Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change by the National Association of Securities Dealers, Inc. Relating to Amendments to the Public Disclosure Program

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42240; File No. SR-NASD-99-45]

Self-Regulatory Organizations; Notice of Filing of Proposed Rule

Change by the National Association of Securities Dealers, Inc. Relating

to Amendments to the Public Disclosure Program

December 16, 1999.

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 September 15, 1999, the National Association of Securities Dealers,

Inc. (``NASD'' or ``Association''), through its wholly owned subsidiary

NASD Regulation, Inc. (``NASD Regulation''), filed with the Securities

and Exchange Commission (``Commission'' or ``SEC'') the proposed rule

change as described in Items I, II, and III below, which Items have

been prepared by NASD Regulation. On December 1, 1999, NASD Regulation

submitted Amendment No. 1 to the proposed rule change.\3\ The

Commission is publishing this notice of the rule change, as amended, 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\ See letter from Alden S. Adkins, Senior Vice President and

General Counsel, NASD Regulation, to Katherine A. England, Assistant

Director, Division of Market Regulation (``Division''), Commission,

dated December 1, 1999. In Amendment No. 1, NASD Regulation

clarifies certain proposed changes to the Public Disclosure Program

and submits Form U-6 as an exhibit (``Amendment No. 1''). The

Commission notes that the Form U-6 is being submitted to help the

public determine what additional information will be disclosed

through the Public Disclosure Program and is not the subject matter

of this rule filing.

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I. Self-Regulatory Organization's Statement of the Terms of

Substance of the Proposed Rule Change

NASD Regulation proposes to amend Interpretive Material 8310-2(a),

which concerns the Public Disclosure Program. Proposed new language is

italicized; proposed deletions are in brackets.

IM-8310-2. Release of Disciplinary Information

(a) [The Association shall, in response to a written inquiry,

electronic inquiry, or telephonic inquiry via a toll-free telephone

listing, release certain information contained in its files regarding

the employment and disciplinary history of members and their associated

persons, including information regarding past and present employment

history with Association members; all final disciplinary actions taken

by federal, state, or foreign securities agencies or self-regulatory

organizations that relate to securities or commodities transactions;

all pending disciplinary actions that have been by federal or state

securities agencies or self-regulatory organizations that relate to

securities and commodities transactions and are required to be reported

on Form BD or U-4 and all foreign government or self-regulatory

organization disciplinary actions that relate to securities or

commodities transactions and are required to be reported on Form BD or

U-4; and all criminal indictments, information or convictions that are

required to be reported on Form BD or Form U-4. The Association will

also release information required to be reported on Form BD or Form U-4

concerning civil judgments and arbitration decisions in securities and

commodities disputes involving public customers, pending and settled

customer complaints, arbitrations and civil litigation, current

investigations involving criminal or regulatory matters, terminations

of employment after allegations involving violations of investment-

related statutes or rules, theft or wrongful taking of property,

bankruptcies less than ten years old, outstanding judgments or liens,

any bonding company denial, pay out or revocation, and any suspension

or revocation to act as an attorney, accountant or federal contractor.]

In response to a written inquiry, electronic inquiry, or telephonic

inquiry via a toll-free telephone listing, the Association shall

release certain information contained in the Central Registration

Depository regarding a current or former member, an associated person,

or a person who was associated with a member within the preceding two

years, through the Public Disclosure Program. Such information shall

include:

(1) the person's employment history and other business experience

required to be reported on Form U-4;

(2) currently approved registrations for the member or associated

person;

(3) the main office, legal status, and type of business engaged in

by the member; and

(4) an event or proceeding--

(A) required to be reported under Item 23 on Form U-4;

(B) required to be reported under Item 11 on Form BD; or

(C) reported on Form U-6.

The Association also shall make available through the Public

Disclosure Program certain arbitration decisions against a member

involving a securities or commodities dispute with a public customer.

The Association shall not release through the Public Disclosure Program

social security numbers, residential history information, or physical

description information, or information that the Association is

otherwise prohibited from releasing under Federal law.

* * * * *

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 Regulation 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 Regulation 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 Regulation's Public Disclosure Program is described in

Interpretive Material 8310-2 of the NASD Rules (``the

Interpretation''). Under the Public Disclosure Program, NASD Regulation

releases to the public certain information reported on uniform forms

\4\

[[Page 72126]]

to the Central Registration Depository (``CRD'') regarding the

employment history, other business experience \5\ and disciplinary

history of NASD members and associated persons. The NASD's practice is

and will continue to be to provide such information on a per associated

person or per member basis. The primary purpose of the Public

Disclosure Program is to help investors make informed choices about the

individuals and firms with whom they may wish to do business.

