers are 
held or maintained by such other person, firm or organization.'' Under 
the proposed amendments, current Items 8A (1) and (2) will be revised 
and separated out as Items 8A, 8B, and 8C. Item 8A will continue to 
inquire about arrangements to maintain books and records. Items 8B and 
C will ask about arrangements to maintain the accounts, funds, or 
securities of the applicant, and the accounts, funds, or securities of 
customers of the applicant, respectively.15

    \15\These items also have been reorganized because accounts 
generally are associated with funds and securities, rather than with 
records.
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    While Item 8 contains a question that asks whether the applicant is 
an introducing broker-dealer, it currently does not contain the same 
question about clearing broker-dealers. Information about clearing 
broker-dealers is important for regulatory purposes, including 
identifying clearing broker-dealers that will be responsible for paying 
certain transaction fees pursuant to Section 31 of the Exchange 
Act.16 Accordingly, new Item 6 will be added to ask ``does 
applicant hold or maintain any funds or securities or provide clearing 
services for any other broker or dealer?''17

    \16\15 U.S.C. Sec. 78ee.
    \17\Because a clearing broker-dealer may provide such services 
for multiple broker-dealers, details of clearing arrangements would 
not be required to be provided by the clearing broker-dealer on 
Schedule D.
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D. Instructions

    The Commission is proposing to add to the filing instructions of 
Form BD an ``Explanation of Terms,'' containing definitions of the 
following words: charged, order, felony, misdemeanor, found, minor rule 
violation, and enjoined.18 The definitions contained in this 
section are intended to assist applicants in responding to 
disciplinary-related questions, and are consistent with the definitions 
recently proposed to be added to Form U-4 by NASAA.

    \18\The proposed definitions are set out below:
    Charged: Being accused of a crime in a formal complaint, 
information, or indictment (or equivalent formal charge).
    Order: A written directive issued pursuant to statutory 
authority and procedures, including orders of denial, suspension, or 
revocation; does not include special stipulations, undertakings or 
agreements relating to payments, limitations on activity or other 
restrictions unless they are included in an order.
    Felony: Includes a general court martial. For jurisdictions that 
do not differentiate between a felony or misdemeanor, a felony is an 
offense punishable by a sentence of at least one year imprisonment 
and/or a fine of at least $1,000.
    Misdemeanor: Includes a special court martial. For jurisdictions 
that do not differentiate between a felony or misdemeanor, a 
misdemeanor is an offense punishable by a sentence of less than one 
year imprisonment and/or a fine of less than $1,000.
    Found: Includes adverse final actions, including consent decrees 
in which the respondent has neither admitted nor denied the 
findings, but does not include agreements, deficiency letters, 
examination reports, memoranda of understanding, letters or caution, 
admonishments, and similar informal resolutions of matters. This 
term is discussed in Securities Exchange Act Release No. 22468 
(Sept. 26, 1985), 50 FR 41867.
    Minor Rule Violation: A violation of a self-regulatory 
organization rule that has been designated as ``minor'' pursuant to 
a plan approved by the U.S Securities and Exchange Commission. A 
rule violation may be designated as ``minor'' under a plan if the 
sanction imposed consists of a fine of $2,500 or less, and if the 
sanctioned person does not contest the fine. This term is discussed 
in Securities Exchange Act Release No. 30958 (July 27, 1992), 57 FR 
34028.
    Enjoined: Includes being subject to a mandatory injunction, 
prohibitory injunction, preliminary injunction, or a temporary 
restraining order.
    In addition, the proposed amendments move current definitions, 
such as control affiliate, investment or investment-related, foreign 
financial regulatory authority, and proceeding to the section 
containing the proposed ``Explanation of Terms.''
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III. Proposed Amendments to the Schedules to Form BD

A. Schedules A, B, and C--Direct and Indirect Ownership Disclosure

    The proposed changes revise Schedules A, B, and C to elicit more 
relevant and accurate information concerning an applicant and its 
control affiliates. Schedules A, B, and C currently require applicants 
to disclose the identity of their executive officers, directors, 
partners, and direct and indirect owners.19 In response to 

[[Page 4043]]
heightened interest in national treatment of foreign international 
markets, including foreign ownership of U.S. broker-dealers,20 the 
Commission is proposing to collect on Schedules A, B, and C information 
concerning foreign ownership of U.S. broker-dealers.

