[Federal Register Volume 69, Number 155 (Thursday, August 12, 2004)]
[Notices]
[Pages 49924-49926]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-18450]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50157; File No. SR-NASD-2004-095]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by National Association of 
Securities Dealers, Inc. Adopting a Fingerprinting Program for NASD 
Employees and Independent Contractors in the State of New York, and, as 
Dictated by Business Need, in Other Jurisdictions

August 5, 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 June 18, 2004, the National Association of Securities Dealers, Inc. 
(``NASD''), 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. The NASD filed 
the proposed rule change under paragraph (f)(3) of Rule 19b-4 under the 
Act.\3\ The Commission is publishing this notice to solicit comments on 
the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 17 CFR 240.19b-4(f)(3).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Pursuant to New York State law, the NASD proposes to adopt a 
program for conducting fingerprint-based background checks of NASD 
employees and independent contractors in the State of New York, and in 
other jurisdictions as business need may dictate.
    Below is the text of the proposed rule change. Proposed new 
language is italicized.
* * * * *

Policy To Conduct Fingerprint-Based Background Checks of NASD Employees 
and Independent Contractors

    (a) In accordance with the requirements of the law of the State of

[[Page 49925]]

New York (``New York State''), it shall be the policy of NASD to 
conduct a fingerprint-based criminal records check of (i) all 
prospective and current employees located in New York State, and (ii) 
all prospective and current independent contractors and temporary 
employees located in New York State who provide services to NASD within 
New York State and who have access to secure records or systems, or 
other material or secure buildings or secure property for a specified 
number of days as determined by NASD from time to time.
    (b) As business need may dictate and where permitted by applicable 
law, NASD will implement a program outside of New York State to conduct 
a fingerprint-based criminal records check of (i) any or all 
prospective and current employees, and (ii) any or all prospective and 
current independent contractors or temporary employees who provide 
services to NASD and who have access to records or systems, or other 
material or secure buildings or secure property for a specified number 
of days as determined by NASD from time to time.
    (c) In implementing the program in New York State or in other 
jurisdictions, NASD shall submit fingerprint images or cards obtained 
pursuant to the foregoing program to the Attorney General of the United 
States or his or her designee for identification and processing. NASD 
shall at all times maintain the security of fingerprint images or cards 
and information received from the Attorney General or his or her 
designee.
    (d) NASD shall evaluate information received from the Attorney 
General or his or her designee in accordance with the terms of a 
written fingerprint policy and provisions of applicable law. A felony 
or serious misdemeanor conviction will be a factor in considering 
whether to hire a prospective employee, take adverse employment action 
with respect to a current employee, or deny prospective or current 
independent contractors or temporary employees access to NASD's 
facilities or records.
    (e) A prospective employee who refuses to submit to fingerprinting 
shall be denied employment by NASD, and a prospective independent 
contractor or temporary employee who refuses to submit to 
fingerprinting under the program shall be denied access to NASD 
facilities or records. A current employee, independent contractor, or 
temporary employee who refuses to submit to fingerprinting under the 
program will be terminated after having been given notice and three 
opportunities to comply.
* * * * *

