[Federal Register Volume 69, Number 33 (Thursday, February 19, 2004)]
[Notices]
[Pages 7833-7836]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-3539]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49224; File No. SR-NASD-2003-192]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change and Amendment No. 1 Thereto by 
the National Association of Securities Dealers, Inc. Relating to 
Section 4 of Schedule A to the NASD By-Laws

February 11, 2004.
    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 December 22, 2003, the National Association of Securities Dealers, 
Inc. (``NASD'') submitted to 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. On January 29, 
2004, NASD submitted Amendment No. 1 to the proposed rule change.\3\ 
NASD has designated the proposed rule change as ``establishing or 
changing a due, fee, or other charge'' under section 19(b)(3)(A) of the 
Act,\4\ and Rule 19b-4(f)(2) thereunder,\5\ which renders the proposal 
effective upon filing with the Commission. 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 Shirley H. Weiss, Associate General Counsel, 
NASD, to Katherine A. England, Assistant Director, Division of 
Market Regulation, Commission, dated January 29, 2004 (``Amendment 
No. 1''). In Amendment No. 1, NASD amended the discussion of the 
purpose of the proposed rule change (i) to correct a reference to 
the NASD By-Laws and (ii) to include a discussion of NASD's multi-
pronged program to help ensure that members make required 
disclosures on Forms U4 and U5 in a timely manner.
    \4\ 15 U.S.C. 78s(b)(3)(A).
    \5\ 17 CFR 240.19b-4(f)(2).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    NASD is proposing to amend Section 4 of Schedule A to the NASD By-
Laws to establish a late fee to be assessed against NASD members that 
fail timely to pay their yearly renewal fees to the Central 
Registration Depository (``CRD[reg]'' or ``Web CRDSM'').\6\ 
The

[[Page 7834]]

proposed late fee would be operative on March 8, 2004. The text of the 
proposed rule change is set forth below. Proposed new language is in 
italics; proposed deletions are in [brackets].
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    \6\ The Commission notes that NASD filed the proposed rule 
change with an incorrect reference to section 4(b) of the Schedule A 
to the NASD By-Laws. In this instance, because the error was 
technical in nature, the Commission did not require NASD to file an 
amendment to the proposed rule change. In the future, the Commission 
expects that NASD will carefully review proposed rule changes before 
filing them with the Commission to ensure their accuracy.
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* * * * *

Schedule A to NASD By-Laws

    Assessments and fees pursuant to the provisions of Article VI of 
the By-Laws of NASD shall be determined on the following basis.
* * * * *

Section 4--Fees

    (a) through (l) No change.
    (m) NASD shall assess each member a fee of $10 per day, up to a 
maximum of $300, for each day that a new disclosure event or a change 
in the status of a previously reported disclosure event is not timely 
filed as required by NASD on an initial Form U5, an amendment to a Form 
U5, or an amendment to a Form U4, with such fee to be assessed starting 
on the day following the last date on which the event was required to 
be reported.
* * * * *

