[Federal Register Volume 68, Number 107 (Wednesday, June 4, 2003)]
[Notices]
[Pages 33545-33548]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-13938]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-47936; File No. SR-NASD-2003-57]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change, Amendment No. 1, and Amendment No. 2 Thereto by the National
Association of Securities Dealers, Inc. Relating to Revisions to the
Uniform Application for Securities Industry Registration or Transfer
(Form U-4) and Uniform Termination Notice for Securities Industry
Registration (Form U-5)
May 28, 2003.
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 April 8, 2003, the National Association of Securities Dealers, Inc.
(``NASD'' or ``Association'') 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 NASD. On April 16, 2003, NASD submitted Amendment No. 1 to the
proposed rule change.\3\ On April 30, 2003, NASD submitted Amendment
No. 2 to the proposed rule change.\4\ 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 letter from Patrice M. Gliniecki, Vice President and
Deputy General Counsel, NASD, to Katherine A. England, Assistant
Director, Division of Market Regulation (``Division''), SEC, dated
April 16, 2003 (``Amendment No. 1''). In Amendment No. 1, NASD
stated that the rule filing would be effective on July 14, 2003,
instead of June 30, 2003.
\4\ See letter from Patrice M. Gliniecki, Vice President and
Deputy General Counsel, NASD, to Katherine England, Assistant
Director, Division, SEC, dated April 29, 2003 (``Amendment No. 2'').
In Amendment No. 2, NASD amended the filing to correct typographical
errors on pages 51 of 100 and 68 of 100 of the filing. On page 51 of
100, the NASD added the following language to renumbered question
14D(1)(e): ``denied, suspended, or revoked your registration license
or.'' On page 68 of 100, the NASD eliminated the word ``or'' before
``commodities exchange.''
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
NASD is proposing to revise the Uniform Application for Securities
Industry Registration or Transfer (``Form U-4'') and Uniform
Termination Notice for Securities Industry Registration (``Form U-5'')
to: (1) Add disclosure questions to the ``Regulatory Disciplinary
Actions'' subsection of section 14 (Disclosure Questions) of the Form
U-4 to elicit information regarding events that might cause a person to
be subject to a statutory disqualification as a result of additional
categories of statutory disqualification in the Act created by passage
of the Sarbanes-Oxley Act of 2002 (``Sarbanes-Oxley Act''); (2) add a
Disclosure Reporting Page (``DRP'') and a question to the Form U-5 that
parallels the Form U-4 DRP relating to terminations for cause; (3)
streamline the language associated with questions on the Form U-4
relating to fingerprinting requirements; and (4) make certain
technical, clarifying, and conforming changes to facilitate accurate
reporting and filing.
The text of the proposed rule change and the Exhibits related
thereto are available at the principal offices of NASD and at the
Commission.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, NASD included statements
concerning the purpose of and the 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 IV below. NASD 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 \5\
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\5\ The NASD requested that the Commission make certain non-
substantive organizational changes to the Purpose section (and the
corresponding numbered introductory text throughout the notice). In
addition, the NASD requested that the Commission include footnotes
in the notice that specifically provide the new definitions for the
following new defined Form U-4 terms: (1) ``Affiliated Firm;'' (2)
``Federal Banking Agency;'' and (3) ``Final Order.'' Telephone
conference between Shirley H. Weiss, Office of General Counsel, NASD
Regulation, Richard E. Pullano, Chief Counsel and Associate
Director, CRD/Public Disclosure, NASD Regulation, Elizabeth Badawy,
Senior Policy Liaison, Division, Commission, and Christopher B.
Stone, Special Counsel, Division, Commission (May 22, 2003).
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The Form U-4 is the Uniform Application for Securities Industry
Registration or Transfer. Representatives of broker-dealers and
investment advisers must use this form to become registered in the
appropriate jurisdictions and/or with appropriate self-regulatory
organizations (``SROs''). The Form U-5 is the Uniform Termination
Notice for Securities Industry Registration. Broker-dealers and
investment advisers must use this form to terminate registration of an
individual in the various SROs and jurisdictions. (Form U-4 and Form U-
5 are together hereinafter referred to as the ``Forms.'')
