[Federal Register Volume 64, Number 129 (Wednesday, July 7, 1999)]
[Notices]
[Pages 36728-36730]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-17152]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-41575; File No. SR-NASD-99-28]


Self-Regulatory Organizations; Filing and Order Granting 
Accelerated Approval of Proposed Rule Change by the National 
Association of Securities Dealers, Inc. Relating to Amendments to Rule 
1140

June 29, 1999.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on June 2, 1999, the National Association of Securities Dealers, Inc. 
(``NASD'' or ``Association''), through its wholly owned subsidiary NASD 
Regulation, Inc. (``NASD Regulation'' or ``NASDR''), filed with the 
Securities and Exchange Commission (``SEC'' or ``Commission'') the 
proposed rule change as described in Items I and II below, which Items 
have been prepared by NASDR. The Commission is publishing this notice 
to solicit comments on the proposed rule change from interested 
persons. For the reasons discussed below, the Commission is granting 
accelerated approval of the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    NASDR proposes to amend and implement Rule 1140 to require 
electronic filing of Form U-4, the Uniform Application for Securities 
Industry Registration or Transfer, and the Form U-5, the Uniform 
Termination Notice for Securities Industry Termination (collectively 
``Forms'') and to make other conforming changes. Additions are 
italicized; deletions are bracketed.

1140. Electronic Filing Rules

    (a) Filing Requirement.
    All forms required to filed by Article IV, Sections 1, 7, and 8, 
and Article V, Section 2 and 3, of the NASD By-Laws shall be filed 
through an electronic process or such other process the Association may 
prescribe to the Central Registration Depository.
    (b) Supervisory Requirements
    (1) In order to comply with the supervisory procedures requirement 
in Rule 3010 [of the Conduct Rules], each member [must] shall identify 
a Registered Principal(s) or corporate officer(s) who has a position of 
authority over registration functions, to be responsible for 
supervising the electronic filing of appropriate forms pursuant to this 
Rule.
    (2) The Registered Principal(s) or corporate officer(s) who has or 
have the responsibility to review and approve the forms filed pursuant 
to this Rule [will] shall be required to acknowledge, electronically, 
that he is filing this information on behalf of the [firm] member and 
the [member firm's] member's associated persons.
    (c) Form U-4 Filing Requirements
    (1) Initial and transfer electronic application filings [will] 
shall be based on a signed Form U-4 provided to the [firm] member by 
the applicant. As part of the [member firm's] member's recordkeeping 
requirements, it [must] shall retain the applicant's signed Form U-4 
and make it available upon regulatory request.
    (2) [Amendments to the disclosure information in Item 22 can be 
filed electronically without obtaining the associated person's 
signature on Form U-4. The member will be required to provide the 
associated persons with a copy of the amended disclosure information 
that was filed. In providing this material to the associated person, 
the firm must obtain the written acknowledgement [sic] that the 
information has been received and reviewed. The member must maintain 
this acknowledgement in its books and records and must make it 
available upon regulatory request.]
    Fingerprint Cards
    Upon filing an electronic Form U-4 on behalf of an applicant for 
registration, a member shall promptly submit a fingerprint card for the 
applicant. NASD Regulation may make a registration effective pending 
receipt of the fingerprint card. If a member fails to submit a 
fingerprint card within 30 days after NASD Regulation receives the 
electronic Form U-4, the person's registration shall be deemed 
inactive. In such case, NASD Regulation shall notify the member that 
the person must immediately cease all activities requiring registration 
and is prohibited from performing any duties and functioning in any 
capacity requiring registration. NASD Regulation shall administratively 
terminate a registration that is inactive for a period of two years. A 
person whose registration is administratively terminated may reactivate 
the registration only by reapplying for registration and meeting the 
qualification requirements of the applicable provisions of the Rule 
1020 Services and the Rule 1030 Series. Upon application and a showing 
of good cause, the Association may extend the 30-day period.
    (d) Form U-5 Filing Requirements
    Initial filings and amendments of Form U-5 [will] shall be [done] 
submitted electronically. As part of the [member firm's] member's 
recordkeeping requirements, it [must] shall make [them] such records 
available upon regulatory request.
    (e) Third Party Filing
    A member may employ a third party to file the required forms 
electronically on its behalf[, if the member and the third party have 
executed the Association's Broker-Dealer Agent-Filing Addendum to CRD 
Subscriber Agreement].
* * * * *
    Rule 3010. Supervision
* * * * *
    (e) Qualifications Investigated
    Each member shall have the responsibility and duty to ascertain by 
investigation the good character, business repute, qualifications, and 
experience of any person prior to making such a certification in the 
application of such person for registration with this Association. 
Where an applicant for registration has previously been registered with 
the Association, the member shall obtain from the [Firm Access Query 
System (FAQS)] Central Registration Depository or from the applicant a 
copy of the Uniform Termination Notice of Securities Industry 
Registration (Form U-5) filed with the Association by such person's 
most recent previous NASD member employer, together with any amendments 
thereto that may have been filed pursuant to Article IV, Section 3 of 
the Association's By-Laws. The member shall obtain the Form U-5 as 
required by this Rule no later than sixty (60) days following the 
filing of the application for registration or demonstrate to the 
Association that it has made reasonable efforts to comply with the 
requirement. A member receiving a Form U-5 pursuant to this Rule shall 
review the Form U-5 and any amendments thereto and shall take such 
action as may be deemed appropriate.
* * * * *

