[Federal Register Volume 68, Number 137 (Thursday, July 17, 2003)]
[Notices]
[Pages 42444-42447]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-18065]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48161; File No. SR-NASD-2003-57]


Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc; Order Granting Approval of Proposed Rule Change and 
Amendment Nos. 1 and 2 Thereto, and Notice of Filing and Order Granting 
Accelerated Approval to Amendment No. 3 to the Proposed Rule Change 
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)

July 10, 2003.

I. Introduction

    On April 8, 2003, the National Association of Securities Dealers, 
Inc. (``NASD'' or ``Association'') filed with 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 that would 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.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

    On April 16, 2003, NASD submitted Amendment No. 1 to the proposed 
rule change.\3\ On April 30, 2003, NASD

[[Page 42445]]

submitted Amendment No. 2 to the proposed rule change.\4\ The proposed 
rule change, as amended, was published for comment in the Federal 
Register on June 4, 2003.\5\ The Commission received a comment on the 
proposal from the Association of Registration Management (``ARM'') on 
June 25, 2003.\6\ The NASD responded to this comment by amending the 
filing on July 1, 2003.\7\ The Commission received a second comment on 
June 26, 2003 \8\ and the NASD responded to this comment on July 3, 
2003.\9\ This order approves the proposed rule change, as amended. In 
addition, the Commission is publishing notice to solicit comment on and 
is simultaneously approving, on an accelerated basis, Amendment No. 3 
to the proposal.
---------------------------------------------------------------------------

    \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''), Commission, 
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, Commission, 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.''
    \5\ See Securities Exchange Act Release No. 47936 (May 28, 
2003), 68 FR 33545.
    \6\ See letter from Mario Di Trapani, President, ARM, to 
Jonathan G. Katz, Secretary, Commission (June 24, 2003) (``ARM 
Comment'').
    \7\ See letter from Patrice M. Gliniecki, Vice President and 
Deputy General Counsel, NASD, to Katherine A. England, Assistant 
Director, Division, Commission (July 1, 2003) (``Amendment No. 3'') 
(The Commission notes that the NASD inadvertently numbered Amendment 
No. 3 as Amendment No. 1).
    \8\ See letter from Dan Jamieson (``Jamieson'') to Jonathan 
Katz, Secretary, Commission (June 26, 2003) (``Jamieson Comment'').
    \9\ See e-mail from Richard E. Pullano, Associate Vice 
President/Chief Counsel Registration & Disclosure, NASD, to 
Katherine A. England, Assistant Director, Division, Commission (July 
3, 2003) (``NASD Response'').
---------------------------------------------------------------------------

II. Summary of Comments and Response to Comments

A. ARM Comment

    As stated above, the Commission received the ARM Comment on the 
proposed rule change on June 25, 2003, in which ARM made two primary 
arguments. First, ARM asserted that the information being sought by the 
introduction of questions 14D(2)(a) and (b) on the Form U-4 is 
redundant of the information already being sought by existing question 
14D on the Form U-4. Moreover, ARM argued that this addition of a new 
question would ``present a monumental task to [the securities] 
industry'' due to the sheer number of Form U-4 amendments that would be 
required. ARM noted its concern that, upon the introduction of the new 
question, ``every registered person in NASD's WebCRD database 
(approximately 650,000 individuals) would * * * immediately have an 
incomplete Form U-4 on file.'' Second, ARM argued that the expanded 
definition of statutorily disqualified person, contained in the 
Sarbanes-Oxley Act, extends to non-registered individuals as well as 
registered individuals. In order to capture non-registered persons (and 
decrease the administrative burden on member firms), ARM suggested an 
annual certification procedure in which broker-dealer employees would 
certify their answers to the proposed questions instead of adding the 
new questions to the Form U-4.

