[Federal Register Volume 65, Number 31 (Tuesday, February 15, 2000)]
[Notices]
[Pages 7582-7584]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-3446]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42402; File No. SR-NASD-99-45]


Self-Regulatory Organizations; Order Granting Approval to 
Proposed Rule Change by the National Association of Securities Dealers, 
Inc. Relating to Amendments to the Public Disclosure Program

February 7, 2000.

I. Introduction

    On September 15, 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'') a proposed rule change pursuant to Section 19(b)(1) of 
the Securities Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 
thereunder.\2\ In its proposal, NASD Regulation seeks to amend certain 
aspects of the Public Disclosure Program (``PDP''). Notice of the 
Proposal was published in the Federal Register on December 23, 1993.\3\ 
The Commission received no comment letters on the filing and this order 
approves the proposal.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 42240 (December 16, 
1999), 64 FR 72125 (File No. SR-NASD-99-45).
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II. Description of the Proposal

    NASD Regulation proposes to amend certain aspects of the PDP in an 
effort to make the operation of the PDP clearer and fairer to NASD 
members, associated persons, and the public. The PDP is described in 
Interpretive Material 8310-2 of the NASD Rules (``the 
Interpretation''). Under the PDP, NASD Regulation discloses to the 
public certain information regarding employment history, other business 
experience, and disciplinary history of NASD members and associated 
persons. NASD Regulation uses information reported on the uniform forms 
\4\ to the Central Registration Depository (``CRD'') as the source for 
the PDP. One of the primary purposes of the PDP is to help investors 
make informed choices about the individuals and firms with whom they 
may wish to do business.
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    \4\ The uniform forms are Form BD (the Uniform Application for 
Broker-Dealer Registration); Form BDW (the Uniform Request for 
Broker-Dealer Withdrawal); Form U-4 (the Uniform Application for 
Securities Industry Registration or Transfer); Form U-5 (the Uniform 
Termination Notice for Securities Industry Registration); and Form 
U-6 (the Uniform Disciplinary Action Reporting Form). Except for the 
Form U-6, the Commission has approved all of these forms. See 
Securities Exchange Act Release No. 41594 (July 2, 1999), 64 FR 
37586 (July 12, 1999) (adoption of the amended Form BD); Securities 
Exchange Act Release No. 41356 (April 30, 1999), 64 FR 25144 (May 
10, 1999) (adoption of the amended Form BDW); Securities Exchange 
Act Release No. 41560 (June 25, 1999), 64 FR 36059 (July 2, 1999) 
(order approving the new Forms U-4 and U-5).
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Persons Subject to the Interpretation

    NASD Regulation seeks to clarify which firms or persons will be 
subject to disclosure through the PDP. Although the NASD currently 
releases information about current or former members and associated 
persons, the Interpretation does not explicitly address the issue of 
disclosure regarding former members and associated persons. Under NASD 
Regulation's proposal, the firms or persons subject to disclosure 
through the PDP will be: (1) Current and former NASD members; (2) 
persons currently associated with an NASD member; and (3) persons who 
have been associated with an NASD member within the preceding two 
years. This two-year disclosure period coincides with the period in 
which an individual can return to the industry without being required 
to requalify by examination and the initial period in which an

[[Page 7583]]

individual remains subject to the jurisdiction of the Association.\5\
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    \5\ See NASD Rules 1021(c) and 1031(c); NASD By-Laws Article V, 
Section 4. Article V, Section 4 of the By-Laws provides that a 
person whose association with a member has been terminated or 
revoked shall continue to be subject to the NASD's jurisdiction for 
certain specified purposes. Under that provision, the two-year 
period begins on the effective date of the termination, and may be 
extended under certain circumstances. For purposes of disclosure 
under the PDP, the two-year period would begin on the effective date 
of the termination and would not be extended beyond the initial two-
year period. The effective date of termination is the date that the 
Form U-5 is captured by the CRD system. Conversation between Mary 
Dunbar, Office of General Counsel, NASD Regulation, and Joseph P. 
Corcoran, Attorney, Division of Market Regulation, Commission on 
December 10, 1999.
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Clarification of the ``Required to Reported'' Standard

