[Federal Register: January 25, 2007 (Volume 72, Number 16)]
[Notices]
[Page 3455-3462]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr25ja07-89]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-55127; File No. SR-NASD-2003-168]
Self-Regulatory Organizations; National Association of Securities
Dealers, Inc.; Notice of Filing of Amendment No. 6 and Order Granting
Accelerated Approval to Proposed Rule Change Relating to the Release of
Information Through NASD's BrokerCheck
January 18, 2007.
I. Introduction
On November 21, 2003, the National Association of Securities
Dealers, Inc. (``NASD'') filed with the Securities and Exchange
Commission (``SEC'' or ``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 amend NASD Interpretive
Material (``IM'') 8310-2 (as proposed, ``NASD BrokerCheck Disclosure'')
and add IM-8310-3 (``Release of Disciplinary Complaints, Decisions and
Other Information''). NASD filed Amendment Nos. 1, 2, and 3 to the
proposed rule change on September 28, 2004, March 8, 2005, and April
12, 2005, respectively. The proposed rule change, as amended by
Amendment Nos. 1, 2 and 3, was published for comment in the Federal
Register on June 30, 2005.\3\ In response to the First Notice, the
Commission received eight comment letters.\4\ On June 6, 2006, NASD
submitted a response to the comment letters \5\ and filed Amendment No.
4 to the proposed rule change. On June 22, 2006, NASD filed Amendment
No. 5 to the proposed rule change. The Commission published the
proposed rule change, as further amended by Amendment Nos. 4 and 5, for
comment in the Federal Register on July 5, 2006.\6\ In response to the
Second Notice, the Commission received four comment letters.\7\ On
August 30, 2006, NASD submitted a response to the additional comment
letters \8\ and filed
[[Page 3456]]
Amendment No. 6 to the proposed rule change.\9\ The Commission received
one comment letter on NASD Response Letter II.\10\
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 51915 (June 23,
2005), 70 FR 37880 (``First Notice'').
\4\ See Letters from Barry Augenbraun, Senior Vice President and
Corporate Secretary, Raymond James Financial, Inc., dated July 8,
2005 (``Raymond James Letter''); Joseph D. Fleming, Managing
Director and Chief Compliance Officer, Piper Jaffray & Co., dated
July 13, 2005 (``Piper Jaffray Letter''); Ronald C. Long, Senior
Vice President, Regulatory Policy and Administration, Wachovia
Securities, LLC, dated July 18, 2005 (``Wachovia Letter''); Mario Di
Trapani, President, Association of Registration Management, dated
July 19, 2005 (``ARM Letter I''); John S. Simmers, CEO, ING Advisors
Network, dated July 19, 2005 (``ING Letter''); Coleman Wortham III,
President and CEO, Davenport & Company LLC, dated July 20, 2005
(``Davenport Letter''); Jill Gross, Director of Advocacy, and
Rosario M. Patane, Student Intern, Pace Investor Rights Project,
dated July 21, 2005 (``Pace Letter); and Ira Hammerman, Senior Vice
President and General Counsel, Securities Industry Association,
dated July 27, 2005 (``SIA Letter I'') to Jonathan G. Katz,
Secretary, Commission.
\5\ See Letter from Richard E. Pullano, Associate Vice President
and Chief Counsel, Registration and Disclosure, NASD, to Katherine
A. England, Assistant Director, Division of Market Regulation
(``Division''), Commission, dated June 6, 2006 (``NASD Response
Letter I'').
\6\ See Securities Exchange Act Release No. 54053 (June 27,
2006), 71 FR 38196 (``Second Notice'').
\7\ See Letters from Pamela S. Fritz, Chief Compliance Officer,
MWA Financial Services, Inc., dated July 18, 2006 (``MWA Financial
Letter''); Eileen O'Connell Arcuri, Executive Committee Member, ARM,
dated July 20, 2006 (``ARM Letter II''); Stuart J. Kaswell, Senior
Vice President and General Counsel, SIA, dated July 20, 2006 (``SIA
Letter II''); and Patricia D. Struck, NASAA President, Wisconsin
Securities Administrator, North American Securities Administrators
Association, Inc. (``NASAA''), dated July 20, 2006 (``NASAA Letter
I'') to Nancy M. Morris, Secretary, Commission.
\8\ See Letter from Richard E. Pullano, Associate Vice President
and Chief Counsel, Registration and Disclosure, NASD, to Katherine
A. England, Assistant Director, Division, Commission, dated August
30, 2006 (``NASD Response Letter II'').
\9\ See Partial Amendment dated August 30, 2006. In Amendment
No. 6, NASD indicated that it is amending its initial proposal which
would have changed the manner in which it will measure the two-year
time frame for customer complaint disclosures to begin on the date
on which the member received the complaint. Accordingly, for
purposes of disclosure pursuant to IM-8310-2, NASD will continue to
disclose complaints through BrokerCheck for 24 months, beginning on
the date that the complaint is reported to the Central Registration
Depository (``CRD[supreg]'' or ``CRD System''), regardless of the
date on which the member received the complaint. In addition, NASD
clarified that it currently releases summary information concerning
arbitration awards issued by NASD arbitrators and will continue to
work with other regulators regarding disclosure of arbitration
awards issued in other forums. In conjunction with this
clarification, NASD proposed to amend the text of proposed IM-8310-
2(b)(3) to correct the placement of the word ``certain'' so that it
modifies ``arbitration awards'' rather than ``summary information.''