B. Amendment No. 3

    NASD responded to the ARM comment through Amendment No. 3. In 
Amendment No. 3, NASD conceded that there is an overlap between the 
information elicited by current Question 14D and proposed Question 
14D(2), but that the literal language of current Question 14D does not 
specifically require individuals to report final orders of the National 
Credit Union Administration (``NCUA'') or state credit union 
regulators. Further, NASD does not agree with ARM that it may be 
implied on the basis of the current Form U-4 definition of 
``investment-related'' that such orders should be reported under 
current Question 14D. In light of the fact that the Sarbanes-Oxley Act 
created a new set of statutory disqualifications, NASD, representatives 
of other self-regulatory organizations, and state regulators (including 
representatives of the North American Securities Administrators 
Association (``NASAA'')), made a policy decision that, although 
Question 14D currently requires firms to report most events that may 
cause an individual to become statutorily disqualified under the 
Sarbanes-Oxley Act, the forms should be amended to require firms and 
individuals to report all such information (in response to questions 
that specifically track the language of the Sarbanes-Oxley Act) in a 
new question.
    NASD disagreed with ARM's suggestion that, as an alternative to 
including these questions on the forms, NASD should adopt a rule that 
would require firms to have their employees certify annually their 
answers to the proposed questions. First, NASD stated that it does not 
believe that this approach would save time and effort, since it likely 
would require firms to establish a methodology for requesting and 
collecting this information on paper. Second, NASD noted its belief 
that firms and individuals should be required to report timely (rather 
than annually) all statutorily disqualifying events on the Forms, 
including statutorily disqualifying events pursuant to the Sarbanes-
Oxley Act.
    Also in Amendment No. 3, NASD provided an in depth discussion of 
how it intends to ease the administrative burden on firms with which 
the ARM Comment was concerned. The NASD noted that beginning July 14, 
2003, it will implement procedures with respect to filing answers to 
proposed Question 14D(2).\10\ NASD noted generally that a change to a 
disclosure question or the addition of a new disclosure question on 
Form U-4 requires the prompt filing of an amended Form U-4 only if a 
registered person is subject to an action or event that requires an 
affirmative response to the changed or new question or additional 
disclosure on detailed DRPs relating to the new or changed question. 
Firms making such amendments to Section 14 (Disclosure Questions) or 
any DRP also generally are required to complete Section 15D of the Form 
U-4 (the Individual/Applicant's Amendment Acknowledgment and Consent). 
If a registered person has not been the subject of an action or event 
that is elicited by a changed or new disclosure question, he or she 
need not answer the changed or new disclosure question until an amended 
Form U-4 filing is otherwise required (e.g., with the filing of a 
change of address, a request for a new registration category or 
license, or any new or amended responses to the questions in Section 14 
or related DRPs).
---------------------------------------------------------------------------

    \10\ In addition, NASD will publish a Notice to Members 
explaining these procedures and publish these procedures on the NASD 
Web Site.
---------------------------------------------------------------------------

    Further, the NASD elaborated that, with respect to the proposed new 
Question 14D(2), firms need to determine immediately whether their 
registered persons have been subject to an action that requires 
reporting under the new question. Firms then will be required to amend 
Forms U-4 to respond to Question 14D(2) promptly (i.e., not later than 
30 days from implementation of the new question or August 13, 2003). 
Registered persons will be required to amend their Form U-4 by August 
13, 2003 only when a firm has determined that one of its registered 
persons must answer ``yes'' to any part of Question 14D(2). Firms must 
obtain a completed Form U-4 Section 15D (the Individual/Applicant's 
Amendment Acknowledgment and Consent) in such

[[Page 42446]]

cases. These amendment filings must include completed DRP(s) covering 
the proceedings or action reported. Firms are required to maintain a 
copy, with original signatures, of these amendment filings.
    While NASD noted its appreciation that this requirement places an 
administrative burden on firms, it stated the belief that the NASD has 
taken sufficient steps to mitigate the burden. First, as a practical 
matter, NASD stated that current Question 14D elicits virtually all 
information required by the Sarbanes-Oxley Act changes with the 
exception of NCUA and state credit union regulatory proceedings or 
actions. Consequently, according to NASD, registered persons already 
should have reported most information responsive to the Sarbanes-Oxley 
Act changes, with the exception of those proceedings or actions. While 
registered persons with affirmative answers to current Question 14D 
also may be required to report an affirmative answer to new Question 
14D(2), a statistical review done by the NASD of information in the CRD 
system reflects that only about five percent of registered persons 
(approximately 3,600 individuals) have affirmative answers to current 
Question 14D. Moreover, based on preliminary discussions with the NCUA 
and state regulators, NASD noted its belief that the number of required 
amendment filings to report NCUA and state credit union regulatory 
proceedings/actions will be even smaller, involving less than one-tenth 
of one percent of registered persons. Thus, NASD attested that the 
number of Form U-4 amendments firms will be obligated to file to report 
affirmative answers to new Question 14D(2) by August 13, 2003 will be 
quite small. Firms will, however, be required to obtain Section 15D 
(the registered person's acknowledgement and consent), with original 
signatures, for these registered persons.
    Moreover, in Amendment No. 3, NASD noted that any registered person 
who has not filed an amended Form U-4 reporting credit union regulatory 
proceedings within the specified 30-day period will be deemed to have 
represented that he or she has not been the subject of any such 
proceedings. Firms will be entitled to submit amended Forms U-4 on 
behalf of such registered persons without completing Section 15D, 
provided that the amended filing does not involve any other Section 14 
Disclosure Question changes. Although firms will not be required to 
obtain an executed Section 15D from registered persons under these 
circumstances, the registered persons will be required to answer the 
new 14D(2) questions.\11\ NASD cautioned that a registered person who 
fails timely to notify his or her member firm of a reportable credit 
union regulatory proceeding will be deemed to have made a false or 
incomplete filing, irrespective of whether his or her firm has made a 
specific inquiry of its registered persons about such proceedings. In 
addition, NASD emphasized that reporting such proceedings is an 
affirmative obligation of the registered person, which is not excused 
by a firm's failure specifically to inquire as to the existence of such 
proceedings.
---------------------------------------------------------------------------