    \19\Schedule A currently requires disclosure of all five percent 
owners. Schedule B requires disclosure of all twenty-five percent 
owners of direct owners, their twenty-five percent owners, and each 
successive twenty-five percent owner of a twenty-five percent owner, 
continuing up the chain of ownership until a reporting company is 
reached. Similar provisions apply to limited partners that have 
contributed twenty-five percent or more of a partnership's capital. 
Schedule C is used to amend Schedules A and B.
    \20\For example, the Treasury Department, with the assistance of 
the Commission, prepares, on a periodic basis, a study for Congress 
entitled the National Treatment Study: Report to Congress on Foreign 
Government Treatment of U.S. Commercial Banking and Securities 
Organizations (Nov. 30, 1990) (``National Treatment Study''). This 
report is required to include information about foreign ownership of 
U.S. broker-dealers.
    In recent years, a growing number of broker-dealers with foreign 
owners have applied for registration in the United States. In 1990, 
foreign persons had equity interests of 25 percent or more in 
approximately 130 registered broker-dealers. See National Treatment 
Study at 86.
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    In some instances, because of their complex organizational 
structures, U.S. applicants may not know or may not be able to obtain 
detailed information regarding remote foreign owners. Accordingly, 
rather than require applicants to provide on Schedule D detailed 
information concerning their foreign owners, which may be unavailable 
to the applicant, the Commission is proposing to require only that the 
applicant check a box on Schedules A and B to indicate if an owner is a 
domestic entity, an entity incorporated or domiciled in a foreign 
country, or an individual.

B. Other Schedules

1. Schedule D--Miscellaneous Disclosure
    The proposed amendments restructure the contents and increase the 
specificity of the information required to be reported on Schedule D, 
which currently requires disclosure of details relating to Items 1C(2), 
5, 7, 8, 9, 10, 12Z, and 13B. Descriptions of events resulting in an 
affirmative answer to these Form items currently are set forth in free 
form, non-structured text in Schedule D.21 In order to organize 
this information into a format useful for electronic filing and 
retrieving, Schedule D will be revised to add separate sections for 
each Form item that requires applicants to disclose details of an event 
or occurrence. For example, an applicant providing an affirmative 
answer to Items 7 and 8, relating to introducing and clearing 
arrangements, will be required to complete Section IV of proposed 
Schedule D. Section IV will require the applicant to include the 
clearing or custodial entity's name, business address, CRD number (if 
applicable), and the effective and termination date of the arrangement.

    \21\For example, details regarding a succession reported under 
Item 5 must be disclosed on Schedule D.
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2. Schedule E--Branch Office Disclosure
    The proposed amendments would add two new items to Schedule E, 
which requires applicants to disclose information regarding all 
business locations apart from the applicant's main office, including 
the location and name of the supervisor of each branch office, and any 
closing or opening of an office. The Commission is proposing amendments 
to Schedule E that are designed to elicit information concerning branch 
offices and other business locations that are considered by the broker-
dealer to be franchised22 or that employ a significant number of 
independent contractors engaging in securities activities.23 The 
use of franchised branch offices or large numbers of independent 
contractors raises concerns that such offices may not be properly 
supervised and may be operating outside the scope of federal and state 
securities laws.24 By identifying and monitoring so-called 
franchised branch offices through disclosure in Schedule E, the 
Commission and the SROs' examination and enforcement functions will be 
enhanced.