\10\ See Letter from Patricia D. Struck, NASAA President,
Wisconsin Securities Administrator, NASAA, to Nancy Morris,
Secretary, Commission, dated September 7, 2006.
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This order grants accelerated approval to the proposed rule change,
as amended by Amendment Nos. 1 through 6 and solicits comments from
interested persons on the filing as amended by Amendment No. 6.
II. Description of Proposed Rule Change
A. Background
NASD established NASD BrokerCheck (``BrokerCheck'') in 1988 to
provide investors with information on the professional background,
business practices, and conduct of NASD members and their associated
persons. In 1990, Congress passed legislation requiring NASD to
establish and maintain a toll-free telephone number to receive
inquiries regarding its members and their associated persons. In 1998,
NASD began providing certain administrative information, such as
approved registrations and employment history, online via NASD's Web
site. In 2000, NASD amended IM-8310-2(a) which amendment: (1)
Established a two-year period for disclosure of information about
persons formerly registered with NASD; (2) authorized release of
information about terminated persons and firms that is provided on the
Form U6 (the form regulators use to report disciplinary actions), if
such matters would be required to be reported on Form U4 (``Uniform
Application for Securities Industry Registration or Transfer'') or Form
BD (``Uniform Application for Broker-Dealer Registration''); and (3)
provided for delivery of automated disclosure reports, which include
information as reported by filers on the uniform forms. In 2002, NASD
initiated a comprehensive review of the information that NASD makes
publicly available under IM-8310-2, which included an evaluation of
BrokerCheck from the perspective of public investors regarding their
experience in obtaining information, as well as their assessment of the
value of the information they received. NASD subsequently issued Notice
to Members 02-74 in November 2002, seeking comment on, among other
things, the possible expansion of information that NASD makes available
to the public and Notice to Members 03-76 in December 2003, seeking
comment on proposed enhancements to the existing approach for the
electronic delivery of written reports used by BrokerCheck.\11\
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\11\ See First Notice for a discussion on the comments received
on Notice to Members 02-74 (November 2002) and Notice to Members 03-
76 (December 2003).
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B. Proposed Rule Change
Information NASD Proposes To Release
While all disclosures would be subject to certain exceptions as
described more fully below, NASD proposes to release through
BrokerCheck certain information as applicable regarding current or
former members, associated persons, or persons who were associated with
a member within the preceding two years. Under proposed IM-8310-2, NASD
would release any information reported on the most recently filed Form
U4, Form U5 (``Uniform Termination Notice for Securities Industry
Registration''), Form U6, Form BD, and Form BDW (``Uniform Request for
Broker-Dealer Withdrawal'') (collectively, ``Registration Forms'').
NASD also proposes to release currently approved registrations,
summary information about certain arbitration awards against a member
involving a securities or commodities dispute with a public
customer,\12\ information with respect to qualification examinations
passed by the person and the date passed,\13\ and, in response to
telephonic inquiries via the BrokerCheck toll-free telephone listing,
whether a member is subject to the provisions of NASD Rule 3010(b)(2),
the Taping Rule. In addition, NASD proposes to release the name and
succession history for current or former members.
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\12\ NASD currently releases summary information concerning
arbitration awards issued by NASD arbitrators and will continue to
work with other regulators regarding disclosure of arbitration
awards issued in other forums. See Amendment No. 6, supra note 9.
\13\ NASD would not, however, release information regarding
examination scores or examinations that the person failed.
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The proposed rule change also would address the reporting of
Historic Complaints, defined by NASD as the information last reported
on Registration Forms relating to customer complaints that are more
than two years old and that have not been settled or adjudicated, and
customer complaints, arbitrations, or litigations that have been
settled for an amount less than $10,000 and which are no longer
reported on a Registration Form.\14\ NASD proposes to release Historic
Complaints only if all three of the following conditions have been met:
(1) Any such matter became a Historic Complaint on or after the
implementation date of this proposed rule change; \15\ (2) the most
recent Historic Complaint or currently reported customer complaint,
arbitration, or litigation is less than ten years old; and (3) the
person has a total of three or more currently disclosable regulatory
actions, currently reported customer complaints, arbitrations, or
litigations, or Historic Complaints (subject to the limitation that
they became a Historic Complaint on or after the implementation date of
this proposed rule change), or any combination thereof. Once all these
conditions have been met, NASD would release all information regarding
the person's Historic Complaints, again provided they became Historic
Complaints on or after the implementation date of this proposed rule
change.
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\14\ NASD does not currently make Historic Complaints available
to the public.
\15\ NASD has indicated that the implementation date of this
proposed rule change would be no later than 90 days following
Commission approval.