    \11\ The CRD system will process such Form U4 filings as 
follows. If a registered person has a ``yes'' answer to any question 
in Questions 14A through J in the Disclosure Section of the Form U-4 
on or after July 14, the CRD system will require that the firm 
filing an amended Form U-4 enter a response (by selecting the 
appropriate ``yes'' or ``no'' radio button) to new disclosure 
Question 14D(2) and also obtain a completed Section 15D. If those 
questions are not answered, the filing will fail the CRD system 
completeness check. For the sake of clarity, NASD notes that an 
amendment to a Form U-4 filing on or after July 14, for the purpose 
of adding a ``yes'' answer to Questions 14A through J, when 
previously there had been no ``yes'' answers, would require the firm 
filing the amendment to answer new disclosure Question 14D(2) and 
obtain a completed Section 15D.
    If a registered person does not have a ``yes'' answer to 
questions 14A through J in the Disclosure Section of the Form U4, 
the CRD system will default new disclosure Question 14D(2) with a 
``no'' response for any filings prepared for submission after 
implementation of the new questions, and the firm will not be 
required to obtain a completed Section 15D for the purposes of 
answering Question 14D(2). Form U4 amendments filed by the firm for 
such individuals will not fail the completeness check due to these 
new questions; however, by submitting the filing, firms will be 
representing that they are filing ``no'' answers to the new 
questions, unless they affirmatively change the ``no'' answer to 
``yes'' before submitting the filing. Similarly, as discussed above, 
registered persons who have not filed an amended Form U-4 reporting 
credit union regulatory proceedings within the specified 30-day 
period will be deemed to have represented that they have not been 
the subject of any such proceedings.
---------------------------------------------------------------------------

    Finally, NASD concluded in Amendment No. 3 that these procedures 
should avoid imposing on firms the unwarranted administrative burdens 
and costs associated with obtaining more than 600,000 copies of Form U-
4 Section 15D with original signatures for registered persons who have 
no reportable credit union regulatory proceedings.

C. Jamieson Comment

    The Jamieson Comment was received by the Commission on June 26, 
2003 in which Jamieson made one primary argument that was germane to 
the NASD's proposed rule change. Specifically, Jamieson questioned the 
need and rationale for the proposal to add Question 7F to the Form U-5. 
That 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 terminated individual's obligation to report the termination on the 
Form U-4 in response to current Question 14J thereon.

D. NASD Response

    The Commission received the NASD Response to the Jamieson Comment 
on July 3, 2003. NASD noted in its response that the new question 7F on 
the Form U-5 does not change the reporting obligations of either a 
broker-dealer or a registered person. Instead, the new question 
parallels Form U-4, Question 14J, relating to terminations for cause 
and will provide a firm with a specific question to answer if it has 
terminated a registered person under the circumstances identified in 
the question.
    NASD further argued that affirmative responses to proposed Question 
7F should clarify for NASD staff and terminated individuals the 
specific basis for and circumstances surrounding the termination (and 
whether it requires an affirmative answer on the corresponding Form U-4 
question). The new question also should enable firms to specifically 
identify and provide supporting details regarding certain categories of 
terminations for cause. Currently, NASD staff must rely on the reason 
for termination provided by the terminating firm, which may provide an 
adequate response regarding the reason for termination, but may not 
provide sufficient detail to allow staff or the terminated person to 
determine whether an affirmative response is required to Form U-4, 
Question 14J. Similarly, NASD stated that although current Question 7B 
on Form U-5 elicits information relating to an internal review 
conducted by a firm relating to certain violations, fraud, wrongful 
taking of property, or failure to supervise, an affirmative answer to 
that question reports only that a terminated person was under internal 
review for those particular circumstances or conduct either at the time 
of termination or after; it does not, however, specifically identify 
whether the registered person was terminated for the reasons specified 
in the question.