    \22\Typically, in a franchise arrangement, the registered 
broker-dealer allows the franchised office to use its broker-dealer 
registration and its name to conduct a securities business in return 
for a percentage of the commissions and fees generated from the 
securities transactions executed by the franchised office. The 
registered broker-dealer generally is not responsible under the 
agreement for paying any of the operating expenses of the franchised 
office, including licensing fees for registered representatives.
    \23\The designation of registered representatives as independent 
contractors has no effect on a broker-dealer's responsibilities 
under the federal securities laws, including Section 15(b) of the 
Exchange Act [15 U.S.C. Sec. 78o(b)]. See, e.g., Letter regarding 
Titan Capital Corporation (Sept. 30, 1988); and Hollinger v. Titan 
Capital Corp., 914 F.2d 1564, 1572-76 (9th Cir. 1990), cert. denied, 
111 S.Ct. 1621 (1991).
    \24\Section 15(a) of the Exchange Act provides that it is 
unlawful for a broker or dealer that is a person other than a 
natural person to use the means of interstate commerce to effect 
transactions in securities, unless such broker or dealer is 
registered in accordance with Section 15(b) of the Exchange Act, or 
unless an exemption applies. The registration requirements of 
Section 15(a)(1) of the Exchange Act apply only to brokerage firms 
or natural persons not associated with a brokerage firm. Natural 
persons associated with a broker-dealer are not required to register 
separately as broker-dealers.
    Section 3(a)(18) of the Exchange Act defines ``associated person 
of a broker or dealer'' in relevant part to mean ``any person 
directly or indirectly controlling, controlled by, or under common 
control with such broker or dealer.'' Thus, under a franchised 
branch office arrangement, where the branch manager and registered 
representatives are not subject to the supervisory control of the 
registered broker-dealer, they are not associated persons of such 
broker-dealer, and accordingly the franchised branch office would be 
required to register separately as a broker-dealer. See Roth v. 
Securities and Exchange Commission, 22 F.3d 1108 (D.C. Cir. 1994), 
Fed.Sec. L. Rep. para.98,206, cert. denied, 115 S.Ct. 575 (1994) 
(upholding the Commission's interpretation of Section 15(a) of the 
Exchange Act that the exclusion from registration for associated 
persons of a broker-dealer only applies to the extent associated 
persons act within the scope of their employment with a registered 
broker-dealer and are subject to supervisory control of such broker-
dealer).
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    Accordingly, the proposed amendment to Item 10 in Schedule E will 
ask if a business location will operate pursuant to a written agreement 
or contract (other than an insurance agency agreement)25 with the 
main office, and the location: (a) assumes liability for its own 
expenses or has its expenses paid by a party other than the applicant; 
(b) has primary responsibility for decisions relating to the employment 
and remuneration of its registered representatives; (c) deems 5% or 
more of its total registered representatives to be ``independent 
contractors'' for tax purposes; or (d) engages in separate market 
making and/or underwriting activities.

    \25\Proposed Item 12Y(2) relates to securities activities of 
broker-dealers that have networking arrangements with an insurance 
company or agency. See supra note 14. The Commission requests 
comment on whether insurance agency agreements should be required to 
be disclosed in proposed Item 10 of Schedule E.
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    In addition, the amendments to Schedule E propose revisions to Item 
5, which will require an applicant to provide the name of the financial 
institution if the branch office or other business location occupies or 
shares space within a bank, savings bank or association, or credit 
union.

IV. Other Proposed Amendments

    In addition to the substantive amendments to Form BD discussed 
above, the Commission is proposing several technical amendments to the 
Form. Item 1 will be revised to expressly inform applicants that branch 
offices and other business locations from which an applicant may be 
conducting business must be reported on Schedule E. Also, current Items 
12 and 13, concerning government securities activities, will become a 
subset of SEC registration under Item 2.26 In addition, the 
proposed amendments renumber Item 3 as Items 3A and 3B. Proposed Item 
3A adds limited liability companies as a choice of legal form of 
organization the applicant may select. The proposed changes move 
successor identification and effective date of succession information 
currently in Item 5 to Schedule D. Finally, the amendments propose 
clarifying changes to Item 6B, which requests disclosures of control 
persons of the applicant.27

    \26\Proposed changes to Item 2 also remove the instruction ``if 
any registration, license, or membership listed is of a restricted 
nature, explain fully on Schedule D.'' The redesigned CRD system 
will allow the Commission, SROs, and states to enter directly in the 
CRD system any restrictions placed on an applicant's securities 
business. 

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    \27\The amendments propose to renumber current Item 6B as Item 
9B and make explicit that disclosure of financing through public 
offerings, credit obtained in the ordinary course of business, or a 
satisfactory subordination agreement, as defined under Rule 15c3-1 
of the Exchange Act [17 CFR 240.15c3-1], is unnecessary.
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V. Request for Comment

    The Commission is soliciting comment on whether the changes to Form 
BD described above will provide more meaningful information to the 
Commission and other securities regulators without increasing the 
regulatory burden on broker-dealers. The Commission further requests 
comment on each of the changes to the Form. In particular, the 
Commission request comment on whether the disclosure of bankruptcy 
proceedings should be limited to ten years or some other period of 
time, and whether proposed Item 10B (relating to bank affiliations) 
covers the universe of bank-affiliated broker-dealers. The Commission 
also requests comment on the definition of franchise office in Schedule 
E. Electronic filing of Form U-4 currently is in the planning stages 
and the Commission expects that, upon completion of the redesign, the 
CRD system also will have the capability of accepting electronic filing 
of Form BD. Thus, the system, when implemented, contemplates full 
electronic filing of Form U-4 and Form BD. As noted above, the NASD 
will ensure that all broker-dealers will have full access to electronic 
filing facilities.28 The Commission therefore requests comment on 
the feasibility of electronic filing of Form BD, and in particular, 
whether electronic filing should be mandatory.

