[Federal Register Volume 67, Number 241 (Monday, December 16, 2002)]
[Notices]
[Pages 77119-77121]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-31591]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-46974; File No. SR-NASD-2002-113]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 Thereto by the National Association of 
Securities Dealers, Inc. Relating to the Implementation of a 
Fingerprinting Program for Nasdaq Employees and Independent Contractors

December 9, 2002.
    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 August 16, 2002, the National Association of Securities Dealers, 
Inc. (``NASD''), through its subsidiary, The Nasdaq Stock Market, Inc. 
(``Nasdaq''), filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I, II, and III below, which Items have been prepared by Nasdaq. 
Nasdaq amended the proposed rule change on September 10, 2002.\3\ The 
Commission is publishing this notice to solicit comments on the 
proposed rule change, as amended, from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See September 9, 2002, letter from Mary M. Dunbar, Vice 
President and Deputy General Counsel, Nasdaq, to Katherine A. 
England, Assistant Director, Division of Market Regulation, 
Commission (``Amendment No. 1''). In Amendment No. 1, Nasdaq added 
language to the proposed rule text to indicate that the rule applies 
only where permitted by applicable law and deleted text from the 
Purpose sections of the form and draft notice related to the 
preemption of certain state laws by Commission order.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Nasdaq is proposing to adopt NASD Rule 0140, Fingerprint-Based 
Background Checks of Nasdaq Employees and Independent Contractors, 
which will establish a program for conducting fingerprint-based 
background checks of Nasdaq employees and independent contractors. 
Nasdaq will implement the proposed rule change as soon as practicable 
following approval by the Commission. Below is the text of the proposed 
rule, as amended. Proposed rule language, as amended, is in italics.

0140. Fingerprint-Based Background Checks of Nasdaq Employees and 
Independent Contractors.

    (a) In order to enhance the physical security of the facilities, 
systems, data, and information of The Nasdaq Stock Market, Inc. 
(``Nasdaq''), it shall be the policy of Nasdaq to conduct a 
fingerprint-based criminal records check of (i) all prospective and 
current employees, (ii) all prospective and current independent 
contractors who have or are anticipated to have access to Nasdaq 
facilities for ten business days or longer, and (iii) all prospective 
and current temporary employees who have or are anticipated to have 
access to Nasdaq facilities for ten business days or longer. Nasdaq 
shall apply this policy in all circumstances where permitted by 
applicable law.
    (b) Nasdaq shall submit fingerprint cards obtained pursuant to the 
foregoing policy to the Attorney General of the United States or his or 
her designee for identification and processing. Nasdaq shall at all 
times maintain the security of fingerprint cards and information 
received from the Attorney General or his or her designee.
    (c) Nasdaq shall evaluate information received from the Attorney 
General or his or her designee in accordance with the terms of a 
written fingerprint policy and provisions of applicable law. A felony 
or serious misdemeanor conviction will be a factor in considering 
whether to hire a prospective employee, take adverse employment action 
with respect to a current employee, or deny prospective or current 
independent contractors or temporary employees access to Nasdaq's 
facilities.
    (d) A prospective employee who refuses to submit to fingerprinting 
shall be denied employment by Nasdaq, and a prospective independent 
contractor or temporary employee who refuses to submit to 
fingerprinting shall be denied access to Nasdaq facilities. A current 
employee, independent contractor, or temporary employee who refuses to 
submit to fingerprinting will be terminated following notice and being 
given three opportunities to submit.

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

    In its filing with the Commission, Nasdaq included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change, as 
amended. The text of these statements may be examined at the places 
specified in Item IV below. Nasdaq has prepared summaries, set forth in 
Sections A, B, 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
    In the wake of the September 11, 2001 terrorist attacks, Nasdaq has 
been exploring ways in which to enhance the security of the critical 
financial infrastructure that it operates. Market participants use 
Nasdaq systems to execute and report transactions in Nasdaq-listed 
securities and rely upon Nasdaq for the dissemination of quotation and 
transaction information,