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NASD also proposes to provide persons with the opportunity to
submit a brief comment, in the form and in accordance with procedures
established by NASD, which would be included in the information NASD
releases through BrokerCheck. Only comments relating to the information
provided through BrokerCheck would be included.\16\ Persons who were
associated with a member within the preceding two years but who are no
longer registered with a member that wish to submit a comment
[[Page 3457]]
would be required to submit a signed, notarized affidavit in the form
specified by NASD.\17\ Persons who are currently registered with a
member firm would continue to be required to amend Form U4, where
possible, instead of submitting a separate comment.\18\ These comments
also would be made available through the CRD system to participating
regulators, and to any member firms that the person who submitted the
comment is associated with or is seeking to be associated with.\19\
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\16\ Consistent with current practice, NASD would reserve the
right to reject comments or redact information from a comment or a
report, on a case-by-case basis, that contains confidential customer
information, offensive or potentially defamatory language or
information that raises significant identity theft, personal safety
or privacy concerns, which concerns are not outweighed by investor
protection concerns. NASD, in rare circumstances, has excluded or
redacted information in cases involving stalking or terrorist
threats.
\17\ NASD would publish instructions for submitting comments on
its Web site for such persons. NASD would review the affidavit to
confirm relevance and compliance with the established instructions
and, if it met the criteria, would add the comment to the written
report provided through BrokerCheck. The person submitting the
comment would be able to replace or delete the comment in the same
way.
\18\ NASD indicated that it would include instructions on how
firms could amend archived disclosures in a Notice to Members
announcing approval of this proposed rule change and also would post
frequently asked questions and answers about this process on NASD's
Web site. See NASD Response Letter I.
\19\ The availability of comments submitted by persons who were
associated with a member within the preceding two years but who are
no longer registered with a member through the CRD system would
parallel the availability of a report on a broker through
BrokerCheck. For example, such comments would no longer be available
through the CRD system if the broker has been out of the industry
for more than two years.
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NASD also proposes that, upon written request, NASD could provide a
compilation of information about NASD members, subject to terms and
conditions established by NASD, and after execution of a licensing
agreement prepared by NASD. NASD expects to charge commercial users of
such compilations reasonable fees as determined by NASD.\20\ Such
compilations of information would consist solely of information
selected by NASD from Forms BD and BDW and would be limited to
information that is otherwise publicly available from the Commission.
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\20\ The Commission notes that such proposed fees would need to
be filed with the Commission pursuant to Section 19(b)(2) of the
Act.
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Information NASD Proposes Not To Release
Notwithstanding information that NASD proposes to release above,
NASD would not release Social Security numbers, residential history
information, physical description information, information that NASD is
otherwise prohibited from releasing under Federal law or information
provided solely for use by regulators. Additionally, NASD proposes to
reserve the right to exclude, on a case-by-case basis, information that
contains confidential customer information, offensive or potentially
defamatory language, or information that raises significant identity
theft, personal safety, or privacy concerns that are not outweighed by
investor protection concerns.
NASD also proposes not to release information about current or
former members, associated persons or persons who were associated with
a member within the preceding two years that has been reported on the
Registration Forms relating to regulatory investigations or proceedings
if the reported regulatory investigation or proceeding was vacated or
withdrawn by the instituting authority. Additionally, NASD proposes not
to release the most recent information reported on the Registration
Forms if: (1) NASD has determined that the information was reported in
error by a member, regulator, or other appropriate authority; or (2)
the information has been determined by regulators, through amendments
to the uniform Registration Forms, to be no longer relevant to
securities registration or licensure, regardless of the disposition of
the event or the date the event occurred.
With respect to information reported on the Form U5, NASD proposes
not to release Form U5 information for 15 days following the filing of
such information with NASD, in order to give persons on whose behalf
the Form U5 was submitted an opportunity to file a Form U4 or submit a
separate comment to NASD for inclusion with the information released
pursuant to BrokerCheck, regarding disclosure information reported on
Form U5 and any amendments thereto. NASD would then release both the
Form U5 disclosure and the person's comment, if any, to a requestor.
However, NASD proposes to continue its current practice of not
releasing ``Internal Review Disclosure'' information reported by
members, associated persons, or regulators on Section 7 of Form U5 \21\
or the ``Reason for Termination'' information reported on Section 3 of
Form U5. Nonetheless, under IM-8310-2, as proposed, information
regarding certain terminations for cause (i.e., those that meet the
criteria in current Question 7F on Form U5) would be disclosed through
BrokerCheck. Finally, NASD currently does not release information
reported on Schedule E of the Form BD.\22\ Under the proposed rule
change, NASD would continue not to release this information.
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\21\ Although the response to the internal review question and
related information reported on the associated disclosure reporting
page would not be released, if the matter subject to the internal
review is or becomes reportable under the investigation,
termination, or other disclosure questions, the disclosure made
pursuant to these other disclosure questions would be released.