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, NASDR included statements 
concerning the purpose of, and basis for, the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item III below. NASDR has prepared summaries, set forth in Sections A, 
B,

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and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    On July 15, 1996, the Commission approved NASD Rule 1140.\3\ The 
purpose of this rule was to require members to file Form U-4 and U-5 
electronically on a redesigned Central Registration Depository 
(``CRD'') system then under development. That system used network-based 
architecture and proprietary software developed by the NASD. In 1997, 
NASDR determined to proceed with a new approach to the CRD system that 
will permit members to submit CRD filings electronically via NASDR's 
World Wide Web site (``Web CRD''),\4\ rather than using network-based 
architecture and proprietary software to submit such filings.\5\ As a 
result, Rule 1140 has never been implemented.
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    \3\ Securities Exchange Act Release No. 37439 (July 15, 1996), 
61 FR 37950 (July 22, 1996).
    \4\ The address for NASDR's website is http://www.nasdr.com.
    \5\ Web CRD is designed to support electronic filing of Forms U-
4, U-5, U-6, BD, and BDW via NASD Regulation's World Wide Web site. 
Ultimately, NASD Regulation expects that all filings for both 
broker-dealers and their associated persons will be submitted 
exclusively through electronic means. All Forms U-4 and U-5 (i.e., 
the uniform securities industry applications for registration and 
termination, respectively) will be submitted electronically upon 
deployment of Web CRD on August 16, 1999. See Securities Exchange 
Act Release No. 41326 (April 22, 1999), 64 FR 23366 (April 30, 1999) 
(notice of filing of File No. SR-NASD-98-96); Securities Exchange 
Act Release No. 41560 (June 25, 1999) (order approving File No. SR-
NASD-98-96, which implemented Web CRD and amended certain disclosure 
questions).
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    The purpose of the proposed rule change is to amend Rule 1140 to 
make it consistent with the newly developed Web CRD and to implement 
the Rule on the planned date of deployment of Web CRD, which is August 
16, 1999.\6\ First, current paragraph (c)(2) is deleted. As approved in 
1996, this provision would have permitted a firm to amend disclosure 
information in Item 22 of the Form U-4 without obtaining the registered 
person's signature if the firm provided a copy of the filing to the 
registered person and obtained and maintained a record of an 
acknowledgment by the registered person. NASDR has not provided for 
such a practice in the initial release of the Web CRD system in August 
1999. NASD may consider providing for such a practice in the future.\7\
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    \6\ NASDR also revised Forms U-4 and U-5 that are designed to be 
used with the new Web CRD system. These Forms become effective on 
August 1, 1999. For a description of the transition period from July 
31 to August 16, 1999, see Securities Exchange Act Release No. 41326 
(April 22, 1999), 64 FR 23366 (April 30, 1999) (notice of filing of 
File No. SR-NASD-98-96) and Securities Exchange Act Release No. 
41560 (June 25, 1999) (order approving File No. SR-NASD-98-96, which 
implemented Web CRD and amended certain disclosure questions).
    \7\ The current practice of permitting administrative 
information on pages 1 and 2 of Form U-4 to be amended without 
obtaining the registered person's signature will be continued in Web 
CRD. This practice was approved in the Commission's 1996 order. See 
Securities Exchange Act Release No. 37439 (July 15, 1996); 61 FR 
37950 (July 22, 1996).
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    Second, a new paragraph (c)(2) would be added to the Rule to 
address the continued submission of paper fingerprint cards in the Web 
CRD electronic filing environment. This amendment is necessary because 
it is not feasible at this time to implement electronic filing of 
fingerprint cards. In Web CRD, firms will: (1) include a barcode number 
from the fingerprint card in an electronic Form U-4 filing; and (2) 
undertake to submit the fingerprint card by mail or delivery 
service.\8\ The amended rule would authorize NASDR to make a 
registration effective pending receipt of the fingerprint card. The 
rule also would be amended to authorize NASDR to place a person in an 
inactive status if NASDR does not receive the fingerprint card within 
30 days of the filing of a Form U-4. This will enable NASDR to address 
those instances in which fingerprint cards (which are required by NASD 
and SEC rules \9\) are not submitted in a timely fashion.\10\
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    \8\ A person submitting the electronic Form U-4 filing will be 
asked to enter the barcode on the fingerprint cards into a 
designated field on the screen; the screen will also contain 
language indicating that, by entering the barcode, the filer is 
representing that he is or will be submitting the hard copy 
fingerprint cards by mail or delivery service.
    \9\ See NASD Rule 1013(a)(1)(C) and 17 CFR 240.17f-2.
    \10\ Web CRD will have a mechanism that will enable firms to 
identify individuals whose paper fingerprint cards have not been 
delivered to NASDR within the 30-day period.
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    Paragraph (e) of Rule 1140 also is amended. This paragraph permits 
members to use a service bureau for filing the Forms if the member and 
the service bureau have executed a Filing Addendum to the CRD 
Subscriber Agreement. The reference to the Agreement is deleted because 
such agreements, which were necessary to protect the NASD's proprietary 
software, are not necessary in the Web CRD environment because 
proprietary software is not used. As with other electronic filings 
required under the NASD Rules, members may use a service bureau to 
submit electronic filings, but the member will remain ultimately 
responsible for the timeliness and content of the filings. NASDR is 
working with service bureaus to make sure they are prepared to provide 
this service to members. Other grammatical changes have been made to 
the Rule.
    In 1996, the NASD Board had intended to provide a one-year 
transition during which the NASD would continue to process paper 
filings for firms with 50 or fewer registered representatives. The 
NASDR Board has reconsidered this issue and determined that a 
transition period is not necessary. Web CRD, unlike the earlier system, 
does not require a firm to purchase any special hardware or software; 
members will have low-cost access to the system through NASDR's Web 
site.\11\ NASDR also has been working closely with end-users (i.e., 
broker-dealers, states, self-regulatory organizations, and the 
Commission) to prepare them for Web CRD. To familiarize end-users with 
the system and how it will operate, NASDR has conducted several 
successful pilot programs during 1998 and early 1999 in preparation for 
the deployment of Web CRD in August 1999. In addition, NASDR has 
conducted conferences nationwide to provide end-users with an 
opportunity to familiarize themselves with Web CRD.\12\ NASDR also is 
providing current CRD users with periodic updates discussing the 
features and functionality of Web CRD through the CRD/PD Bulletin and 
Web CRD Update, publications that are available in hard copy and on 
NASDR's Web site. Also, beginning in February 1999, NASDR began 
providing current CRD users with Web CRD user accounts and passwords. 
End-users will have an opportunity to practice accessing and working in 
the Web CRD system in July 1999 prior to deployment the following 
month. Furthermore, NASDR has prepared Web-base tutorials (accessible 
through NASDR's Web site) for all end-