    NASD Regulation also seeks to clarify its ``required to be 
reported'' standard and the effect of this standard on former members 
and associated persons, especially in light of former members and 
associated persons' limited ability to submit information to amend or 
update a disclosure record.\6\ Until 1996, the NASD only released 
information actually reported on Form U-4 or Form BD. In 1996, the 
Commission approved a rule change that permitted the NASD to release 
information ``required to be reported'' on Form U-4 or Form BD.\7\ One 
of the reasons for the proposal was that in some instances, the NASD 
possessed information about a currently registered person that should 
have been reported on the person's Form U-4, but the amended Form U-4 
had not yet been submitted. The rule change allowed the NASD to release 
all of the information that it possessed that was ``required to be 
reported'' on the Forms U-4 and BD, thereby ensuring that investors 
received more complete information. The current Interpretation does 
not, however, explicitly address events and proceedings reported on 
Form U-5 or Form U-6.\8\
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    \6\ With the exception of a former associated person filling out 
Part II of the Form U-5 Internal Review Disclosure Reporting Page 
(``DRP''), there is currently no other mechanism for a former 
associated person or member to submit information to amend or update 
a disclosure record.
    \7\ See Securities Exchange Act Release No. 37797 (October 9, 
1996), 61 FR 53984 (October 16, 1996).
    \8\ Form U-6 is filed by state securities regulators and self-
regulatory organizations (``SRO'') to report disciplinary and other 
matters that are also required to be reported on Form U-4 or Form 
BD. Form U-6 includes DRPs in five categories: (1) Bankruptcy/SIPC/
Compromise with Creditors; (2) Civil Judicial; (3) Criminal; (4) 
Regulatory Action; and (5) SRO Arbitration/Reparation. The format of 
the Form U-6 DRPs parallels the format of the DRPs used for the 
Forms U-4, U-5, and BD for those categories. Generally, the Form U-6 
reports the identifying information on the subject of the filing 
(i.e., the individual or entity), the regulator reporting the 
action, and a brief description of the matter being reported, 
including its status or final resolution.
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    NASD Regulation presently interprets the ``required to be 
reported'' standard for current members and associated persons to 
include all information reported on Form U-4 or Form BD, as well as 
information that has been reported on a Form U-5 or Form U-6 that 
should be, but has not yet been, reported on a Form U-4 or Form BD. For 
example, a former employer of a currently registered representative may 
report a customer complaint against that registered representative by 
amending his Form U-5. NASD Regulation includes information about this 
complaint in any public disclosure report it issues about the 
registered representative, even if the current employer of the 
registered person has not updated his Form U-4 to reflect the 
complaint.
    For former members and associated persons, the current 
interpretation of the ``required to be reported'' standard has a 
different result because once an association or membership is 
terminated, there is no longer a requirement to report on Form U-4 or 
Form BD, respectively. Consequently, when NASD Regulation receives a 
public disclosure request about a former associated person or member, 
NASD Regulation releases all information reported to CRD up to the date 
of the termination of association or membership. However, events and 
proceedings reported on an initial or amended Form U-5 or Form BDW,\9\ 
or on Form U-6 after an individual has terminated his association or 
after termination of a firm's membership, are not released under the 
PDP. If a former associated person or member reapplies and is approved 
for NASD registration or membership, NASD Regulation resumes public 
disclosure under the ``required to be reported'' standard, which 
included releasing all information reported on any uniform form during 
any period of active or inactive registration or membership.
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    \9\ The Commission notes that copies of a firm's Form BDW are 
available to the public through the Commission's Public Reference 
Room
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    Under the proposed rule change, NASA Regulation will begin 
releasing information reported on Form U-6 for former members and 
associated persons, subject to the two-year time limitation discussed 
above. Among other things, NASD Regulation believes that the 
information reported on Form U-6 is highly reliable because it is filed 
by state securities regulators and self-regulatory organizations 
(``SROs''). NASD Regulation, however, does not currently release 
information that has been reported on a Form U-5 regarding former 
registered persons and does not propose any change to this policy.

Clarifications of Other Types of Information Released Through the PDP

    NASD Regulation proposes to clarify that it releases information on 
awards rendered in the NASD's arbitration forum involving securities or 
commodities disputes between members and public customers through the 
PDP, even though this information is not required to be reported on the 
Form BD. This information is already available to the public pursuant 
to NASD arbitration rules.\10\ and the PDP receives this information 
from the NASD's Office of Dispute Resolution.
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    \10\ See NASD Rule 10330(f).
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    NASD also proposes to continue its current policy of not releasing 
social security numbers, home addresses, or physical description 
information reported on the uniform forms. Further, the proposed rule 
change clarifies that NASD Regulation will not release information 
through the PDP that it is otherwise prohibited from releasing under 
Federal law e.g., criminal history record information provided by the 
Federal Bureau of Investigations.\11\ The criminal history information 
that is released through the PDP is the information provided by the 
associated person or the member on the uniform forms.
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    \11\ 28 CFR 50.12(b).
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    Additionally, NASD Regulation proposes to discontinue public 
disclosure of a limited category of CRD information that it deems to be 
factually incorrect. NASD Regulation occasionally receives requests to 
expunge an event from CRD where the person who was the subject of the 
CRD filing can demonstrate to the NASD's satisfaction that it was 
factually impossible for him to have been involved in the event (e.g., 
a person was named in an arbitration as a branch manager of a firm, and 
the person was working at a different firm at that time). NASD 
Regulation and the North American Securities Administrators Association 
(``NASAA'') agree that factually incorrect information can be expunged 
from the CRD if the person obtains a court order of expungement. 
However, NASD Regulation believes that obtaining a court order can be 
time-consuming and expensive. Further, NASD Regulation believes that 
information that can be proven to be factually incorrect should be 
expunged from the CRD system without a court order and is discussing 
this issue with

[[Page 7584]]

NASAA. Until an agreement is reached with NASAA on expunging factually 
incorrect information from the CRD system, NASD Regulation will 
discontinue releasing this information via the PDP. NASD Regulation 
plans to develop guidelines to implement this policy.