The proposed revisions to the Forms would (1) Add disclosure
questions to the ``Regulatory Disciplinary Actions'' subsection of
Section 14 (Disclosure Questions) of the Form U-4 to elicit information
regarding events that might cause a person to be subject to a statutory
disqualification as a result of additional categories of statutory
disqualification in the Act created by passage of the Sarbanes-Oxley
Act; (2) add a DRP and a question to the Form U-5 that parallels the
DRP and Form U-4 question relating to terminations for cause; (3)
streamline the language associated with questions on the Form U-4
relating to fingerprinting requirements; and (4) make certain
technical, clarifying, and conforming changes on the Forms to
facilitate accurate reporting.\6\
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\6\ On April 6, 2003, the North American Securities
Administrators Association, Inc. (''NASAA'') voted to approve the
proposed listed Forms revisions at its Membership meeting.
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[[Page 33546]]
New Disclosure Questions Required by Enactment of the Sarbanes-Oxley
Act
Section 604 of the Sarbanes-Oxley Act amended the Act by adding new
categories of ``statutory disqualification.'' Under the expanded
definition, members and their associated persons may be subject to a
statutory disqualification (i.e., may be required to obtain regulatory
approval before becoming a member of NASD or becoming associated with
an NASD member) if they are subject to certain orders issued by a state
securities commission or state insurance commissioner (or any agency or
officer performing like functions); state authorities that supervise or
examine banks, savings associations, or credit unions; an appropriate
federal banking authority, or the National Credit Union Administration.
Specifically, persons (including members) may be subject to a statutory
disqualification based on orders issued by the above agencies that (1)
bar a person from association or from engaging in the business of
securities, insurance, banking, savings association activities, or
credit union activities or (2) are based on violations of any laws or
regulations that prohibit fraudulent, manipulative, or deceptive
conduct.\7\
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\7\ Section 15(b)(4)(H) of the Act, 15 U.S.C. 78o(b)(4)(H).
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The Form U-4 has historically been the vehicle for the reporting of
events that may cause a person to become subject to statutory
disqualification. NASD generally takes the lead in amending the Forms.
Accordingly, with the concurrence of a working group of regulators,
including state regulators, representatives of other SROs, and SEC
observers, NASD is proposing to amend section 14 (Disclosure Questions)
of the Form U-4 to elicit reporting of regulatory actions that may now
make individuals subject to a statutory disqualification under the
expanded definition of ``statutory disqualification'' in the Act
created by passage of the Sarbanes-Oxley Act.
The proposed rule change renumbers current Regulatory Action
Disclosure Question 14D on the Form U-4 as Question 14D(1), adds
Question 14D(2) to mirror the language in section 15(b)(4)(H) of the
Act,\8\ and modifies the ``Regulatory Action DRP'' on the Forms. To aid
in reporting events under Question 14D(2), NASD proposes amending the
``Specific Instructions'' section of the Form U-4 with respect to
section 14 (Disclosure Questions). NASD proposes adding two new defined
terms, ``final order'' \9\ and ``federal banking agency,'' \10\ to the
``Explanation of Terms'' section of the Form U-4. NASD also proposes
amending the ``Regulatory Action'' DRP on the Form U-4 to aid in
reporting events required to be reported pursuant to the Sarbanes-Oxley
Act.
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\8\ Id.
\9\ The new term ``final order'' is to be defined in the Form U-
4 as follows: FINAL ORDER, for purposes of Question 14D(2), means a
written directive or declaratory statement issued by an appropriate
federal or state agency (as identified in Question 14D(2)) pursuant
to applicable statutory authority and procedures, that constitutes a
final disposition or action by that federal or state agency.
\10\ The new term ``federal banking agency'' is to be defined in
the Form U-4 as follows: FEDERAL BANKING AGENCY shall include any
Federal banking agency as defined in Section 3 of the Federal
Deposit Insurance Act (12 U.S.C. 1813(q)).
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Form U-5 DRP and Question Addition Relating to Terminations for Cause
NASD proposes adding to the Form U-5 a new disclosure question
(Question 7F) and corresponding DRP to mirror Question 14J on the Form
U-4. This question would allow firms to report that an individual was
terminated after allegations of certain violations, fraud, wrongful
taking of property, or failure to supervise, and would further clarify
the individual's obligation to report the termination on the Form U-4.
Currently, NASD staff must rely on the reason for termination or a
firm-initiated internal review as reported (by the former employing
firm) on an individual's Form U-5 to determine whether that individual
is required to answer Question 14J (on the Form U-4) affirmatively. The
new Question 7F on the Form U-5 should clarify for NASD staff and
terminated individuals the basis for and circumstances surrounding the
termination (and whether it requires an affirmative answer on the
corresponding Form U-4 question) and will enable firms appropriately to
identify and provide supporting details regarding terminations for
cause. Similarly, NASD proposes adding ``resign or resigned'' as an
explained term on the Form U-5 to parallel the same term on the Form U-
4 for purposes of the new Question 7F.