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 basis for the proposed rule change, as 
amended, 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
    The purpose of the proposed rule change, as amended, is to amend 
Section 4 of Schedule A to the NASD By-Laws to establish a late fee of 
$10 per day, up to a maximum of $300, to be assessed against members 
that fail timely to report a new disclosure event or a change in the 
status of a disclosure event that was previously reported on an initial 
Form U5, an amendment to a Form U5, or an amendment to a Form U4. This 
fee would be assessed starting on the day following the last day on 
which the event was required to be reported. As further detailed below, 
the proposed rule change, as amended, is effective immediately upon 
filing and would become operative on March 8, 2004. As more fully 
explained below, NASD proposes to provide a six-month transition period 
starting on March 8, 2004, and ending on September 10, 2004, during 
which time NASD would waive the late fee for the first 10 days the 
filing is late, provided the filing is made during those 10 days. NASD 
represents that disclosure events, in this context, generally refer to 
events that require affirmative answers to the questions on Forms U4 
(``Uniform Application for Securities Industry Registration or 
Transfer'') and U5 (``Uniform Termination Notice for Securities 
Industry Registration'') that elicit information about criminal 
actions, regulatory disciplinary actions, civil judicial actions, 
customer complaints, terminations, and financial matters (currently, 
Questions 14A-M on Form U4 and Questions 7A-F on Form U5). Disclosure 
events must be reported either 30 days or 10 days after the member 
learns of the triggering event, depending on the type of information to 
be reported. NASD represents that, with respect to the Form U4, Article 
5, section 2(c) of the NASD By-Laws requires all Forms U4 filed with 
NASD to be kept current at all times by supplementary amendments that 
must be filed with NASD not later than 30 days after learning of the 
facts or circumstances giving rise to a reporting obligation. If such 
filing involves a statutory disqualification as defined in section 
3(a)(39) and Section 15(b)(4) of the Act, such amendment shall be filed 
not later than 10 days after such disqualification occurs.
    With respect to the Form U5, a member is required under Article V, 
Section 3(a) of the NASD By-Laws to give notice of the termination of a 
registered person not later than 30 days following the termination of 
the person's association with the member. Article V, Section 3(b) 
requires members to file an amendment to the Form U5 in the event that 
the member learns of facts or circumstances causing any information in 
the Form U5 to become inaccurate or incomplete, not later than 30 days 
after the member learns of the facts or circumstances giving rise to 
the amendment.\7\
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    \7\ Examples of events that trigger a reporting requirement 
include: notice of an NASD decision or order containing findings 
that a registered person violated NASD rules or receipt of a 
customer complaint or arbitration claim that meets the reporting 
criteria on Forms U4 or U5.
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    Upon submission of a late disclosure filing, CRD[reg] 
would calculate the late fee and debit the firm's CRD[reg] 
account $10 per day, up to a maximum charge of $300.\8\ NASD represents 
that the proposed rule change is part of a multi-pronged program to 
help ensure that members make required disclosures on Forms U4 and U5 
in a timely manner. In addition to the proposed late filing fee, NASD 
represents that it will be issuing a Notice to Members asking members 
to comment on two proposals. The first proposal concerns amending the 
Minor Rule Violation Plan to clarify and expand the provisions 
governing the late filing of required registration information. The 
second proposal concerns adopting a rule that would enable NASD to 
place a broker in an inactive status if the broker and his or her firm 
failed to respond to an NASD notice that a disclosure event is required 
to be reported or updated. Further, NASD represents that its staff is 
implementing enhanced internal processes for reviewing all Rule 3070 
filings and customer-related arbitration claims to determine whether 
firms have made required disclosures on Forms U4 and U5 in a timely 
manner. NASD represents that those firms that have demonstrated a 
pattern of late filings will be subject to disciplinary actions.
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    \8\ NASD recognizes that members may be prevented from filing 
timely disclosures if their registered persons fail to advise them 
of certain reportable information to which the registered persons, 
and not the members, are privy, such as criminal charges or 
bankruptcies. In such cases, NASD would consider the facts and 
circumstances in determining whether imposition of a late fee is 
appropriate.
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    NASD proposes to assess late fees against members that fail timely 
to report a new disclosure event or a change in the status of a 
previously reported disclosure event on initial Forms U5 and amendments 
to Forms U4 and U5. With respect to amendments to Forms U4 and U5, NASD 
would determine whether a disclosure event (or update to a previously 
reported event) is being reported late by identifying the date on which 
the disclosure event should have been reported and comparing it to the 
day on which it was reported. If the event were to be reported after 
the 10-day or 30-day period established under NASD rules, the late fee 
would be assessed. In addition, NASD would assess a late fee if a 
member were to fail to report timely a new disclosure event or a change 
in the status of a previously reported disclosure event on an initial 
Form U5.\9\

[[Page 7835]]

Moreover, with respect to Forms U5, a failure to file the initial Form 
U5 within 30 days after the date of termination would continue to 
subject members to an $80 late filing fee under Section 4(b)(2) of 
Schedule A, in addition to a late fee based on any late reporting of a 
disclosure event.\10\
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    \9\ For example, NASD would assess a late fee if a member 
reports on an initial Form U5 a customer complaint that was received 
by the member three months before the registered person was 
terminated. In this scenario, the member should have reported the 
customer complaint via an amended Form U4 within 30 days of 
receiving the customer complaint while the individual was still 
associated with the member (rather than reporting it for the first 
time on the Form U5 giving notice of the person's termination).
    \10\ Timely notice of the termination of a registered person and 
the reason for that termination is important information for NASD 
and other regulators. Accordingly, NASD will continue to assess a 
late fee for full Forms U5 (i.e., Forms U5 giving notice of 
termination in all capacities with a member) that are filed more 
than 30 days after the member terminates the registered person. If a 
full Form U5 is filed late and also reports disclosure information 
late, NASD also will assess a late disclosure reporting fee.
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    NASD represents that it currently may bring disciplinary actions 
for failure to timely file amendments to Forms U4 and U5, and would 
continue to exercise discretion to bring such actions based on the 
facts and circumstances of individual cases notwithstanding the 
establishment of the late fee.\11\ NASD represents that timely and 
complete reporting of such information is critical to regulators for 
registration, investigation and examination purposes, as well as to 
investors who are or who may be interested in doing business with a 
registered person and are seeking information through NASD's 
BrokerCheck Program. NASD represents that the establishment of the late 
fee is intended to act as a disincentive to late filing and to 
encourage members to timely update Forms U4 and U5.
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    \11\ The Commission notes that charging a late fee in no way 
absolves the NASD of its duty to enforce compliance by its members 
with the NASD's rules or the Federal Securities laws.
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    NASD proposes to provide a six-month transition period starting on 
March 8, 2004, and ending on September 10, 2004. During this time, NASD 
would waive the late fee for the first 10 days the filing is late, 
provided the filing is made during those 10 days. Accordingly, NASD 
would not assess the first $100 (at $10 per day) if the filing were to 
be made during those 10 days. Instead, during the six-month transition 
period, the member's CRD[reg] account would indicate that NASD has 
waived the late fee, thereby alerting the member it has an issue with 
timely reporting.
    NASD would not waive any portion of the late fee for members making 
filings that are between 11 and 30 days late during this transition 
period. Such members would be charged $10 for each late day, up to 
$300. For example, a member reporting a disclosure event eight days 
late during the transition period would receive a report showing the 
number of days late, but would not be assessed a late fee. Conversely, 
a member reporting a disclosure event 11 days late during these six 
months would be charged $10 per late day, for a total of $110. Starting 
on September 13, 2004, the end of the six-month transition period, 
members would be charged the $10 fee beginning each day the filing is 
late, up to a maximum of $300.
2. Statutory Basis
    NASD believes that the proposed rule change, as amended, is 
consistent with the provisions of section 15A of the Act,\12\ in 
general, and with sections 15A(b)(5) and 15A(b)(6) of the Act,\13\ in 
particular, which require, among other things, that NASD rules provide 
for the equitable allocation of reasonable dues, fees, and other 
charges among members and issuers and other persons using any facility 
or system that NASD operates or controls, and that NASD rules be 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, to foster cooperation 
and coordination with persons engaged in regulating, clearing, 
settling, processing information with respect to, and facilitating 
transactions in securities, to remove impediments to and perfect the 
mechanism of a free and open market and a national market system, and, 
in general, to protect investors and the public interest. NASD believes 
that the proposed late filing fee would provide an additional incentive 
to NASD members to file new disclosure events or changes in the status 
of previously reported disclosure events on or before the date on which 
the event or status change is required to be reported under NASD rules.
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    \12\ 15 U.S.C. 78o-3.
    \13\ 15 U.S.C. 78o-3(b)(5) and 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, as amended, 
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