\22\ The Commission notes the Division has granted no-action
relief indicating that it will not recommend enforcement action to
the Commission under Rules 15b1-1, 15b3-1, 15Ba2-2, and 15Ca2-1
under the Act for broker-dealers that file the Uniform Branch Office
Registration Form (``Form BR''), and do not complete Schedule E, or
file amendments to Schedule E, of the Form BD, as of the date on
which the transition to the Form BR began and the CRD[supreg] no
longer accepted Schedule E filings, which occurred in October 2005.
See Letter from Catherine McGuire, Chief Counsel, Division,
Commission, to Patrice M. Gliniecki, Senior Vice President and
Deputy General Counsel, NASD, dated September 30, 2005.
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Electronic Delivery of Written Reports
Currently, NASD makes written reports available to the public by
U.S. mail in printed form and by email in an electronic format upon
receipt of a request via email or the established toll-free number. Due
to a number of practical issues that have arisen regarding email
delivery, NASD plans to replace the current delivery approach with a
link to a controlled-access server that would allow access to the
requested report through a secure Internet session in response to
inquiries via email or through the established toll-free number. Access
to the information would be limited to the written report requested,
and only the individual making the request would be granted access to
the database. A requestor also would be able to view investor education
materials that would aid him or her in understanding the written
report. NASD also would continue to provide hard copy reports to those
requesting hard copies.
Other Changes
NASD also proposes to make conforming changes to IM-8310-2,
including making various numbering and lettering changes, moving former
subsections (b) through (m) into new IM-8310-3, and updating references
to ``the Association'' and ``NASD Regulation, Inc.''
III. Comment Summary and NASD's Response
As noted above, the Commission received eight comment letters with
respect to the First Notice and four comment letters with respect to
the Second Notice.\23\ After the First and Second Notices, NASD filed
two response letters, respectively, to address the concerns raised by
the commenters.\24\ The Commission then
[[Page 3458]]
received a second comment letter addressing NASD Response Letter
II.\25\
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\23\ See supra notes 4 and 7.
\24\ See NASD Response Letters I and II.
\25\ See NASAA Letter II.
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Generally, the initial set of commenters took issue with the
portion of the proposed rule change regarding disclosure of an
individual's Historic Complaints, which includes information last
reported on the Registration Forms relating to customer complaints that
are more than two years old and that have not been settled or
adjudicated and customer complaints, arbitrations, or litigations that
have been settled for an amount less than $10,000 and are no longer
reported on a Registration Form. Although one commenter suggested that
all Historic Complaints should be disclosed to customers,\26\ most of
the commenters argued that the proposed changes to NASD's rules
relating to Historic Complaints would have harmful effects on member
firms and investors, with several of the commenters requesting that the
Commission not approve the proposed rule change because of this
provision.\27\ For instance, several of the commenters believed that
the release of a broker's Historic Complaints would give too much
weight to unproven allegations and complaints and thereby could
unfairly harm the broker's reputation.\28\ These commenters argued that
disclosure of all the complaints could be misleading to investors and
invite them to form conclusions based on allegations that may not have
merit and are not necessarily representative of a pattern of
misconduct.\29\ Two commenters also argued that disclosing archived
complaints to the public would ignore the fact that this type of
information was originally reported for regulatory purposes in
connection with registration and licensing matters.\30\ Similarly,
another commenter indicated that since the reporting process was
``first and foremost a regulatory tool and not a public disclosure
tool,'' firms had often reported events that were not clearly
reportable. This commenter believed that the proposed rule change would
now have the effect of discouraging firms from reporting questionable
matters.\31\
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\26\ See Pace Letter.
\27\ See, e.g., Davenport Letter, Piper Jaffray Letter, Raymond
James Letter, and Wachovia Letter. See also SIA Letter I (objecting
to the proposed release of archived Historic Complaints).
\28\ See, e.g., ARM Letter I, Davenport Letter, ING Letter,
Piper Jaffray Letter, Raymond James Letter, SIA Letter I, and
Wachovia Letter. One commenter believed this emphasis on
unsubstantiated and unadjudicated customer complaints to be
``fundamentally unfair'' and that NASD's proposal ``significantly
erodes'' due process and undermines the customer arbitration
process. This commenter also asserted that registered
representatives should have the opportunity to defend against
regulatory allegations before such allegations are used as the basis
of expanded adverse disclosure. See Davenport Letter. Another
commenter argued that, unlike the current system, NASD's proposal
would make it possible for frivolous claims to remain reportable as
a Historic Complaint potentially for years to come and could allow a
``vexatious complainant'' to place a broker in the continuous status
of having all of its Historic Complaints disclosed by repeatedly
making frivolous claims to meet the ``three or more'' standard. See
Wachovia Letter.
\29\ See, e.g., ARM Letter I, Davenport Letter, ING Letter,
Piper Jaffray Letter, Raymond James Letter, SIA Letter I and
Wachovia Letter. See also SIA Letter II.
\30\ See ARM Letter I and SIA Letter I (arguing that the
disclosure of Historic Complaints ignores the inherent differences
between the CRD system, which is used by regulators, and the
BrokerCheck system, which discloses to the public a subset of the
information contained within the CRD system). See also ING Letter.
\31\ See ING Letter.