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\4\ The uniform forms are Form BD (the Uniform Application for

Broker-Dealer Registration); Form BDW (the Uniform Request for

Broker-Dealer Withdrawal); Form U-4 (the Uniform Application for

Securities Industry Registration or Transfer); Form U-5 (the Uniform

Termination Notice for Securities Industry Registration); and Form

U-6 (the Uniform Disciplinary Action Reporting Form). Except for the

Form U-6, all of these forms have been approved by the Commission.

See Securities Exchange Act Release No. 41594 (July 2, 1999), 64 FR

37586 (July 12, 1999) (order adopting the amended Form BD);

Securities Exchange Act Release No. 41356 (April 30, 1999), 64 FR

25144 (May 10, 1999) (order adopting the amended Form BDW);

Securities Exchange Act Release No. 41560 (June 25, 1999), 64 FR

36059 (July 2, 1999) (order approving the new Forms U-4 and U-5).

\5\ Employment experience includes the last ten years of full-

and part-time work, self-employment, military service, unemployment,

and full-time education. The Form U-4 also requires registered

persons to report certain other business experience on page 2 of the

Form.

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NASD Regulation has determined that the Interpretation governing

the Public Disclosure Program should be amended to ensure that

disclosure practices are clearer and fairer to NASD members, associated

persons, and the public.\6\ The proposed rule change would affect only

information released through the Public Disclosure Program. NASD

Regulation is not proposing any change to the uniform forms or

requesting authority to delete or change any information in CRD records

that would require agreement from state regulators.

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\6\ To that end, the Interpretation has been reformatted to make

it easier to read and understand. The Interpretation has been

amended to conform to style and grammatical conventions followed in

the NASD Rules, e.g., using singular nouns. In addition, certain

words and phrases in the Interpretation have been conformed to usage

in the uniform forms. All of these changes are clarifying, non-

substantive amendments.

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Persons Subject to the Interpretation. Since the inception of the

Public Disclosure Program, NASD Regulation's practice has been to

release information about a current or former member or associated

person. The current Interpretation, however, refers to the release of

information about ``members'' or ``their associated persons,'' which

the NASD By-Laws define as current members and persons currently

associated with members.\7\ The Interpretation does not explicitly

address the issue of disclosure regarding former members and associated

persons.

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\7\ See Articles I(q) and (ee) of the NASD By-Laws.

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The proposed rule change would explicitly address disclosure on

former members and associated persons. Persons who would be subject to

disclosure under the Program would include: (1) Current and former NASD

members; (2) persons currently associated with an NASD member; and (3)

persons who have been associated with an NASD member within the

preceding two years. NASD Regulation believes that it is inappropriate

to continue public disclosure indefinitely for an individual who has

chosen to leave the securities industry. Instead, NASD Regulation

believes it should strike a balance between an investor's interest in

being easily able to obtain information about a former associated

person and that person's desire for privacy once he has left the

securities industry. A two-year disclosure period coincides with the

period in which an individual can return to the industry without being

required to requalify by examination and the initial period in which an

individual remains subject to the jurisdiction of the Association.\8\

NASD Regulation notes, however, that with the exception of part II of

the Form U-5 Internal Review Disclosure Reporting Page (``DRP''),\9\

there is currently no mechanism for a former associated person or

member to submit information to amend or update a disclosure record.

Accordingly, NASD Regulation intends to clearly identify the scope of

the disclosure information for former associated persons or members.

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\8\ See NASD Rules 1021(c) and 1031(c); NASD By-Laws Article V,

Section 4. Article V, Section 4 of the By-Laws provides that a

person whose association with a member has been terminated or

revoked shall continue to be subject to the NASD's jurisdiction for

certain specified purposes. Under that provision, the two-year

period begins on the effective date of the termination, and may be

extended under certain circumstances. For purposes of disclosure

under the Public Disclosure Program, the two-year period would begin

on the effective date of the termination and would not be extended

beyond the initial two-year period. The effective date of

termination is the date that the Form U-5 is captured by the CRD

system. Conversation between Mary Dunbar, Office of General Counsel,

NASD Regulation, and Joseph P. Corcoran, Attorney, Division,

Commission on December 10, 1999.

\9\ Part II of the Form U-5 Internal Review DRP provides a

current or former registered representative an opportunity to

provide a summary of the circumstances relating to an internal

review reported on a Form U-5 by a former employer.