III. Discussion and Commission's Findings

    The Commission has carefully reviewed the proposed rule change, the 
comments, and the NASD's responses thereto, and finds that the proposed 
rule change, as amended, is consistent with the Act and the rules and 
regulations

[[Page 42447]]

promulgated thereunder applicable to a national securities 
association,\12\ and, in particular, with the requirements of Section 
15A \13\ of the Act. Specifically, the Commission finds that approval 
of the proposed rule change is consistent with Section 15A(b)(6) \14\ 
of the Act because it is designed to promote just and equitable 
principles of trade, and, in general, to protect investors and the 
public interest. The Commission finds that the proposed rule change, as 
amended, is reasonably designed to accomplish these ends by eliciting 
the reporting of events that may cause an individual to be subject to a 
statutory disqualification as that definition has been expanded by the 
Sarbanes-Oxley Act and, generally, making changes to the Forms U-4 and 
U-5 that should increase the accuracy and completeness of the 
information reported on the forms.
---------------------------------------------------------------------------

    \12\ 15 U.S.C. 78f(b). In approving this proposal, the 
Commission has considered the proposed rule's impact on efficiency, 
competition and capital formation. 15 U.S.C. 78c(f).
    \13\ 15 U.S.C. 78o-3.
    \14\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

    The Commission has carefully considered the relevant issues raised 
by ARM's and Jamieson's comments and is not persuaded by their 
arguments. With respect to the concerns raised in the ARM Comment, the 
Commission believes that the NASD has sufficiently responded through 
Amendment No. 3. Specifically, the Commission believes that the policy 
decision made in connection with the adoption of proposed Questions 
14D(2)(a) and (b) to the Form U-4 was appropriate. In spite of the fact 
that certain overlap may exist between proposed Questions 14D(1) and 
14D(2), the Commission agrees that the creation of a new set of 
statutory disqualifications by the U.S. Congress through the Sarbanes-
Oxley Act is significant and warrants an additional question on the 
Form U-4 to assure accurate and complete reporting. Likewise, the 
Commission believes that an annual certification process would not be 
appropriate in this case.
    In addition, the Commission believes that Amendment No. 3, 
regarding the implementation of the proposed rule change, proposes a 
fair and reasonable balance between the administrative burden that will 
be imposed upon member firms and the benefit that the proposed rule 
change will produce. The NASD's estimates with respect to the 
relatively low number of firms and representatives that will likely be 
affected by the new questions to be persuasive.
    The Commission believes that the NASD has addressed the concerns 
raised in the Jamieson Comment. The Commission believes it is important 
for NASD staff and terminated individuals to be able to determine the 
specific basis for and circumstances surrounding the termination (and 
whether it requires an affirmative answer on the corresponding Form U-4 
question). The Commission also considers it significant that, although 
current Question 7B on Form U-5 elicits information relating to an 
internal review conducted by a firm, it does not specifically identify 
whether the registered person was terminated for the reasons specified 
in the question. Proposed Question 7F should provide this information.
    Finally, the Commission, pursuant to Section 19(b)(2) \15\ of the 
Act, finds good cause for approving Amendment No. 3 prior to the 
thirtieth day after the date of publication of notice thereof in the 
Federal Register. As discussed above, the Commission believes that the 
NASD has responded to the concerns raised in the ARM Comment and has 
struck a fair and reasonable balance between the burden that the 
proposed rule change will impose upon member firms and the benefit that 
the proposed rule change will produce. In addition, the Commission 
notes that granting accelerated approval to Amendment No. 3 will 
facilitate the timely implementation of the proposed rule change and 
facilitate the NASD's meeting the pre-scheduled CRD systems change 
implementation date for these forms changes.
---------------------------------------------------------------------------

    \15\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning Amendment No. 3, including whether the amendment 
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 August 7, 2003.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\16\ that the proposed rule change (SR-NASD-2003-57), as modified 
by Amendment Nos. 1 and 2, be, and it hereby are, approved, and that 
Amendment No. 3 be, and hereby is, approved on an accelerated basis.
---------------------------------------------------------------------------

    \16\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\17\
---------------------------------------------------------------------------

    \17\ 17 CFR 200.30-2(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-18065 Filed 7-16-03; 8:45 am]
BILLING CODE 8010-01-U