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Furthermore, several commenters expressed concern that NASD's
proposal would inhibit firms from settling minor claims, since these
could be publicly disclosed, and thereby create an incentive for firms
to litigate customer complaints more often.\32\ Some of these
commenters asserted that the settlement of customer complaints does not
necessarily indicate an acknowledgement of improper behavior by the
broker, but rather is frequently the result of a cost/benefit analysis
or an effort to maintain client goodwill.\33\ Accordingly, several of
the commenters believed that the adverse impact on settlements would
not serve the interest of investors or advance the public interest.\34\
Additionally, believing that the proposal would encourage a broker to
litigate customer complaints in order to protect its record, some
commenters maintained that the increase in cost and time spent on
customer complaints would adversely affect member firms and investors
alike.\35\
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\32\ See, e.g., ARM Letter I, Davenport Letter, ING Letter,
Piper Jaffray Letter, Raymond James Letter, SIA Letters I and II,
and Wachovia Letter. See also ARM Letter II.
\33\ See, e.g., ARM Letter I, Davenport Letter, ING Letter,
Piper Jaffray Letter, Raymond James Letter, SIA Letter I and
Wachovia Letter.
\34\ See, e.g., ING Letter, Piper Jaffray Letter, Raymond James
Letter, SIA Letter I and Wachovia Letter.
\35\ See, e.g., ARM Letter I, ING Letter and Wachovia Letter.
One commenter predicted that NASD Dispute Resolution would be
overwhelmed by having to handle cases which otherwise would have
been settled. See SIA Letter I.
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A few commenters also opposed NASD's proposed threshold which would
trigger the release of all Historic Complaints, i.e., if the person has
three or more currently disclosable regulatory actions, currently
reported customer complaint, arbitration, or litigation disclosures, or
Historic Complaint disclosures, and the most recent Historic Complaint
or currently reported customer complaint, arbitration, or litigation is
less than 10 years old.\36\ While most of these commenters appeared to
incorrectly understand NASD's proposed application of the ten-year
condition,\37\ these commenters generally believed that three
disclosures over ten years would not necessarily be indicative of a
pattern of conduct by the registered representative because it could
include frivolous and baseless complaints filed against the
representative.\38\ Three of these commenters suggested that the
threshold for reporting Historic Complaints should be amended to be
five reportable events within a three-year period,\39\ with one
commenter also recommending that the look back for Historic Complaints
should be limited to ten years.\40\ One commenter also believed that
certain types of complaints should be excluded from the list of
disclosable events that would trigger reporting of Historic Complaints,
such as certain complaints filed by joint or related account holders,
operational complaints or those alleging primarily a product failure or
poor performance.\41\ Other commenters suggested that denied or
unsubstantiated claims \42\ and unadjudicated regulatory allegations
\43\ should not be counted towards the threshold requirement for
disclosing Historic Complaints.
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\36\ See, e.g., ING Letter, MWA Financial Letter, SIA Letter I
and Wachovia Letter. But see Pace Letter (arguing that the ``three
or more'' disclosed incident threshold for reporting all Historic
Complaints was too high and that BrokerCheck should disclose all
Historic Complaints to customers).
\37\ The Commission notes that most of these commenters
misunderstood NASD's proposal, believing that NASD would release all
Historic Complaint information, regardless of age, if the registered
person has a total of three of more disclosures within a ten-year
period. The Commission clarifies that the ten-year condition of
NASD's proposal would require that only the most recent of the
Historic Complaint or currently reported customer complaint,
arbitration, or litigation must be less than ten years old, which
would trigger disclosure of all Historic Complaints, if the other
conditions are met.
\38\ See, e.g., ING Letter, MWA Financial Letter, and SIA Letter
I. See also Wachovia Letter.
\39\ See ING Letter, MWA Financial Letter, and SIA Letter I.
\40\ See ING Letter.
\41\ See SIA Letter I.
\42\ See ARM Letter I.
\43\ See Davenport Letter.
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As part of their argument regarding the proposed rule's unfairness
in disclosing trivial or frivolous claims, three commenters asserted
that NASD's proposal to allow brokers to provide a brief commentary in
response to the disclosed information would not provide an adequate
safeguard for
[[Page 3459]]
brokers.\44\ As evidence of the proposed rule's imbalance against
brokers, these commenters pointed to the procedural obstacles that
brokers would have to overcome in order to submit a comment.\45\
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\44\ See Piper Jaffray Letter, Raymond James Letter, and
Wachovia Letter. See also ARM Letter I and SIA Letter I (criticizing
the expungement process as a viable remedy for a registered person
to remove meritless claims from its record).
\45\ For instance, two of these commenters believed that the
comment process would be administered by a ``skeptical NASD staff''
that would have the right to reject any brief comment. See Piper
Jaffray Letter and Raymond James Letter. The other commenter
criticized the signed, notarized affidavit that certain brokers
would have to provide in order to submit a comment. See Wachovia
Letter. But see Pace Letter. This commenter supported NASD's
proposed comment process for associated persons to respond to
disclosed material and believed it provided an opportunity for them
to explain any information they perceive to be incomplete.
