[Federal Register: December 16, 2002 (Volume 67, Number 241)]
[Notices]
[Page 77119-77121]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr16de02-90]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-46974; File No. SR-NASD-2002-113]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change and Amendment No. 1 Thereto by the National Association of
Securities Dealers, Inc. Relating to the Implementation of a
Fingerprinting Program for Nasdaq Employees and Independent Contractors
December 9, 2002.
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 16, 2002, the National Association of Securities Dealers,
Inc. (``NASD''), through its subsidiary, The Nasdaq Stock Market, Inc.
(``Nasdaq''), filed with the Securities and Exchange Commission
(``SEC'' or ``Commission'') the proposed rule change as described in
Items I, II, and III below, which Items have been prepared by Nasdaq.
Nasdaq amended the proposed rule change on September 10, 2002.\3\ 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 September 9, 2002, letter from Mary M. Dunbar, Vice
President and Deputy General Counsel, Nasdaq, to Katherine A.
England, Assistant Director, Division of Market Regulation,
Commission (``Amendment No. 1''). In Amendment No. 1, Nasdaq added
language to the proposed rule text to indicate that the rule applies
only where permitted by applicable law and deleted text from the
Purpose sections of the form and draft notice related to the
preemption of certain state laws by Commission order.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
Nasdaq is proposing to adopt NASD Rule 0140, Fingerprint-Based
Background Checks of Nasdaq Employees and Independent Contractors,
which will establish a program for conducting fingerprint-based
background checks of Nasdaq employees and independent contractors.
Nasdaq will implement the proposed rule change as soon as practicable
following approval by the Commission. Below is the text of the proposed
rule, as amended. Proposed rule language, as amended, is in italics.
0140. Fingerprint-Based Background Checks of Nasdaq Employees and
Independent Contractors.
(a) In order to enhance the physical security of the facilities,
systems, data, and information of The Nasdaq Stock Market, Inc.
(``Nasdaq''), it shall be the policy of Nasdaq to conduct a
fingerprint-based criminal records check of (i) all prospective and
current employees, (ii) all prospective and current independent
contractors who have or are anticipated to have access to Nasdaq
facilities for ten business days or longer, and (iii) all prospective
and current temporary employees who have or are anticipated to have
access to Nasdaq facilities for ten business days or longer. Nasdaq
shall apply this policy in all circumstances where permitted by
applicable law.
(b) Nasdaq shall submit fingerprint cards obtained pursuant to the
foregoing policy to the Attorney General of the United States or his or
her designee for identification and processing. Nasdaq shall at all
times maintain the security of fingerprint cards and information
received from the Attorney General or his or her designee.
(c) Nasdaq 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 Nasdaq's
facilities.
(d) A prospective employee who refuses to submit to fingerprinting
shall be denied employment by Nasdaq, and a prospective independent
contractor or temporary employee who refuses to submit to
fingerprinting shall be denied access to Nasdaq facilities. A current
employee, independent contractor, or temporary employee who refuses to
submit to fingerprinting will be terminated following notice and being
given three opportunities to submit.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, Nasdaq included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change, as
amended. The text of these statements may be examined at the places
specified in Item IV below. Nasdaq 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
In the wake of the September 11, 2001 terrorist attacks, Nasdaq has
been exploring ways in which to enhance the security of the critical
financial infrastructure that it operates. Market participants use
Nasdaq systems to execute and report transactions in Nasdaq-listed
securities and rely upon Nasdaq for the dissemination of quotation and
transaction information,
[[Page 77120]]
while the capital markets have traditionally looked to Nasdaq as the
market of choice for new listings. According to Nasdaq, 4,109 companies
(with a market valuation of $2.9 trillion) had shares listed for
trading on Nasdaq as of December 31, 2001; the average daily volume of
transactions during 2001 was 1.9 billion shares valued at $44.1
billion. Accordingly, a significant disruption in the operation of
Nasdaq systems could have serious adverse effects on U.S. and world
financial markets.
Nasdaq has active and aggressive programs in place to minimize the
risk of system disruptions, including the use of multiple computer
facilities in separate geographic locations that are designed to
provide redundancy and back-up. In addition, since 1999, Nasdaq has
conducted background checks and urinalysis drug testing of all new
employees. The background check involves verification of social
security number, previous employment, education, credentials, and
professional licenses, as well as a name-based criminal record check.
The latter consists of an examination of courthouse records of counties
where the applicant, according to his employment application, resided
during the past seven years. Although this process constitutes a
measure of due diligence, it is subject to evasion by applicants who
provide false information. Moreover, it does not provide a basis for
conducting a comprehensive nationwide search of records. As a result,
even if an applicant with a criminal history provides accurate
information, the search would not uncover pertinent records if the
applicant was tried and convicted in a jurisdiction other than his
place of residence.
By contrast, a background check that makes use of the fingerprint
database maintained by the Federal Bureau of Investigation (``FBI'')
permits a nationwide search that covers federal, state, local, and
military convictions. Accordingly, it significantly reduces the number
of ``false negatives'' (i.e., failures to uncover pertinent criminal
records) associated with less comprehensive searches and eliminates
``false positives'' caused by confusion of individuals having the same
or similar names.