Modifications to the Form U-4 Relating to Fingerprinting Requirements
NASD proposes to streamline the language associated with questions
under section 2 (Fingerprint Information) and section 6 (Registration
Requests with Affiliated Firm) on the Form U-4 to clarify
fingerprinting requirements, including electronic filing
representations, exceptions to the fingerprint requirement, and
fingerprint requirements for investment adviser representative only
applicants. In conjunction with the proposed changes relating to the
fingerprint questions, NASD is proposing to amend the ``Specific
Instructions'' section of the Form U-4 with respect to section 2
(Fingerprint Information) and Section 6 (Registration Requests with
Affiliated Firms).
Under section 2 (Fingerprint Information), NASD proposes to modify
the ``Electronic Filing Representation'' subsection to address two
situations that are not adequately covered by the current language. The
first involves a firm's submitting fingerprint results on behalf of an
individual whose fingerprints were processed through another SRO, in
lieu of submitting fingerprint cards. The second occurs when a firm is
seeking registration for an individual who (1) is currently employed by
the firm (usually in an unregistered capacity) and (2) previously has
been fingerprinted (either through NASD or another SRO).
The current electronic filing representation states that the firm
is submitting or will promptly submit fingerprint cards as required by
applicable SRO rules. In the two situations described above, firms will
not be submitting fingerprint cards contemporaneously with, or within
30 days of, filing a Form U-4. The proposed language will allow firms
and individuals to represent that the filing firm has continuously
employed the individual since the last submission of a fingerprint card
to NASD (and therefore is not required to resubmit a card at this time)
or has continuously employed the individual since the individual had
his or her fingerprints processed through another SRO, and the
individual will submit (or has submitted) the processed results to the
Central Registration Depository (``CRD'') system.
Also, under section 2 (Fingerprint Information), NASD proposes to
modify the ``Exceptions to the Fingerprint Requirement'' subsection.
Currently, firms can claim an exception to the fingerprint requirement
by affirming that the individual has been continuously employed by the
filing firm in an unregistered capacity (and had previously submitted a
fingerprint card in connection with that employment) or meets one or
more exemptions under SEC Rule 17f-2.\11\ The proposed modification to
the ``Exceptions to the Fingerprint Requirement'' questions would allow
a firm to select the specific permissive exemption under SEC Rule 17f-
2(a)(1)(i)
[[Page 33547]]
and/or (a)(1)(iii).\12\ Additional proposed changes to section 2
(Fingerprint Information) will clarify fingerprint filing requirements
for investment adviser representative only applicants.
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\11\ 17 CFR 240.17f-2.
\12\ SEC Rule 17f-2, 17 CFR 240.17f-2, governs the
fingerprinting requirements of securities personnel. SEC Rule 17f-
2(a)(1)(i), 17 CFR 240.17f-2(a)(1)(i), permits an exemption for
persons who are not engaged in the sale of securities; do not
regularly have access to the keeping, handling, or processing of
securities, monies, or books and records; and do not have
supervisory responsibility over persons engaged in such activities.
SEC Rule 17f-2(a)(1)(iii), 17 CFR 240.17f-2(a)(1)(iii), generally
exempts the partners, directors, officers, and employees of a
broker-dealer that is engaged exclusively in the sales of certain
securities, such as variable contracts, limited partnership
interests, and unit investment trusts.
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Individuals use the Form U-4 to register with states in an
investment adviser representative capacity (shown as ``RA'' on the Form
U-4). Some states have advised NASD that individuals are confused about
which radio button \13\ to select when applying solely for registration
as an investment adviser. In some cases, these individuals have
previously submitted a fingerprint card for registration with a broker-
dealer. NASD proposes to amend the ``Investment Adviser Representative
Only Applicants'' section by adding additional instructions under the
heading ``Fingerprint Information for Affiliated Firms'' that will
explain the fingerprint filing requirements for these applicants.
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\13\ A ``radio button'' is a navigation and selection device
that allows a filer to select a particular option in an electronic
filing environment.
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The proposed language will clarify the circumstances under which an
individual may need to file a fingerprint card when submitting an
application for state licensure as an investment adviser representative
notwithstanding having previously submitted a fingerprint card with an
unaffiliated broker-dealer. The proposed language will also address
situations in which an investment adviser representative previously has
satisfied a state fingerprint requirement by allowing the
representative to make that representation on the Form U-4.\14\
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\14\ This addition should be particularly helpful to investment
adviser representatives who became licensed in a jurisdiction
through the submission of a hard copy Form U-4 before that
jurisdiction accepted electronic filings via the Investment Adviser
Registration Depository and who are now being ``transitioned'' onto
an electronic system via an electronically filed Form U-4 amendment.
