[Federal Register Volume 68, Number 190 (Wednesday, October 1, 2003)]
[Notices]
[Pages 56661-56662]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-24865]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48541; File No. SR-NASD-2003-122]


Self-Regulatory Organizations; Order Approving 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

September 25, 2003.
    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''), 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 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.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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    The Commission published the proposed rule change for comment in 
the Federal Register on August 14, 2003.\3\ The Commission received no 
comments relating to the proposal. This order approves the proposed 
rule change.
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    \3\ See Securities Exchange Act Release No. 48294 (August 6, 
2003), 68 FR 48653 (``Notice of Proposal'').
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    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.
    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

[[Page 56662]]

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.\4\
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    \4\ 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 Web site, Market Regulation 
page, at: http://www.sec.gov/pdf/arbconflict.pdf.
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    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).
    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.\5\
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    \5\ See Notice of Proposal, supra note 3.
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    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.\6\ 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 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.
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    \6\ Id.
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    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 October 1, 2003.\7\
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    \7\ Id.
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    The Commission finds that the proposed rule change is consistent 
with the provisions of section 15A(b) of the Act,\8\ in general, and 
furthers the objectives of section 15A(b)(6),\9\ 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. The Commission 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.
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    \8\ 15 U.S.C. 78o-3(b)
    \9\ 15 U.S.C. 78o-3(b)(6).
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    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\10\ that the proposed rule change (SR-NASD-2003-122) is approved.
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    \10\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-24865 Filed 9-30-03; 8:45 am]
BILLING CODE 8010-01-P