I. 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 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
    On August 20, 2002, Governor George E. Pataki signed into law an 
act that requires fingerprint-based background checks of self-
regulatory organization (``SRO'') employees who are regularly employed 
in New York State.\4\ The New York law also requires an SRO to 
fingerprint independent contractors that provide services to the SRO if 
those individuals have ``access to records * * * or other material or 
secure buildings or secure property, which place the security of [the 
SRO] at risk.'' \5\ The New York law requires NASD to implement and 
maintain a fingerprinting program for employees and certain independent 
contractors in New York State.
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    \4\ 2002 N.Y. Laws 453 (Aug. 20, 2002).
    \5\ 2002 N.Y. Laws 453 (Aug. 20, 2002).
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    Access to the Federal Bureau of Investigation's (``FBI'') database 
of fingerprint-based criminal records is permitted only when authorized 
by law. Numerous Federal and State laws authorize employers to conduct 
fingerprint-based background checks that make use of the FBI's 
database.\6\ Notably, section 17(f)(2) of the Act \7\ and SEC Rule 17f-
2 \8\ require employees of broker-dealers, transfer agents, and 
clearing agencies to be fingerprinted and authorize SROs to maintain 
facilities for processing and storing fingerprint cards and criminal 
record information received from the FBI database with respect to such 
cards. Although section 17(f)(2) does explicitly direct the Attorney 
General of the United States (i.e., the FBI) to provide SROs designated 
by the Commission with access to criminal history record information, 
it does not, however, require SROs to fingerprint their own employees. 
NASD believes, therefore, that a proposed rule change for a 
fingerprinting program for NASD employees and independent contractors 
located in New York State is a necessary component of NASD's compliance 
with New York State law, and of any plan by NASD, as dictated by its 
assessment of business need, to implement a program for fingerprint-
based background checks of its employees and independent contractors in 
other jurisdictions as permitted by law.
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    \6\ See, e.g., 42 U.S.C. 5119a (child care providers); Pub. L. 
92-544, 86 Stat. 1109, 1115 (employees of federally chartered or 
insured banks); Alaska Stat. 04.11.295 (liquor license applicants); 
Ariz. Rev. Stat. 32-122.02 (home inspectors); Cal. Bus. & Prof. Code 
6980.18 (locksmiths); Fla. Stat. 468.453 (athlete agents); Official 
Code Ga. Ann. 43-47-6 (used car dealers); Ohio Rev. Code Ann. 
3770.051 (vendors of lottery equipment).
    \7\ 15 U.S.C. 78q(f)(2).
    \8\ 17 CFR 240.17f-2.
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    As reflected in the text of the proposed rule change, the program 
applies to: (1) Prospective and current NASD employees in New York 
State, as well as prospective and current temporary employees and 
independent contractors in New York State who have or are anticipated 
to have access to NASD facilities in New York State or NASD records or 
systems for a specified number of days as determined by NASD from time 
to time, and (2) as NASD deems necessary according to business need, to 
prospective and/or current employees in other jurisdictions, as well as 
prospective and current temporary employees and independent contractors 
who have or are anticipated to have access to NASD facilities or 
records in other jurisdictions.
    NASD evaluates information received from the FBI concerning an 
individual in accordance with the terms of NASD's written fingerprint 
policy, which reflects the application of employment laws governing the 
use of information concerning criminal convictions in employment 
decisions. In accordance with such laws, a felony or serious 
misdemeanor conviction will be a factor in considering whether to hire 
a prospective employee, take adverse employment action with respect to 
a current employee, or deny prospective or current independent 
contractors or temporary employees access to NASD's facilities or 
records.
2. Statutory Basis
    NASD believes that the proposed rule change is consistent with 
section 15A(b)(6) of the Act \9\, which requires,

[[Page 49926]]

among other things, that NASD's rules must be designed to prevent 
fraudulent and manipulative acts and practices, promote just and 
equitable principles of trade, and, in general, protect investors and 
the public interest. NASD believes the proposed rule change will 
provide a basis for NASD's compliance with New York State law, which 
requires fingerprint-based background checks of SRO employees who are 
regularly employed in New York State as well as of independent 
contractors that provide services to the SRO if those individuals have 
``access to records * * * or other material or secure buildings or 
secure property, which place the security of [the SRO] at risk'', and 
further permit NASD to implement a fingerprinting program in other 
jurisdictions, as business need may dictate.
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    \9\ 15 U.S.C. 78o-3(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.

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

    The proposed rule change has been filed by the NASD pursuant to 
section 19(b)(3)(A) of the Act \10\ and subparagraph (f)(3) of Rule 
19b-4 thereunder.\11\ Because the foregoing proposed rule change is 
concerned solely with the administration of the NASD, it has become 
effective pursuant to Section 19(b)(3)(A) of the Act \12\ and Rule 19b-
4(f)(3) \13\ thereunder.
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    \10\ 15 U.S.C. 78s(b)(3)(A).
    \11\ 17 CFR 240.19b-4(f)(3)
    \12\ 15 U.S.C. 78s(b)(3)(A).
    \13\ 17 CFR 240.19b-4(f)(3).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission may summarily abrogate such 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.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the proposed rule change, including whether the 
proposed rule change is consistent with the Act. Comments may be 
submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment for (http://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to [email protected]. Please include 
SR-NASD-2004-095 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., 
Washington, DC 20549-0609.
    All submissions should refer to SR-NASD-2004-095. 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, please 
use only one method. The Commission will post all comments on the 
Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). 
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 also will be 
available for inspection and copying at the principal office of NASD. 
All comments received will be posted without change; the Commission 
does not edit personal identifying information from submissions. You 
should submit only information that you wish to make available 
publicly. All submissions should refer to SR-NASD-2004-095 and should 
be submitted on or before September 2, 2004. 

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-18450 Filed 8-11-04; 8:45 am]
BILLING CODE 8010-01-P