[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]]
_______________________________________________________________________
Part IX
Securities and Exchange Commission
_______________________________________________________________________
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).
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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
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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
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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).
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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]
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