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Release of Information Reported on Forms U-5 and U-6. NASD

Regulation currently releases under the Public Disclosure Program those

events and proceedings that are required to be reported on Form U-4 and

Form BD. The Interpretation currently does not explicitly address

events and proceedings reported on Form U-5 or Form U-6.

Form U-6 is filed by state securities regulators and self-

regulatory organizations (``SRO'') to report disciplinary and other

matters that are also required to be reported on Form U-4 or Form

BD.\10\ Form U-6 includes DRPs in five categories: (1) Bankruptcy/SIPC/

Compromise with Creditors; (2) Civil Judicial; (3) Criminal; (4)

Regulatory Action; and (5) SRO Arbitration/Reparation. The format of

the Form U-6 DRPs parallels the format of the DRPs used for the Forms

U-4, U-5, and BD for those categories. Generally speaking, the Form U-6

reports the identifying information on the subject of the filing (i.e.,

the individual or entity), the regulator reporting the action, and a

brief description of the matter being reported, including its status or

final solution.

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\10\ If a state securities regulator or SRO chooses to report

regulatory information to CRD, it must use a Form U-6 for the

information to be available through the Public Disclosure Program.

Regulators also are able to report on Form U-6 matters involving

individuals or entities that are not currently registered, provided

the events being reported to CRD would be required to be reported if

the individuals or entities were registered or attempted to become

registered.

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Until 1996, the NASD only released information actually reported on

Form U-4 or Form BD. In 1996, the NASD proposed and the Commission

approved a rule change that permitted the NASD to release information

``required to be reported'' on Form U-4 or Form BD.\11\ NASD Regulation

proposed the change because in some instances, it possessed information

about a currently registered person that should have been reported on

the person's Form U-4, but the amended Form U-4 had not yet been

submitted. NASD Regulation proposed the rule change so that it could

release all information that it possessed that was required to be

reported on the Forms U-4 and BD, even if the registered person or firm

was not current in its filings, thereby ensuring that investors

received more complete information.

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\11\ See Securities Exchange Act Release No. 37797 (October 9,

1996), 61 FR 53984 (October 16, 1996).

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NASD Regulation currently interprets the ``required to reported''

standard as follows. For current members and associated persons, NASD

Regulation interprets the ``required to be reported'' standard to

include all information reported on Form U-4 or Form BD, as well as

information that has been reported on a Form U-5 or Form U-6 that

should be, but has not yet been, reported on a Form U-4 or Form BD. For

example, a former employer of a currently registered representative may

report a customer complaint against that registered representative by

amending his Form U-5. NASD Regulation includes information about this

complaint in any public disclosure report it issues about the

registered representative, even if the current employer of the

registered person has not updated his Form U-4 to reflect the

complaint.

[[Page 72127]]

For former members and associated persons, the ``required to be

reported'' standard has a different result because once an association

or membership is terminated, there is no longer a requirement to report

on Form U-4 or Form BD, respectively. Consequently, when NASD

Regulation receives a public disclosure request for a former associated

person or member, NASD Regulation releases all information reported to

CRD up to the date of the termination of association or membership.

However, events and proceedings reported on an initial or amended Form

U-5 or Form BDW,\12\ or on Form U-6 after an individual has terminated

his association or after termination of a firm's membership, are not

released under the Program. If a former associated person or member

reapplies and is approved for NASD registration or membership, NASD

Regulation resumes public disclosure under the ``required to be

reported'' standard, which includes releasing all information reported

on any uniform form during any period of active or inactive

registration or membership.

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\12\ The Commission notes that copies of a firm's Form BDW is

available to the public through the Commission's Public Reference

Room.

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Under the proposed rule change, NASD Regulation would begin

releasing information reported on Form U-6 for former members and

associated persons, subject to the two-year time limitation discussed

above. There are several reasons for this change. First, the

information reported on Form U-6 is provided by regulators and SROs,

and therefore NASD Regulation believes that it is highly reliable.

Second, the information reported on Form U-6 may be particularly

valuable to a public investor who who done business with a former

member of associated person who has recently left the industry. Third,

the proposed rule change would make disclosure of Form U-6 information

more consistent between currently registered members and associated

persons and former members and associated persons. Finally, the

proposed rule change would result in more consistent disclosure by the

Program and the states; some of which currently release information

reported on all uniform forms, whether or not it is currently

reportable on a uniform form.

NASD Regulation does not release information that has been reported

on a Form U-5 regarding former registered persons because that

information may not have been reviewed by such individuals and may not,

as a result, include their comments on, or concurrence with, the

information. NASD Regulation does not propose any change to this policy

in this filing.

