[Federal Register Volume 63, Number 17 (Tuesday, January 27, 1998)] [Notices] [Pages 3942-3944] From the Federal Register Online via the Government Publishing Office [www.gpo.gov] [FR Doc No: 98-1853] ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION [Release No. 34-39562; File No. SR-NASD-97-78] Self-Regulatory Organizations; Order Approving a Proposed Rule Change by National Association of Securities Dealers, Inc. Relating to the Amended Interpretation of IM-8310-2 Concerning the Release of Additional Disciplinary Information January 20, 1998. I. Introduction On October 17, 1997, the National Association of Securities Dealers, Inc. (``NASD'' or ``Association'') submitted to the Securities and Exchange Commission (``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 thereunder,\2\ a proposed rule change which amended the Interpretation on the Release of Disciplinary Information, IM-8310-2 of Rule 8310 of the Procedural Rules of the NASD (``Interpretation'' or ``IM-8310-2''). A notice of the proposed rule change was published in the Federal Register on November 21, 1997.\3\ The Commission has received no comment letters on the proposed rule change. For the reasons discussed below, the Commission is approving the proposed rule change. --------------------------------------------------------------------------- \1\ 15 U.S.C. 78s(b)(1). \2\ 17 CFR 240.19b-4. \3\ Securities Exchange Act Rel. No. 39322 (Nov. 13, 1997), 62 FR 62391. --------------------------------------------------------------------------- In its notice, filed on October 17, 1997, the NASD Regulation, Inc. (``NASDR'') proposed to amend IM-8310-2 to include the phrase ``electronic inquiry'' in the rule language so that it could respond to electronic inquiries, as well as written or telephonic inquiries. In the notice, the NASDR also proposed to amend the rule language to include the additional information required to be reported on the amended Forms U-4, U-5, and BD. In November 1997, the NASDR requested that the Commission approve, on an accelerated basis, that portion of the amended rule language that would allow it to respond to electronic [[Page 3943]] inquiries.\4\ Hence, the Commission partially approved, on an accelerated basis, that portion of the NASDR's request which gives the NASD the option of responding to the electronic inquiries of persons or entities requesting employment and disciplinary history of its members and their associated persons.\5\ This order approves the amended rule language that addresses the release of additional disciplinary history required to be disclosed pursuant to amended Forms U-4, U-5, and BD. --------------------------------------------------------------------------- \4\ Telephone conversation with Alden S. Adkins, General Counsel and Mary M. Dunbar, Assistant General Counsel, NASDR, and Belinda Blaine, Associate Director, Katherine A. England, Assistant Director, and Mignon McLemore, Staff Attorney, Division of Market Regulation, November 26, 1997. \5\ See Securities Exchange Act Rel. No. 39442 (December 11, 1997), 62 FR 66706 (December 19, 1997). --------------------------------------------------------------------------- II. Description of Proposal Under the NASD's Public Disclosure Program (``PDP''),\6\ the NASD, in response to a written inquiry, electronic inquiry,\7\ or telephonic inquiry via a toll-free telephone listing, releases certain information contained in the Central Registration Depository (``CRD'') regarding the employment and disciplinary history of its members and their associated persons, including information regarding past and present employment history with Association members; all final disciplinary actions taken by federal, state, or foreign securities agencies or self-regulatory organizations that relate to securities or commodities transactions; all pending disciplinary actions that have been taken by federal or state securities agencies or self-regulatory organizations that relate to securities and commodities transactions and are required to be reported on Form BD or Form U-4; all foreign government or self- regulatory organization disciplinary actions that relate to securities or commodities transactions and are required to be reported on Form BD or Form U-4; and all criminal indictments, informations or convictions that are required to be reported on Form BD or Form U-4. The Association also releases information concerning civil judgments and arbitration decisions in securities and commodities disputes involving public customers. --------------------------------------------------------------------------- \6\ See Securities Exchange Act Rel. No. 30629 (April 23, 1992), 57 FR 18535 (April 30, 1992); and Securities Exchange Act Rel. No. 32568 (July 1, 1993), 58 FR 36723 (July 8, 1993). \7\ See supra note 5. --------------------------------------------------------------------------- On November 25, 1996, as part of its PDP, the NASD filed a proposed rule change, SR-NASD-96-38, designed to permit the NASD to release additional information regarding the disciplinary history of its members and persons associated with a member.\8\ In January 1997, NASDR's senior management determined that the CRD redesign should be reassessed in light of changing business needs and rapidly advancing computer technology. After negotiations and discussions among the Commission, the NASD, and the North American Securities Administrators Association, Inc. (``NASAA'') concerning CRD development and implementation, SR-NASD-96-38 was withdrawn and replaced by this filing, SR-NASD-97-78. --------------------------------------------------------------------------- \8\ The NASD proposal to release additional disciplinary history of its members and associated persons was initially filed with the Commission on November 26, 1996. See Securities Exchange Act Rel. No. 37994 (November 27, 1996), 61 FR 64549 (December 5, 1996) (SR- NASD-96-38). --------------------------------------------------------------------------- This filing proposes the same substantive disclosure as SR-NASD-96- 38. Specifically, the proposed rule change allows the NASD to release all information on any question on page 3 (Question 22) of the amended Form U-4 and Question 11 of the amended Form BD, as approved by the Commission in July 1996.