[Federal Register Volume 68, Number 157 (Thursday, August 14, 2003)]
[Notices]
[Pages 48653-48654]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-20697]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48294; File No. SR-NASD-2003-122]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the National Association of Securities Dealers, Inc. Relating 
to Proposal To Conduct Background Verification and Charge Application 
Fee for NASD Neutral Roster Applicants

August 6, 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 August 5, 2003, the National Association of Securities Dealers, Inc. 
(``NASD''), through its wholly owned subsidiary, NASD Dispute 
Resolution, Inc. (``NASD Dispute Resolution'') filed with the 
Securities and Exchange Commission (``Commission'') the proposed rule 
change as described in Items I, II, and III below, which Items have 
been prepared by NASD Dispute Resolution. The Commission is publishing 
this notice to solicit comments on the proposed rule change from 
interested persons.
---------------------------------------------------------------------------

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

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    NASD Dispute Resolution proposes to conduct background verification 
and charge an application fee for NASD neutral roster applicants. NASD 
does not propose any textual changes to the By-Laws or Rules of NASD.

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 Dispute Resolution 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 IV below. NASD Dispute Resolution 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
    NASD Dispute Resolution proposes to begin conducting background 
verifications of all new arbitrator applicants, and to assess an 
application fee to cover the cost of the verifications.

Background

    NASD maintains a pool of approximately 7000 available arbitrators. 
Currently, arbitrator applicants submit biographical profile forms, 
together with two letters of reference. The biographical profile forms 
require applicants to provide detailed information on their business 
and employment histories, education, training, possible conflicts, 
experience, expertise, associations with industry members, and other 
matters. The application also requires a narrative background 
information statement in which applicants are asked to explain why they 
believe their experience and knowledge would benefit the process. 
Attorneys and accountants are further directed to provide specific 
details about their practices. A copy of the current NASD arbitrator 
application is attached as Exhibit 2 to the proposed rule change.
    Arbitrator information is entered into NASD's database and is 
provided to parties in the form of a disclosure report during the 
arbitrator selection process. Arbitrators must update this biographical 
information on a regular basis. NASD sends frequent reminders to 
arbitrators about the importance of this obligation, especially after 
they are notified regarding possible service as an arbitrator. NASD 
requires arbitrators in each case to affirm that they have reviewed 
their disclosure report and that it is accurate, and to complete a 
disclosure checklist attached to the oath. NASD provides each 
arbitrator on a panel with the co-panelists' biographical profiles in 
order to facilitate peer reviews for accuracy.\3\
---------------------------------------------------------------------------

    \3\ For additional information on procedures designed to reveal 
potential conflicts of interest, see Professor Michael A. Perino, 
Report to the SEC Regarding Arbitrator Conflict Disclosure 
Requirements in NASD and NYSE Securities Arbitrations (Nov. 12, 
2002), available on the Commission's Website, Market Regulation 
page, at: http://www.sec.gov/pdf/arbconflict.pdf.
---------------------------------------------------------------------------

    In addition to gathering the above information, NASD currently 
checks records on the Central Registration Depository (CRD) for 
arbitrator applicants who have been registered with NASD, most of whom 
would be categorized as ``non-public'' arbitrators under NASD Rule 
10308(a)(4). NASD currently does not verify any of the information 
provided by arbitrator applicants who do not have CRD records, most of 
whom would be classified as ``public'' arbitrators under NASD Rule 
10308(a)(5).

Proposed Rule Change

    NASD proposes to expand its verification of background information 
to cover all arbitrator applicants. NASD believes this will provide 
additional protection to parties using the Dispute Resolution forum, 
raise the standards of the neutral roster, and enhance investor 
confidence in the integrity of the forum.
    Specifically, NASD Dispute Resolution has identified a vendor to 
provide the following verification services:
    [sbull] Criminal check in the county of the applicant's residence;
    [sbull] Federal criminal check;
    [sbull] Employment verification; and
    [sbull] Professional license verification.
    The verification fee will be $80.00 per application. This fee will 
cover the vendor's expected charge for verification of each 
application, with the understanding that the actual work required to 
verify each application will vary. For example, some applicants will 
have only one employer over the past ten years, and some will have two 
or more. NASD believes that having a single, reasonable fee for 
background verification will be more practical administratively than 
charging different fees that vary depending on each applicant's 
background. For this amount, the vendor will perform county and federal 
criminal record checks; verify any professional licenses; and check the 
last employer or, if the applicant has been employed for fewer than ten 
years by the same employer, then the last two employers. To keep the

[[Page 48654]]

fee reasonable, NASD will assume that verification of professional 
licenses provides an indirect check on the applicant's education, since 
licensing authorities generally verify an applicant's educational 
history. If the applicant does not have a professional license, 
however, then the vendor will substitute verification of the last 
degree awarded.
    The background verification fee will be charged for new arbitrator 
applications that are received by NASD after the effective date of the 
proposed rule change. It will not apply to arbitrators currently on 
NASD's arbitrator roster who wish to update information they supplied 
previously. Applications received after the effective date will not be 
processed until NASD receives the proper fee.
    NASD Dispute Resolution represents that the effective date of this 
proposal will be the first business day of the first month immediately 
following Commission approval of the proposal.
2. Statutory Basis
    NASD Dispute Resolution believes that the proposed rule change is 
consistent with the provisions of Section 15A(b) of the Act,\4\ in 
general, and furthers the objectives of Section 15A(b)(6),\5\ in 
particular, which requires, among other things, that NASD'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. NASD believes that verifying 
background information and credentials for arbitrator applicants will 
protect investors and the general public and enhance the integrity of 
the arbitration process.
---------------------------------------------------------------------------

    \4\ 15 U.S.C. 78o-3(b)
    \5\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    NASD Dispute Resolution 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, as amended.

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 \6\ 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:
---------------------------------------------------------------------------

    \6\ The NASD withdrew its request for accelerated approval and a 
shortened comment period. Telephone call between Jean Feeney, NASD 
Dispute Resolution, and Florence Harmon, Senior Special Counsel, 
Division of Market Regulation, Commission, on August 6, 2003.
---------------------------------------------------------------------------

    A. by order approve such proposed rule change, or
    B. institute proceedings to determine whether the proposed rule 
change 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 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-2003-122 and 
should be submitted by September 4, 2003.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\7\
---------------------------------------------------------------------------

    \7\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-20697 Filed 8-13-03; 8:45 am]
BILLING CODE 8010-01-P