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In addition, to address the harm of disclosing potentially
misleading information to investors and to protect against potential
abuses by disgruntled customers, a few commenters suggested adding
certain protections to the proposal,\46\ including changing the
proposal so that Historic Complaints, by default, would not be
disclosed unless NASD reviewed the matter to determine whether to
disclose the Historic Complaints.\47\ To assist investors in evaluating
information regarding unadjudicated claims and de minimis settlements,
the same commenter suggested that NASD insert a clarifying statement
indicating that a matter may have been unadjudicated because the
customer declined to pursue the matter or that it was settled for a
modest amount to avoid litigation and should not be considered an
admission of liability or responsibility.\48\ Another commenter
suggested that NASD require customers and their counsel to attest that
they have a reasonable, good-faith basis for naming a registered person
and that NASD provide to customers who are preparing to file claims
additional investor education material explaining the implications of
naming a particular registered person and the potential damaging
implications.\49\
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\46\ See, e.g., SIA Letter I and Wachovia Letter.
\47\ See Wachovia Letter. The commenter believed that, if
brokers were aware that NASD would exercise discretion and judgment
in determining when Historic Complaints should be disclosed, then
brokers would have less of an incentive to litigate. Id.
\48\ Id.
\49\ See SIA Letter I.
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To address these concerns, NASD indicated that it has developed an
educational component to the proposed BrokerCheck report and Web site
that NASD believes would put Historic Complaints in the appropriate
context and enable investors to give them appropriate weight when
evaluating a particular firm or registered person.\50\ Specifically,
NASD noted that there would be an introductory section preceding the
BrokerCheck report explaining that certain reported items may involve
pending actions or allegations that may be contested and not resolved
or proven, and that these items may be withdrawn or dismissed, resolved
in favor of the registered person, or concluded through a negotiated
settlement with no admission or conclusion of wrongdoing. In addition,
NASD noted that the BrokerCheck report would include certain status
information for each Historic Complaint that would indicate whether or
not the complaint was settled. NASD also indicated that it would advise
readers through the BrokerCheck report and its Web site that they
should not rely solely on the information available through BrokerCheck
and should consult other sources to the extent possible for information
about the registered person.
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\50\ See NASD Response Letter I.
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In response to commenter's criticisms against the brief commentary
mechanism that individuals can use to respond to disclosed information,
NASD emphasized that registered persons would be able to submit
information providing context and perspective about any event,
including Historic Complaints. NASD noted that individuals typically
provide such information in a comment section on the Form U4 at the
time the event is reported, and that the registered individual can add
to its previously submitted comment or comment for the first time
through its firm using the CRD system.\51\ In addition, NASD noted that
individuals who are no longer registered would be able to provide
comment through a signed affidavit to CRD. NASD also represented that
it would not edit the comments, except that it reserved the right to
reject or redact comments that contain confidential customer
information, offensive or potentially defamatory language, or
information that raises significant identity theft, personal safety or
privacy concerns that are not outweighed by investor protection
concerns.\52\
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\51\ If the proposed rule change is approved by the Commission,
NASD represented that it will provide instructions in a Notice to
Members on how firms may amend archived disclosures and will also
post frequently asked questions and answers about this process on
NASD's Web site. See NASD Response Letter I.
\52\ According to NASD, each person, whether registered or
formerly registered, will be responsible for ensuring that a
Historic Complaint that is not currently disclosed through
BrokerCheck adequately reflects its comment about the matter in the
event such matter becomes disclosed to the public. Id.
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Furthermore, a few commenters expressed concern over the fairness
of retroactively altering the rules regarding the disclosure of
Historic Complaints, including the disclosure of settlements after such
settlements have been made, since registered persons often agree to
settlements based on the assumption that the settlement information
would not become part of the public record or have long-term negative
effects on their reputations or business relationships.\53\ Two
commenters suggested that NASD should prospectively implement its
proposed rules regarding the disclosure of Historic Complaints and only
disclose complaints reported after the effective date of the proposed
rule change.\54\
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\53\ See, e.g., ARM Letters I and II, ING Letter and SIA Letters
I and II.
\54\ See ING Letter and SIA Letter I. See also ARM Letter II,
discussed further below (requesting that NASD not apply the new
guidelines to any matters that are currently pending as well).
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In response to commenter's concerns that firms and registered
persons may have made certain decisions relating to customer
complaints, arbitrations, or litigations based on the current rules
under which the CRD system and BrokerCheck operate, NASD proposed in
Amendment Nos. 4 and 5 to provide that only Historic Complaints that
become Historic Complaints on or after the implementation date of the
proposed rule change (i.e., those that are archived on or after the
implementation date) would be eligible for disclosure through
BrokerCheck.\55\ NASD stated that such a change would be in the public
interest. Under this proposed modification, NASD would disclose through
BrokerCheck all of an individual's Historic Complaints that became
Historic Complaints on or after the implementation date of the proposed
rule change if: (1) The most recent Historic Complaint or currently
reported customer complaint, arbitration, or litigation is less than
ten years old, and (2) the person has a total of three or more
currently disclosable regulatory actions, currently reported customer
complaints, arbitrations, or litigations, or Historic Complaints
(subject to the limitation that they became a Historic Complaint on or
after the implementation date of the proposed rule) or any combination
thereof. According to NASD, the revised approach would strike a fair
balance between public investors' interests in the background of the
individuals with
[[Page 3460]]
whom they do business and the concerns of participants in the
securities industry.