Release of Arbitration Decisions Involving Members. NASD Regulation

makes all arbitration awards rendered in its forum available pursuant

to NASD Rule 10330(f). Interested persons may obtain hard copies of

such awards upon request by contacting the Office of Dispute

Resolution. In addition, for the convenience of investors, NASD

Regulation makes available through the Public Disclosure Program

information on awards rendered in the arbitration forum administered by

the NASD that involve securities or commodities disputes between

members and public customers.\13\

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\13\ CRD obtains information regarding awards involving members

from its Office of Dispute Resolution because members are not

required to report arbitration awards on Form BD.

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Clarification of Information Not Released Through Program. A number

of members and associated persons have asked whether social security

numbers, home addresses, or physical description information reported

on the uniform forms are released through the Public Disclosure

Program. NASD Regulation does not release such information, and the

proposed rule change clarifies this policy.

The proposed rule change also clarifies that NASD Regulation will

not release information through the Public Disclosure Program that it

is otherwise prohibited from releasing under Federal law, e.g.,

criminal history record information provided by the Federal Bureau of

Investigation.\14\ The criminal history information that is released

through the Public Disclosure Program is the information provided by

the associated person or the member on the uniform forms.

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\14\ 28 CFR 50.12(b).

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Disconintinuing Release of Certain Factually Incorrect Information.

NASD Regulation also would like to inform the Commission of NASD

Regulation's intention to exercise discretion in discontinuing public

disclosure of a limited category of factually incorrect information

that may be contained in the CRD. NASD Regulation occasionally receives

requests to expunge an event from CRD where the person who was the

subject of the CRD filing can demonstrate that it was factually

impossible for him to have been involved in the event (e.g., a person

was named in an arbitration as a branch manager of a firm, and the

person was working at a different firm at that time). NASD Regulation

and the North American Securities Administrators Association

(``NASAA'') agree that such information can be expunged from the CRD if

the person obtains a court order of expungement. However, obtaining a

court order can be time-consuming and expensive. NASD Regulation

believes that information that can be proven to be factually incorrect

should be expunged from the CRD system without a court order and is

discussing this issue with NASAA. NASD Regulation and NASAA also are

currently discussing other circumstances in which expungement orders

are appropriately honored.\15\ Until an agreement is reached with NASAA

on expunging factually incorrect information from the CRD system, NASD

Regulation intends to discontinue releasing such information via the

Public Disclosure Program. NASD Regulation will develop guidelines to

implement this policy. The policy will provide some measure of

assurance that this type of factually incorrect information is not

provided to investors or other members of the public.

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\15\ See Notices to Members 99-09 and 99-54.

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Automation of Public Disclosure Reports. Currently, when NASD

Regulation receives a public disclosure request, NASD Regulation staff

reviews the CRD record of the subject of the request, identifies events

that must be disclosed under the Interpretation, and manually prepares

a summary report for the requester. With the deployment of Web CRD,\16\

NASD Regulation's Internet-based registration system, the staff plans

to discontinue the manual preparation of these reports. Instead, staff

will use a computer program that automatically generates a report after

drawing information directly from the Web CRD data base. The computer

program will draw the information from specified fields in WEB CRD that

parallel fields on the Forms U-4, U-6,, and BD (and Form U-5 in the

limited circumstances discussed above). The report then will be sent by

regular or electronic mail to the requester. This approach removes the

NASD Regulation staff from the preparation of the reports, provides for

consistent disclosure without manual intervention, and allows the

information that is actually reported to Web CRD on the uniform forms

or from the NASD Regulation Office of Dispute Resolution \17\ to be

reported to the public.\18\

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\16\ See Securities Exchange Act Release No. 41326 (April 22,

1999), 64 FR 23366 (April 30, 1999)(notice of filing of SR-NASD-98-

96, which describes Web CRD).

\17\ See supra note 13.

\18\ As part of the transition from Legacy CRD to Web CRD,

information that was reported prior to the deployment of Web CRD was

converted from the Legacy CRD system and brought into the Web CRD

database structure. Because of differences between the current and

previous uniform registration forms, data was necessarily

reformatted. In nearly all cases, information was converted as filed

(i.e., information reported on a Form U-4 in Legacy CRD was

converted to Web CRD as Form U-4 information, albeit reformatted).

In certain circumstances, however, information submitted on

different uniform forms relating to the same disclosure event was

combined in the data conversion; this occurred only if there were

inconsistencies reported regarding such event. For example, of a

Form U-4 reported that a regulatory action became final but did not

report the date of the final action, and a Form U-6 reported both

the regulatory action and the date, the date of the final action was

populated to the Form U-4 on Web CRD. NASD Regulation will include

an explanation of the data conversion process in all public

disclosure reports provided pursuant to the Program.