    \28\The NASD will provide access to electronic filing through 
terminals and other means. See supra note 4 and accompanying text.
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VI. Effective Date

    The Commission anticipates that the proposed amendments to Form BD 
will not become effective until the redesigned CRD system is fully 
operational. The NASD, which will convert existing information to a new 
format conforming to the redesigned CRD system, currently anticipates 
that the initial phase of the redesigned CRD system will become 
operational in early 1996. Details on how to file revised Form BD, if 
adopted, will be determined when the CRD redesign is closer to 
completion.

VII. Effects on Competition and Regulatory Flexibility Act 
Considerations

    Sections 23(a)(2) of the Exchange Act29 requires the 
Commission, in adopting rules under the Exchange Act, to consider the 
anticompetitive effects of such rules, if any, and to balance any 
anticompetitive impact against the regulatory benefits gained in terms 
of furthering the purpose of the Exchange Act. The Commission is 
preliminarily of the view that the proposed amendments to Form BD would 
not result in any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Exchange Act. The 
Commission requests comment, however, on any competitive burdens that 
might result from adoption of the form revisions described in this 
release.

    \29\15 U.S.C. Sec. 78w(a)(2).
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    In addition, the Commission has prepared an Initial Regulatory 
Flexibility Analysis (``IRFA''), pursuant to the requirements of the 
Regulatory Flexibility Act,\30\ regarding the proposed revisions to 
Form BD. The IRFA indicates that the proposed revisions are intended to 
respond to design updates to the CRD system by expanding it to serve as 
an information resource allowing securities regulators to run reports 
and retrieve information through searches by subject category, and by 
enabling registrants to file Form BD electronically with the CRD 
system. Thus, adoption of the proposed revisions to Form BD not only 
will provide benefits to securities regulators in the retrieval of 
information, but also will ease the burden of registration by future 
registrants. The IRFA also indicates that the proposed revisions to 
Form BD will decrease the cost and lessen the time required to register 
for small broker-dealers that do not have an extensive disciplinary 
history.

    \30\5 U.S.C. Sec. 603 (1990).
---------------------------------------------------------------------------

    In addition, the IRFA indicates the proposed revisions ultimately 
could impose an additional one-time reporting requirement on broker-
dealers. The burden of this one-time reporting requirement, however, 
will fall only on those broker-dealers that have an extensive 
disciplinary history. Finally, because the proposed amendments 
generally are intended to lessen the burden of registration, the IRFA 
further indicates that small broker-dealers will be affected in the 
same manner as other registrants. Thus, exempting small broker-dealers 
from Form BD disclosures will be unwarranted.
    A copy of the IRFA may be obtained from Terry R. Young, Attorney, 
Office of Chief Counsel, Division of Market Regulation, Securities and 
Exchange Commission, 450 Fifth Street, N.W., Mail Stop 7-10, 
Washington, D.C. 20549, (202) 942-0073.

VIII. Statutory Basis

    15 U.S.C. Secs. 78o, 78q, 78w.

List of Subjects in 17 CFR Part 249

    Reporting and recordkeeping requirements, Securities, Broker-
Dealers.

    For the reasons set out in the preamble, the commission is 
proposing to amend Title 17, Chapter II, Part 249 of the Code of 
Federal Regulations as follows:

PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934

    1. The authority citation for Part 249 continues to read in part as 
follows:

    Authority: 15 U.S.C. 78a, et seq., unless otherwise noted;
* * * * *
    2. By revising Form BD (referenced in Sec. 249.501) to read as set 
forth below:

    Note: Form BD does not and the revision will not appear in the 
Code of Federal Regulations. The proposed revised Form BD is 
attached as Appendix I to this document.

    3. By amending Schedule I to Form X-17A-5 (referenced in 
Sec. 249.617) by removing Specific Instructions 19a, b & c and Question 
19, redesignating Questions 20 through 24 as Questions 19 through 23, 
and revising newly designated Question 19 to read as follows:

    Form X-17A-5
* * * * *
    Schedule I
* * * * *
    19. Respondent is an affiliate or subsidiary of a foreign broker-
dealer.

    By the Commission.

    Dated: January 12, 1995.
Margaret H. McFarland,
Deputy Secretary.
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[FR Doc. 95-1359 Filed 1-17-95; 9:36 am]
BILLING CODE 8010-01-C