[[Page 77120]]

while the capital markets have traditionally looked to Nasdaq as the 
market of choice for new listings. According to Nasdaq, 4,109 companies 
(with a market valuation of $2.9 trillion) had shares listed for 
trading on Nasdaq as of December 31, 2001; the average daily volume of 
transactions during 2001 was 1.9 billion shares valued at $44.1 
billion. Accordingly, a significant disruption in the operation of 
Nasdaq systems could have serious adverse effects on U.S. and world 
financial markets.
    Nasdaq has active and aggressive programs in place to minimize the 
risk of system disruptions, including the use of multiple computer 
facilities in separate geographic locations that are designed to 
provide redundancy and back-up. In addition, since 1999, Nasdaq has 
conducted background checks and urinalysis drug testing of all new 
employees. The background check involves verification of social 
security number, previous employment, education, credentials, and 
professional licenses, as well as a name-based criminal record check. 
The latter consists of an examination of courthouse records of counties 
where the applicant, according to his employment application, resided 
during the past seven years. Although this process constitutes a 
measure of due diligence, it is subject to evasion by applicants who 
provide false information. Moreover, it does not provide a basis for 
conducting a comprehensive nationwide search of records. As a result, 
even if an applicant with a criminal history provides accurate 
information, the search would not uncover pertinent records if the 
applicant was tried and convicted in a jurisdiction other than his 
place of residence.
    By contrast, a background check that makes use of the fingerprint 
database maintained by the Federal Bureau of Investigation (``FBI'') 
permits a nationwide search that covers federal, state, local, and 
military convictions. Accordingly, it significantly reduces the number 
of ``false negatives'' (i.e., failures to uncover pertinent criminal 
records) associated with less comprehensive searches and eliminates 
``false positives'' caused by confusion of individuals having the same 
or similar names.
    Access to the FBI's database is permitted only when authorized by 
law. Numerous federal and state laws, however, authorize employers to 
conduct fingerprint-based background checks that make use of the FBI's 
database.\4\ Notably, section 17(f)(2) of the Act \5\ and SEC Rule 17f-
2 \6\ require employees of broker-dealers, transfer agents, and 
clearing agencies to be fingerprinted and authorize self-regulatory 
organizations (``SROs'') to maintain facilities for processing and 
storing fingerprint cards and criminal record information received from 
the FBI database with respect to such cards. Ironically, section 
17(f)(2) of the Act \7\ does not require SROs to fingerprint their own 
employees. Nasdaq strongly believes, however, that a proposed rule 
change to institute a fingerprinting program for Nasdaq employees and 
independent contractors will enhance NASD's ability to perform its 
statutory obligations under section 15A of the Act \8\ and is therefore 
authorized under that section. Specifically, by allowing Nasdaq to 
conduct a more thorough background check of persons that have access to 
Nasdaq facilities, the proposed rule change will enhance Nasdaq's 
ability to identify and exclude individuals whose prior criminal 
activities may pose a threat to the security of Nasdaq operations. This 
will in turn assist NASD in carrying out the purposes of the Act, 
preventing fraudulent and manipulative acts and practices, promoting 
just and equitable principles of trade, removing impediments to and 
perfecting the mechanism of a free and open market and a national 
market system, and protecting investors and the public interest. 
Moreover, although section 17(f)(2) of the Act does not mandate the 
fingerprinting of SRO employees, it explicitly directs the Attorney 
General (i.e., the FBI) to provide SROs designated by the Commission 
with access to criminal history record information.
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    \4\ See, e.g., 42 U.S.C. 5119a (child care providers); Pub. L. 
92-544, 86 Stat. 1109, 1115 (employees of federally chartered or 
insured banks); Alaska Stat. 04.11.295 (liquor license applicants); 
Ariz. Rev. Stat. 32-122.02 (home inspectors); Cal. Bus. & Prof. Code 
6980.18 (locksmiths); Fla. Stat. 468.453 (athlete agents); Official 
Code Ga. Ann. 43-47-6 (used car dealers); Ohio Rev. Code Ann. 
3770.051 (vendors of lottery equipment).
    \5\ 15 U.S.C. 78q(f)(2).
    \6\ 17 CFR. 240.17f-2.
    \7\ 15 U.S.C. 78q(f)(2).
    \8\ 15 U.S.C. 78o-3.
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    The rule that Nasdaq is proposing is concerned with the 
administration of Nasdaq and Nasdaq believes that it might therefore be 