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users that explain how to navigate and use the system.
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    \11\ Electronic filing in Web CRD will be simpler for broker-
dealers because it requires only that a broker-dealer have access to 
an Internet browser (e.g., Internet Explorer, Netscape) and to the 
Internet through an account with an Internet Service Provider (e.g., 
Microsoft Network, MCI WorldCom, America OnLine). Accordingly, 
electronic filing can be accomplished with significantly less 
difficulty and at a lower cost than possible under the earlier CRD 
redesign approach, which required that firms subscribe to 
proprietary software and, in most cases, upgrade their computer 
hardware. In addition, members are already required to have an 
electronic mail account and to be able to access NASDR's Web site 
for the purpose of updating their Firm Contact Questionnaire. See 
NASD By-Laws Article IV, Section 3.
    \12\ 1999 Conferences have been held in Los Angeles, CA (April 
7-8); Atlanta, GA (April 14-15); Washington, DC (April 20-21); New 
York, NY (April 29-30 and May 21); and Chicago, IL (May 4-5).
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    Rule 3010 also is amended to remove a reference to the Firm Access 
Query System (FAQS), a system that currently permits members to view 
certain information in the CRD for the purpose of investigating 
applicants for employment. Upon deployment of Web CRD, FAQS will be 
obsolete; members will use Web CRD to conduct qualifications 
investigations and will have access to all of the same information that 
was available to them under FAQS.
    NASDR proposes to make Rule 1140, as amended, effective for all 
members on August 16, 1999. The effective date will be announced at 
least 30 days in advance in a Notice To Members.
2. Statutory Basis
    NASDR believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) \13\ of the Act, which requires, among 
other things, that the Association's rules must be designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, and, in general, to protect investors 
and the public interest. NASDR believes that the proposed rule change 
will make processing of Forms U-4 and U-5 more efficient, will allow 
members and regulators to have quicker access to information contained 
in those filings, and facilitate oversight of securities industry firms 
and their personnel.
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    \13\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    NASDR does not believe that the proposed rule change will result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received from Members, Participants, or Others