Automation of Public Disclosure Reports

    NASD Regulation also proposes to automate the preparation of 
disclosure reports. Currently, when NASD Regulation receives a public 
disclosure request, NASD Regulation staff reviews the CRD record of the 
subject of the request, identifies events that must be disclosed under 
the Interpretation, and manually prepares a summary report for the 
requester. Under the proposal, NASD Regulation will discontinue the 
manual preparation of these reports and instead use a computer program 
that automatically generates a report after drawing information 
directly from the Web CRD database. The report then will be sent by 
regular or electronic mail to the requester.
    One consequence of this approach is that the automatically 
generated reports will include verbatim any comment submitted by a 
registered representative, firm, or regulator in response to the last 
question on the DRPs of the uniform forms.\12\ NASD Regulation will 
inform members and registered persons via a Notice to Members and other 
communications that the NASD believes that members and registered 
persons may be subject to civil liability or NASD regulatory sanctions 
if they submit offensive or potentially defamatory language on the 
uniform forms. In the future, NASD Regulation may develop electronic 
notices that would appear on the electronic screen when forms are being 
completed on-line advising Web CRD users of this issue. NASD Regulation 
plans to undertake a continuing program to educate members and 
registered persons on this issue.
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    \12\ This question typically asks for a summary of the 
circumstances or details relating to the disclosure event. The 
response comments are not currently included in the manual reports 
prepared by the staff and may contain customer names, confidential 
account information, or offensive or potentially defamatory language 
(NASD Regulation believes that this type of language will rarely 
appear on the uniform forms).
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    After the proposal goes into effect, NASD Regulation will address 
objections to disclosure of customer names, confidential customer 
information, or offensive or potentially defamatory language on a case-
by-case basis in the following manner. After receiving an objection, 
NASD Regulation will identify the filer (i.e., a member firm, 
regulatory, or self-regulatory organization) of the uniform form 
containing the language in question and notify the filer of the 
objectives. NASD Regulation will provide the filer with the opportunity 
to amend the filing to remove the language in controversy. If the filer 
determines not to amend, NASD Regulation will apply a balancing test to 
weigh the value of the language in controversy for regulatory and 
investor protection purposes against the objector's asserted privacy 
rights and/or defamation claims.\13\ Based on the outcome of this test, 
NASD Regulation may determine to redact the language in controversy 
from reports prepared under the PDP. NASD Regulation will inform any 
requester of a report that has been redacted of the reasons for the 
redaction. NASD Regulation staff anticipates that objections to 
disclosure will be infrequent. If objections are more frequent than 
anticipated, NASD Regulation staff will consider alternative 
approaches.

III. Discussion
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    \13\ If it is impossible for a filer to amend, e.g., the firm is 
defunct or the person is no longer registered, then NASD Regulation 
also will apply the balancing test and proceed as described above.
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    The Commission finds that the proposal is consistent with the 
requirements of Section 15A of the Act \14\ and the rules and 
regulations thereunder that govern the NASD.\15\ In particular, the 
Commission finds that the proposal is consistent with Section 15A(b)(6) 
of the Act \16\ which requires, among other things, that the rules of 
an association 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.
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    \14\ 15 U.S.C. 78o-3.
    \15\ In addition, pursuant to Section 3(f) of the Act, the 
Commission has considered the proposed rule's impact on efficiency, 
competition, and capital formation. 15 U.S.C. 78c(f).
    \16\ 15 U.S.C. 78o-3(b)(6).
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    The Commission believes that the proposal will help further one of 
the primary objectives of the PDP--to help investors make informed 
choices about the individuals and firms with whom they choose to do 
business. Under the PDP, NASD Regulation will now release information 
contained on the Form U-6, which contains disciplinary and other 
information provided by SROs and state regulators. This information 
should help investors determine whether to conduct or continue to 
conduct business with a particular firm or individual. Further, the 
disclosure of this additional information may serve as a deterrent to 
fraudulent activity.
    The Commission also believes that the proposal will help clarify 
the standards NASD Regulation uses to release information on current or 
former associated persons and firms. For example, NASD Regulation has 
clarified its policy about the release of information on a former 
associated person. Under the proposed rule change, NASD Regulation will 
release information on a former associated person for a two-year period 
after the associated person's effective date of termination. This 
clarification helps balance an investor's interest in obtaining 
information about a former associated person with the former associated 
person's interest in privacy.
    In addition, the Commission believes that the automation of public 
disclosure reports should benefit investors and the NASD. For 
investors, the automation of public disclosure reports should help them 
receive information in a timelier manner, which in turn should help 
them make quicker decisions about the individuals and firms with whom 
they choose to do business. For the NASD, the automation of public 
disclosure reports should help it reduce its costs in providing these 
reports to the public.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\17\ that the proposed rule change (SR-NASD-99-45) is hereby 
approved.
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    \17\ 15 U.S.C. 78s(b)(2).


    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-3446 Filed 2-14-00; 8:45 am]
BILLING CODE 8010-01-M