\9\ The additional information that the NASD proposes to disclose includes: --------------------------------------------------------------------------- \9\ See Securities Exchange Act Rel. No. 37407 (July 5, 1996), 61 FR 36595 (July 11, 1996); and Securities Exchange Act Rel. No. 37431 (July 12, 1996), 61 FR 37357 (July 18, 1996); See also Securities Exchange Act Rel. No. 37632 (September 4, 1996), 61 FR 47412 (September 9, 1996). --------------------------------------------------------------------------- 1. All pending arbitrations and civil proceedings that relate to securities or commodities transactions; 2. Pending written customer complaints alleging sales practice violations and compensatory damages of $5,000 or more; 3. Settlement's of $10,000 or more of arbitrations, civil suits, and customer complaints involving securities or commodities transactions: 4. Current investigations involving criminal or regulatory matters; 5. Terminations of employment after allegations involving violation of investment-related statutes or rules, fraud, theft, or failure to supervise investment-related activities; 6. Bankruptcies less than 10 years old and outstanding liens or judgments; 7. Bonding company denials, pay outs, or revocations; and 8. Any suspension or revocation to act as an attorney, accountant, or federal contractor. To accomplish the release of this additional information, however, the NASD has reformatted the questions set forth on page 3 of amended Form U-4; questions 13 through 16 on amended Form U-5; and the Disclosure Reporting Pages (``DRPs'') for both forms in a manner that is compatible with its current CRD technology protocol. The reformatted, interim forms and DRPs contain no substantive changes to any of the questions. The NASD proposes to make the interim forms and the disclosure of the additional information set forth in this rule filing effective on February 17, 1998.\10\ This effective date will permit members and the NASD to complete annual registration renewals and permit the NASD to train members on the use of the interim forms before they are implemented. The information that would be released from January 1 \11\ to February 17, 1998, would include only that information that currently is required to be reported on the Forms U-4 and U-5. --------------------------------------------------------------------------- \10\ See supra note 3, at p. 62391. See also letter from Joan Conley, Secretary, NASD to Katherine A. England, Assistant Director, Division of Market Regulation, SEC, dated November 13, 1997, (correcting Amendment No. 2 to reflect this effective date). \11\ Upon approval of the electronic inquiry portion of its proposal, the NASD had planned to begin responding to electronic inquiries for PDP information, via the Internet, on or about January 1, 1998. See supra note 3 at p. 62391. However, hardware problems and system capacity have hampered implementation. Telephone conversation between Alden S. Adkins, General Counsel, NASDR. and Katherine A. England, Assistant Director, Division of Market Regulation, SEC, December 29, 1997. --------------------------------------------------------------------------- III. Discussion The Commission finds that the proposed rule change is consistent with the requirements of the Act\12\ and the rules and regulations promulgated thereunder applicable to the NASD. Specifically, the Commission believes that approval of the proposed rule change is consistent with Section 15A(b)(6) of the Act. Section 15A(b)(6) provides in relevant part that the rules of the Association be designed to foster cooperation and coordination with persons engaged in regulating and processing information with respect to securities and not to permit unfair discrimination among customers, issuers, brokers or dealers. --------------------------------------------------------------------------- \12\ In approving this rule, the Commission notes that it has considered the proposed rule's impact on efficiency, competition, and capital formation. The release of additional disciplinary history of the NASD's members and associated persons should result in competition for brokerage business among those broker-dealers with impeccable disciplinary histories. Efficiency should improve in the marketplace as members and their associated persons become more conscious of compliance and the potential ramifications of this increased disclosure. 15 U.S.C. 78c(f). --------------------------------------------------------------------------- Pursuant to Section 15A(b)(6), the proposed rule change benefits the public because, by releasing this additional disciplinary information, the [[Page 3944]] NASD is providing investors with a resource to aid them in choosing a broker-dealer for their investment needs. Moreover, increasing disclosure of members' and their associated persons' relevant disciplinary history could help investors determine whether to conduct or continue to conduct business with a particular broker-dealer or associated person. The Commission notes that disclosure of this additional information may serve as a deterrent to fraudulent activity as well. According to the NASD, the Forms U-4 and U-5 had to be redesigned to facilitate compliance with this disclosure requirement at this time. Thus, the forms were redesigned to be compatible with the current CRD protocol (i.e., the answers on the interim forms now match the location of questions in the CRD system). Upon completion of the CRD redesign, the forms as originally designed will be implemented. The Commission, therefore, approves the use of these interim forms, recognizing their necessity in disseminating this additional disciplinary history to the public. For the above reasons, the Commission believes that the proposed rule change is consistent with the provisions of the Act, and in particular, with Section 15A(b)(6). It is therefore ordered, pursuant to Section 19(b)(2) of the Act,\13\ that the remaining portion of proposed rule change, SR-NASD- 97-78, concerning the release of additional disciplinary information be, and hereby is, approved. --------------------------------------------------------------------------- \13\ 15 U.S.C. 78s(b)(2). For the Commission, by the Division of Market Regulation, pursuant to delegated authority.\14\ --------------------------------------------------------------------------- \14\ 17 CFR 200.30-3(a)(12). --------------------------------------------------------------------------- Margaret H. McFarland, Deputy Secretary. [FR Doc. 98-1853 Filed 1-26-98; 8:45 am] BILLING CODE 8010-01-M