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[[Page 72128]]

One significant consequence of this approach is that the

automatically generated reports will include verbatim any comment

submitted by a registered representative, firm, or regulator in

response to the last question on the Disclosure Reporting Pages of the

uniform forms. This question typically asks for a summary of the

circumstances or details relating to the disclosure event. These

comments are not currently included in the manual reports prepared by

the staff and may contain customer names. They also may contain

confidential account information or language that is offensive or

potentially defamatory, although that is far less likely.

Because these comments have not been included previously in the

manual reports, NASD Regulation does not intend to begin using these

automated reports until the SEC approves this proposed rule change.

Upon approval, NASD Regulation will inform members and registered

persons via a Notice to Members and other communications that it is

inappropriate, and may subject members to regulatory sanctions or civil

liability, to submit offensive or potentially defamatory language on

the uniform forms.\19\ NASD Regulation also is considering developing

electronic notices that would appear on the electronic screen when

forms are being completed on-line advising Web CRD users of this issue.

NASD Regulation would undertake to conduct a continuing program to

educate members and registered persons on this issue.

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\19\ For example, if a Form contained egregiously offensive

language, NASD Regulation may take disciplinary action against the

member and/or registered person under NASD Rule 2110, which requires

them to observe just and equitable principles of trade and high

standards of commercial honor.

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After implementation of automated reports, NASD Regulation will

address objections to disclosure of customer names, confidential

customer information, or offensive or potentially defamatory language

on a case-by-case basis as follows. After receiving an objection, NASD

Regulation will identify the filer of the uniform form (i.e., a member

firm, regulator, or self-regulatory organization) containing the

language in controversy and notify the filer of the objections. NASD

Regulation will provide the filer with the opportunity to amend the

filing to remove the language in controversy. If the filer determines

not to amend, NASD Regulation will apply a balancing test to weigh the

value of the language in controversy for regulatory and investor

protection purposes against the objector's asserted privacy rights and/

or defamation claims.\20\ Based on the outcome of this test, NASD

Regulation may determine to redact the language in controversy from

reports prepared under the Public Disclosure Program. NASD Regulation

will inform any requester of a report that has been redacted of the

reasons for the redaction. NASD Regulation staff anticipates that

objections to disclosure will be infrequent. If objections are more

frequent than anticipated, NASD Regulation staff will consider

alternative approaches.

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\20\ If its impossible for a filer to amend, e.g., the firm is

defunct and the person is no longer registered, then NASD Regulation

also will apply the balancing test and proceed as described above.

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Other. In Notice To Members 98-71, the NASD requested comment on

whether public disclosure of certain non-investment-related crimes

should be discontinued after ten years. In response, the NASD received

nearly 100 comments. The NASD is still considering this issue in light

of the comments, and therefore the issue is not addressed in this

filing.

2. Statutory Basis

NASD Regulation believes that the proposed rule change is

consistent with the provisions of Section 15A(b)(6) \21\ of the Act,

which requires, among other things, that the Association's rules must

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 Regulation believes

that the proposed rule change is consistent with Section 15A(b)(6) \22\

because it strikes an appropriate balance between: (1) Investor's

interest in obtaining accurate and up-to-date information about current

or former members or associated persons; and (2) members' and

associated persons' interests in having accurate information provided

through the Public Disclosure Program; and (3) former associated

persons' interest in protecting their privacy after leaving the

securities industry. By expanding the availability of Form U-6

information, the proposed rule change also will provide investors and

the public with additional information about former associated persons

with whom they have done business. NASD Regulation also believes that

the proposed rule change is consistent in all respects with Section

15a(i),\23\ particularly the provision for immunity from liability for

actions taken or omitted in good faith with respect to the Public

Disclosure Program.

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\21\ 15 U.S.C. 78o-3(b)(6).

\22\ Id.

\23\ This Section requires the NASD to establish and maintain a

public disclosure program. 15 U.S.C. 78o-3(i).

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

NASD Regulation 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 purpose 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 nether 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 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:

(A) By order approve such proposed rule change, or

(B) Institute proceeding 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

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

[[Page 72129]]

rule change that refiled 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. JR-NASD-99-45 and should be

submitted by January 13, 2000.

For the Commission, by the Division of Market Regulation,

pursuant to delegated authority.\24\

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\24\ 17 CFR 200.30-3(a)(12).

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Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 99-33346 Filed 12-22-99; 8:45 am]

BILLING CODE 8010-01-M