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\55\ See NASD Response Letter I. See also Amendment No. 4.
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In reaction to NASD's proposed changes in Amendment Nos. 4 and 5,
the Commission received four additional comment letters. After the
Second Notice, two commenters expressed support for this recent change
by NASD to provide that Historic Complaints will not be eligible for
disclosure if the matter became a Historic Complaint before the
implementation date of the proposed rule change.\56\ Another commenter
wanted NASD to go even further by recommending that the new BrokerCheck
program disclose only those matters that commence following the rule
change and not include any matters that are currently pending.\57\
According to this commenter, current matters entered into before the
rule change should be archived after two years as the current
guidelines allow.\58\
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\56\ See MWA Financial Letter and SIA Letter II.
\57\ See ARM Letter II.
\58\ Id.
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However, one commenter expressed serious reservations regarding the
proposed limitation on the disclosure of Historic Complaints.\59\
Specifically, this commenter argued that the effect of the recent
amendment is that Historic Complaint information that currently exists
within CRD would never be released to the public through BrokerCheck,
while the only Historic Complaints that would be disclosed are those
that become Historic Complaints after the proposal's effective date.
This commenter was not persuaded by other commenters' arguments that
the proposed rule should be implemented prospectively because firms and
registered persons might have relied on the current rules under which
CRD and BrokerCheck operate when they decided to settle certain
customer complaints, arbitrations, or litigations. First, the commenter
maintained that these other commenters did not substantiate their
argument with any specific cases, surveys, or studies in which
registered representatives actually settled customer disputes because
they would not be publicly disclosed after two years.\60\ Second, the
commenter disagreed with other commenters' assertions that NASD members
had settled matters without the knowledge that the rules might change
in the future. In support of its argument, the commenter indicated that
NASD's Notice to Members 02-74 that was issued in 2002 put NASD members
on notice that the rules regarding the public disclosure of customer
complaints and, more specifically, the rules regarding Historic
Complaints might be revised and modified.\61\ This commenter asserted
that if NASD wanted to strike a balance between the industry and
investors, NASD should have considered that its membership was aware of
the proposed changes to BrokerCheck since its Notice to Members in 2002
and should have proposed the earlier date as the date for measuring
which complaints would fall within the definition of Historic
Complaints under the proposed rule change. Furthermore, this commenter
argued that, if the proposal were implemented as proposed in Amendment
No. 4, more comprehensive information could be available for the same
financial services professional in the Investment Adviser Public
Disclosure--Individual (``IAPDI'') system, which is currently being
developed, than in BrokerCheck. The commenter maintained that this
would go against NASD's original intent of providing the same level of
information through BrokerCheck that the states provide and could lead
to investor confusion.\62\ Finally, this commenter took issue with
NASD's proposal to alter the way it would measure the two-year
reporting and disclosure period for customer complaints. While NASD
currently calculates the two-year period for disclosure of customer
complaints as of the date the complaint was reported on Forms U4 and
U5, NASD had proposed to consider this two-year period to begin on the
date on which the member received the complaint, both for purposes of
reportability on Forms U4 and U5 and for disclosure purposes. This
commenter believed this change could encourage registered persons and
their firms to manipulate the amount of time the complaint would be
publicly disclosed by delaying the reporting or perhaps withholding the
reporting of customer complaints while the two-year period is running.
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\59\ See NASAA Letter I.
\60\ The commenter criticized NASD for agreeing with other
commenters that ``stockbrokers would rather litigate customer
disputes than settle them because the complaint would be publicly
disclosed.'' Id.
\61\ The commenter cited to the 58 plus comment letters that
NASD received in response to this Notice to Members as evidence that
NASD's membership was aware that the rules regarding the release of
historic information might change. Id.
\62\ The commenter was concerned that the same person would be
treated differently for disclosure purposes depending on which
system, BrokerCheck or IAPDI, an investor searches, and that the
public would have to check multiple sources for disclosure on the
same person. Id.
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In response to this commenter's objection to NASD's proposal to
disclose a Historic Complaint only if the item became a Historic
Complaint on or after the implementation date of the proposal, NASD
maintained that its proposal is an evenhanded approach that would
provide investors with additional information about brokers who have
demonstrated a pattern of conduct of accumulating complaints,
regulatory actions, arbitrations, or litigations, and that would also
address the fairness concerns of participants in the securities
industry by not retroactively changing the rules governing the
disclosure of such events.\63\ To address the commenter's concern over
measuring the two-year time period for disclosing customer complaints
through BrokerCheck from the date the complaint is filed with the firm,
rather than the date the complaint is reported to the CRD system, NASD
stated that, to the extent a firm may not timely amend a registered
person's Form U4 to report a customer complaint, the event should still
be disclosed through BrokerCheck for two years. Accordingly, NASD
decided not to amend the manner in which it currently measures the two-
year time frame for complaint disclosures and provided that complaints
will continue to be disclosed through BrokerCheck for 24 months
beginning on the date that the complaint is reported to the CRD
system.\64\
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\63\ See NASD Response Letter II and Amendment No. 6. But see
NASAA Letter II. Continuing to object to NASD's proposal to disclose
only those items that become a Historic Complaint after the
implementation date, the commenter criticized NASD Response Letter
II in failing to specifically respond to issues the commenter raised
in its initial comment letter and urged the Commission to not
approve the proposed rule change.