    Written comments were neither solicited nor received.

III. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
is consistent with the Act. Persons making written submissions should 
file six copies thereof with the Secretary, Securities and Exchange 
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549-0609. Copies 
of the submission, all subsequent amendments, all written statements 
with respect to the proposed rule change that are filed with the 
Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for inspection and copying in the 
Commission's Public Reference Room. Copies of such filing will also be 
available for inspection and copying at the principal office of the 
NASD. All submissions should refer to File No. SR-NASD-99-28 and should 
be submitted by July 28, 1999.

IV. Commission's Findings and Order Granting Accelerated Approval 
of Proposed Rule Change

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act\14\ and the rules and regulations 
thereunder applicable to the NASD.\15\ Specifically, the Commission 
finds that the proposed rule change is consistent with Section 
15A(b)(6)\16\ which requires, among other things, that the rules of an 
association be designed to foster cooperation and coordination with 
persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in 
securities, and, in general, to protect investors and the public 
interest; and are not designed to permit unfair discrimination among 
customers, issuers, brokers, or dealers.
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    \14\ In reviewing this proposal, the Commission has considered 
its impact on efficiency, competition, and capital formation. The 
Commission notes that electronic filing provides SROs and states 
with an efficient means of receiving and maintaining information on 
associated persons. Moreover, the impact on competition is 
negligible because all NASD member firms will be subject to the 
electronic filing requirement. 15 U.S.C. 78c(f).
    \15\ 15 U.S.C. 78o-3.
    \16\15 U.S.C. 78o3(b)(6).
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    The Commission has determined to approve the changes to the NASD 
rules that would require electronic filing. The Commission believes 
that electronic filing will streamline the registration and termination 
process for individuals and firms. Under the NASDR's proposal, an 
individual seeking registration will be required to fill out an 
electronic Form U-4, which will be available on NASDR's website, and 
submit it electronically. Further, when an associated person ends his 
association with a broker-dealer, the broker-dealer will be required to 
fill out an electronic Form U-5, which will also be available on the 
NASDR's website, and submit it electronically.
    In addition, under the proposal, firms and individuals will no 
longer rely on the mail system to transmit the forms to NASDR. Now, 
individuals and firms will electronically submit Forms U-4 and U-5 
through the World Wide Web, which means NASDR should receive the forms 
more quickly. The Commission also believes that investors will benefit 
from the expedited registration and termination process because the 
faster NASDR receives the forms, the faster information on the forms 
can be disclosed to investors through the NASD's Public Disclosure 
program.
    The Commission finds good cause for approving the proposed rule 
change prior to the thirtieth day after the date of publication of 
notice thereof in the Federal Register. The Commission notes that NASD 
Rule 1140, in substantive form, was approved by the Commission in 
1996.\17\ The Commission also notes that the rule is currently in the 
NASD Manual, but is not in effect. Further, this proposal's companion 
filing,\18\ which implemented Web CRD and amended disclosure questions 
on Forms U-4 and U-5, received no comments when it was submitted for 
the requisite notice and comment period. The NASD will implement this 
proposal simultaneously with the companion filing . Accelerated 
approval will provide the NASD lead time to issue a Notice to Members 
explaining how the process will work. Thus, the Commissions finds no 
reason to delay the effectiveness of a rule that has been previously 
approved and will serve to facilitate an important investor benefit--
Web CRD. The Commission finds, therefore, that granting accelerated 
approval to the proposed rule change is appropriate and consistent with 
Section 15A\19\ of the Act.
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    \17\ See supra note 3.
    \18\ See supra note 5.
    \19\ 15 U.S.C. 78o-3.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (SR-NASD-99-28)--is hereby approved on an 
accelerated basis.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-17152 Filed 7-6-99; 8:45 am]
BILLING CODE 8010-01-M