Access to the FBI's database is permitted only when authorized by
law. Numerous federal and state laws, however, authorize employers to
conduct fingerprint-based background checks that make use of the FBI's
database.\4\ Notably, section 17(f)(2) of the Act \5\ and SEC Rule 17f-
2 \6\ require employees of broker-dealers, transfer agents, and
clearing agencies to be fingerprinted and authorize self-regulatory
organizations (``SROs'') to maintain facilities for processing and
storing fingerprint cards and criminal record information received from
the FBI database with respect to such cards. Ironically, section
17(f)(2) of the Act \7\ does not require SROs to fingerprint their own
employees. Nasdaq strongly believes, however, that a proposed rule
change to institute a fingerprinting program for Nasdaq employees and
independent contractors will enhance NASD's ability to perform its
statutory obligations under section 15A of the Act \8\ and is therefore
authorized under that section. Specifically, by allowing Nasdaq to
conduct a more thorough background check of persons that have access to
Nasdaq facilities, the proposed rule change will enhance Nasdaq's
ability to identify and exclude individuals whose prior criminal
activities may pose a threat to the security of Nasdaq operations. This
will in turn assist NASD in carrying out the purposes of the Act,
preventing fraudulent and manipulative acts and practices, promoting
just and equitable principles of trade, removing impediments to and
perfecting the mechanism of a free and open market and a national
market system, and protecting investors and the public interest.
Moreover, although section 17(f)(2) of the Act does not mandate the
fingerprinting of SRO employees, it explicitly directs the Attorney
General (i.e., the FBI) to provide SROs designated by the Commission
with access to criminal history record information.
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\4\ 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).
\5\ 15 U.S.C. 78q(f)(2).
\6\ 17 CFR. 240.17f-2.
\7\ 15 U.S.C. 78q(f)(2).
\8\ 15 U.S.C. 78o-3.
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The rule that Nasdaq is proposing is concerned with the
administration of Nasdaq and Nasdaq believes that it might therefore be
filed on an immediately effective basis pursuant to section
19(b)(3)(A)(iii) of the Act \9\ and Rule 19b-4(f)(3) \10\ thereunder.
However, Nasdaq is seeking Commission approval for the rule under
section 19(b)(2) \11\ because Nasdaq believes that it would not be
appropriate or practical to institute a fingerprinting program without
an explicit determination by the Commission that the program is
authorized under the Act. Nasdaq believes that such a determination
will be required by the FBI as a precondition to Nasdaq obtaining an
Originating Agency Identifier (``ORI'') number from the FBI that will
identify Nasdaq as an entity authorized to submit fingerprints to the
FBI.
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\9\ 15 U.S.C. 78s(b)(3)(A)(iii).
\10\ 17 CFR 240.19b-4(f)(3).
\11\ 15 U.S.C. 78s(b)(2).
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According to Nasdaq, an act to require fingerprint-based background
checks of SRO employees who are regularly employed in New York State
was passed by both the New York State Assembly and Senate and signed
into law by Governor George E. Pataki on August 20, 2002.\12\ The New
York law also requires SROs to fingerprint independent contractors that
provide services to them 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.'' The New York law will
require Nasdaq to implement its proposed fingerprinting program for
employees and some independent contractors in New York State. However,
Commission approval of the program would still be required to implement
the program in other states where Nasdaq has critical operations,
especially Connecticut and Maryland.\13\
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\12\ 2002 N.Y. Laws 453 (Aug. 20, 2002).
\13\ Nasdaq notes that a California statute provides that
employers in that state may not require employees to submit to
fingerprinting as a condition of employment if the fingerprints are
provided to a third party. Cal. Labor Code 1051. Although Nasdaq has
a small number of California employees, they are not involved in the
day-to-day operation of Nasdaq market systems. Accordingly, Nasdaq
will exempt California employees from its program.
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As reflected in the text of the proposed rule change, the program
will apply to prospective and current employees, as well as prospective
and current temporary employees and independent contractors who have or
are anticipated to have access to Nasdaq facilities for ten business
days or longer. Refusal to submit to fingerprinting will be grounds for
termination or denial of employment or access to Nasdaq facilities.
Information received from the FBI concerning an individual will be
evaluated in accordance with the terms of a 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
[[Page 77121]]
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 Nasdaq's facilities.
2. Statutory Basis
Nasdaq believes that the proposed rule change is consistent with
the provisions of section 15A(b)(2) and (b)(6) of the Act,\14\ in that
the proposal is designed, among other things, to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, to remove the impediments to and perfect the
mechanism of a free and open market, and, in general, to protect
investors and the public interest. Nasdaq believes that the proposed
rule will assist the NASD in carrying out the purposes of the Act.
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\14\ 15 U.S.C. 78o-3(b)(2) and 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition
Nasdaq does not believe that the proposed rule change, as amended,
would 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
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 as amended, or
B. Institute proceedings to determine whether the proposed rule
change, as amended, 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, 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. 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-2002-113 and should be submitted by January 6, 2003.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\15\
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\15\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-31591 Filed 12-13-02; 8:45 am]
BILLING CODE 8010-01-P