    NASD requested comment on, among other things, a late disclosure 
filing fee in Notice to Members 02-74 (November 2002). Specifically, 
NASD advised members that it was considering imposing a late disclosure 
filing fee as an additional safeguard to ensure data integrity, reduce 
or eliminate reporting gaps, and ensure that information is timely 
reported. Of the 58 members and individuals who filed comments, 34 
commenters commented on the proposed late fee. The Association of 
Registration Management (``ARM'') found the proposal to be reasonable, 
but suggested that any late fee be assessed against the responsible 
party (and further suggested that the registered person may be the 
responsible party in some cases). The North American Securities 
Administrators Association (``NASAA'') agreed that late fees would 
provide an incentive to filers that do not make timely reports, and the 
Public Investors Arbitration Bar Association (``PIABA'') supported 
implementation of additional safeguards to ensure timely reporting of 
disclosure information. A majority of these commenters believed that 
members, not individual brokers, should be responsible for any late 
fees. One commenter viewed the proposed late fee as a punitive tool 
that should be considered for more egregious offenses, such as failures 
timely to report customer complaints or regulatory actions. Three 
commenters expressed concern about NASD's establishing the correct 
``trigger'' date for the reporting requirement.
    NASD has considered these comments and agrees with the commenters 
who believe that a late fee can be an effective deterrent to late 
filing. NASD has also determined that since it is the members' 
responsibility to file initial Forms U4 and U5 and amendments to those 
Forms, they should also be responsible for paying late fees when the 
filings are late. The proposed rule would not alter the date on which 
disclosure filings are currently required to be made. This rule merely 
would serve as a further disincentive to late filing. Further, it is 
NASD's view that all disclosures that would be subject to the proposed 
rule are important, since they involve an individual's financial, 
regulatory, and criminal history.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The proposed rule change, as amended, has become immediately 
effective pursuant to section 19(b)(3)(A)(ii) of the Act,\14\ and 
subparagraph (f)(2) of Rule 19b-4

[[Page 7836]]

thereunder,\15\ in that it establishes or changes a due, fee, or other 
charge imposed by NASD. The fee would become operative on March 8, 
2004. At any time within 60 days of the filing of the proposed rule 
change, as amended, the Commission may summarily abrogate this proposed 
rule change if it appears to the Commission that such action is 
necessary or appropriate in the public interest, for the protection of 
investors, or otherwise in furtherance of the purposes of the Act.\16\
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    \14\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \15\ 17 CFR 240.19b-4(f)(2).
    \16\ For purposes of calculating the 60-day period within which 
the Commission may summarily abrogate the proposed rule change, as 
amended, under Section 19(b)(3)(C) of the Act, the Commission 
considers the period to commence on January 29, 2004, the date on 
which NASD filed Amendment No. 1. See 15 U.S.C. 78s(b)(3)(C).
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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. Comments may also be submitted electronically at the 
following e-mail address: [email protected]. All comment letters 
should refer to File No. SR-NASD-2003-192. This file number should be 
included on the subject line if e-mail is used. To help the Commission 
process and review your comments more efficiently, comments should be 
sent in hardcopy or by e-mail but not by both methods. 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-2003-192 and should be 
submitted by March 11, 2004.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-3539 Filed 2-18-04; 8:45 am]
BILLING CODE 8010-01-P