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Under section 6 (Registration Requests With Affiliated Firms) of
the Form U-4, NASD is proposing to add a fingerprint question to
section 6 (Registration Requests with Affiliated Firms) on the Form U-4
to create appropriate options for individuals requesting new
registrations with a firm affiliated with the filing firm.\15\ The
proposed ``Electronic or Other Filing Representation'' subsection will
provide three additional radio buttons. Filers can select the current
standard representation (i.e., ``I am submitting, have submitted, or
promptly will submit to the appropriate SRO a fingerprint card * *
*''). In the alternative, the proposed representations would enable the
individual to indicate that (1) he or she has been employed
continuously by the filing firm since the last submission of a
fingerprint card and he or she is not required to resubmit a
fingerprint card; or (2) the individual has been employed continuously
by the filing firm and his or her fingerprints have been processed by
an SRO other than NASD and the individual is submitting, has submitted,
or promptly will submit the processed results for posting to the CRD.
Section 6 (Registration Requests With Affiliated Firms) will also
contain a radio button that allows the applicant to select an exemption
to the fingerprint requirement pursuant to SEC Rule 17f-2.\16\
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\15\ The new term ``Affiliated Firm'' is to be defined in the
Form U-4 as follows: AFFILIATED FIRM means a broker-dealer under
common ownership or control with the filing firm.
\16\ 17 CFR 240.17f-2.
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Conforming Changes
(1) NASD proposes replacing all references to ``NASD Regulation''
or ``NASD Regulation, Inc.'' with ``NASD'' consistent with NASD's
current corporate structure. NASD also proposes changing ``U-4'' to
``U4'' and ``U-5'' to ``U5.''
(2) NASD proposes making grammatical and other modifications that
will make the Form U-4 and Form U-5 more consistent and better clarify
the disclosure information that is required to be reported on the
Forms. For example, NASD proposes rewording the summary field of the
DRPs on the Form U-4 and Form U-5 to emphasize that those fields are
optional for comments by representatives and firms, respectively.
(3) NASD proposes modifying the Customer Complaint DRP on both
Forms to distinguish the fields that are required for reporting a
customer complaint, arbitration and/or litigation. The proposed changes
add instructions and rearrange the questions in a more logical order;
however, the content of the customer complaint disclosure question and
DRP fields will not change.
(4) NASD proposes revising the language in Question 14F (on Form U-
4) to clarify the intent of the reporting obligation.\17\
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\17\ Currently, Question 14F asks, ``Has your authorization to
act as an attorney, accountant or federal contractor ever been
revoked or suspended?'' The proposed Question 14F asks, ``Have you
ever had an authorization to act as an attorney, accountant or
federal contractor that was revoked or suspended?''
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(5) NASD proposes changes to the current hair and eye color codes
to match the codes used by the Federal Bureau of Investigation's
fingerprint system.
(6) NASD proposes other consistency changes that relate to bolding
or highlighting certain instructions in the DRPs to facilitate
appropriate reporting on the Forms.
2. Statutory Basis
NASD believes that the proposed rule change is consistent with the
provisions of section 15A(b)(6) \18\ of the Act, which requires, among
other things, that the Association's rules 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. NASD believes that the proposed rule change is
designed to accomplish these ends by making changes to the Forms that
would (1) add disclosure questions to elicit reporting of events that
may cause a person to be subject to a statutory disqualification as a
result of the expansion of the federal definition of statutory
disqualification based on the enactment of the Sarbanes-Oxley Act; (2)
add a DRP and a question to the Form U-5 (new Question 7F) that
parallels Question 14J on the Form U-4 DRP relating to terminations for
cause; (3) streamline the language associated with questions on the
Form U-4 relating to fingerprinting requirements; and (4) make other
technical, clarifying, and conforming changes that are intended to
facilitate accurate reporting.
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\18\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition
NASD 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.
[[Page 33548]]
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 NASD 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-2003-57 and should be submitted by June 25, 2003.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\19\
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\19\ 17 CFR 200.30-3(a)(12).
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J. Lynn Taylor,
Assistant Secretary.
[FR Doc. 03-13938 Filed 6-3-03; 8:45 am]
BILLING CODE 8010-01-P