filed on an immediately effective basis pursuant to section 
19(b)(3)(A)(iii) of the Act \9\ and Rule 19b-4(f)(3) \10\ thereunder. 
However, Nasdaq is seeking Commission approval for the rule under 
section 19(b)(2) \11\ because Nasdaq believes that it would not be 
appropriate or practical to institute a fingerprinting program without 
an explicit determination by the Commission that the program is 
authorized under the Act. Nasdaq believes that such a determination 
will be required by the FBI as a precondition to Nasdaq obtaining an 
Originating Agency Identifier (``ORI'') number from the FBI that will 
identify Nasdaq as an entity authorized to submit fingerprints to the 
FBI.
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    \9\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \10\ 17 CFR 240.19b-4(f)(3).
    \11\ 15 U.S.C. 78s(b)(2).
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    According to Nasdaq, an act to require fingerprint-based background 
checks of SRO employees who are regularly employed in New York State 
was passed by both the New York State Assembly and Senate and signed 
into law by Governor George E. Pataki on August 20, 2002.\12\ The New 
York law also requires SROs to fingerprint independent contractors that 
provide services to them if those individuals have ``access to records 
* * * or other material or secure buildings or secure property, which 
place the security of [the SRO] at risk.'' The New York law will 
require Nasdaq to implement its proposed fingerprinting program for 
employees and some independent contractors in New York State. However, 
Commission approval of the program would still be required to implement 
the program in other states where Nasdaq has critical operations, 
especially Connecticut and Maryland.\13\
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    \12\ 2002 N.Y. Laws 453 (Aug. 20, 2002).
    \13\ Nasdaq notes that a California statute provides that 
employers in that state may not require employees to submit to 
fingerprinting as a condition of employment if the fingerprints are 
provided to a third party. Cal. Labor Code 1051. Although Nasdaq has 
a small number of California employees, they are not involved in the 
day-to-day operation of Nasdaq market systems. Accordingly, Nasdaq 
will exempt California employees from its program.
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    As reflected in the text of the proposed rule change, the program 
will apply to prospective and current employees, as well as prospective 
and current temporary employees and independent contractors who have or 
are anticipated to have access to Nasdaq facilities for ten business 
days or longer. Refusal to submit to fingerprinting will be grounds for 
termination or denial of employment or access to Nasdaq facilities. 
Information received from the FBI concerning an individual will be 
evaluated in accordance with the terms of a written fingerprint policy, 
which reflects the application of employment laws governing the use of 
information concerning criminal convictions in employment decisions. In 
accordance with such laws, a felony or serious

[[Page 77121]]

misdemeanor conviction will be a factor in considering whether to hire 
a prospective employee, take adverse employment action with respect to 
a current employee, or deny prospective or current independent 
contractors or temporary employees access to Nasdaq's facilities.
2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the provisions of section 15A(b)(2) and (b)(6) of the Act,\14\ in that 
the proposal is designed, among other things, to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, to remove the impediments to and perfect the 
mechanism of a free and open market, and, in general, to protect 
investors and the public interest. Nasdaq believes that the proposed 
rule will assist the NASD in carrying out the purposes of the Act.
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    \14\ 15 U.S.C. 78o-3(b)(2) and 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    Nasdaq does not believe that the proposed rule change, as amended, 
would 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. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding, or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    A. By order approve such proposed rule change as amended, or
    B. Institute proceedings to determine whether the proposed rule 
change, as amended, should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change, as amended, is consistent with the Act. Persons making written 
submissions should file six copies thereof with the Secretary, 
Securities and Exchange Commission, 450 Fifth Street, NW., Washington, 
DC 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-2002-113 and should be submitted by January 6, 2003.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-31591 Filed 12-13-02; 8:45 am]
BILLING CODE 8010-01-P