\64\ See NASD Response Letter II.
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IV. Discussion and Commission's Findings
After careful consideration of the proposal, the comment letters,
and NASD's responses to the comment letters, the Commission finds that
the proposed rule change, as amended, is consistent with the
requirements of the Act and the rules and regulations thereunder
applicable to a national securities association.\65\ The Commission
believes that the proposed rule change, as amended, is consistent with
Section 15A(b) of the Act,\66\ in general, and furthers the objectives
of Section 15A(b)(6),\67\ in particular, in that it is designed to
prevent fraudulent and manipulative acts and practices, to
[[Page 3461]]
promote just and equitable principles of trade, 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. In addition, the Commission believes that the proposed rule
change, as amended, is consistent with Section 15A(i) of the Act,\68\
which requires that NASD establish and maintain a toll-free telephone
listing, and a readily accessible electronic or other process, to
receive and promptly respond to inquiries regarding registration
information on its members and their associated persons.
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\65\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. 15 U.S.C. 78c(f).
\66\ 15 U.S.C. 78o-3(b).
\67\ 15 U.S.C. 78o-3(b)(6).
\68\ 15 U.S.C. 78o-3(i).
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The Commission believes that investors must be given the
information necessary to make an informed decision about whether or not
to conduct business with a particular broker-dealer or associated
person. At the same time, the Commission recognizes that broker-dealers
and their associated persons have legitimate concerns related to the
harm their reputations could suffer from inaccurate or misleading
information being made available to the public, as well as from the
release of confidential personal information. The Commission believes
that the proposed rule change would adequately balance the needs of
investors with the interests of broker-dealers and their associated
persons by increasing the amount of information available through
BrokerCheck, while adopting certain protections for broker-dealers and
their associated persons. For instance, under the proposed rule change,
NASD would not release certain confidential personal information or
other information about an associated person or a member which is
irrelevant or misleading.
Many of the commenters expressed concern regarding the release of
Historic Complaints. Commenters argued, among other things, that the
proposal would give too much weight to unproven allegations and
complaints and could be misleading to investors, that the proposed
threshold for disclosure of Historic Complaints is too low and over-
inclusive, and that firms would be inhibited from settling minor
claims, which are often settled as the result of a cost/benefit
analysis or in an effort to maintain client goodwill, since they could
be publicly disclosed.
The Commission notes that NASD has protections in place that should
address the issues raised by the commenters. First, NASD would allow
associated persons to submit relevant comments for inclusion with the
information provided by BrokerCheck. While some of the commenters
disputed the protections that the ``brief comment'' process would
provide, the Commission notes that, as NASD reiterated in its response
to comments, NASD would only reject or redact comments in very limited
circumstances and, furthermore, would only do so if the concerns raised
by the comments are not outweighed by investor protection concerns. In
addition, NASD will include an introductory section preceding the
BrokerCheck report that would provide a context within which to
consider complaints, status information in the report that would make
clear whether or not a Historic Complaint was settled, and advisories
in the BrokerCheck report and on the Web site that would indicate that
the reader should not rely solely on the information available through
BrokerCheck.
Some commenters were concerned that altering the rules regarding
disclosure of settlements after such settlements had been made would be
unfair. The Commission believes NASD's decision to only release
information on Historic Complaints that become Historic Complaints on
or after the implementation date of the proposed rule change is a
reasonable response to that concern. For instance, under the proposal,
as amended, persons entering into new settlements would be fully aware
that, if such settlements were for less than $10,000 and are no longer
reported on a Registration Form, they would be disclosed as Historic
Complaints if the threshold requirements for disclosure were met.
One commenter argued strongly against NASD's proposal to only
release Historic Complaints that become Historic Complaints on or after
the implementation date of the proposed rule change. This commenter
asserted, among other things, that there had been sufficient notice of
this proposal since November 2002 and that a better approach would be
to release Historic Complaints that became Historic Complaints on or
after that date. The Commission recognizes that differing judgments
could be made as to the relevance of various Historic Complaints and
the appropriate balance between the informational needs of investors
and the interests of broker-dealers and their associated persons in
assuring misleading information about them is not disseminated. The
Commission believes NASD has struck a reasonable balance, and notes
that, even using the implementation date as the ``cutoff'' for
disclosure of Historic Complaints, the amount of information that would
be disclosed through BrokerCheck would increase under this proposed
rule change.
The same commenter argued that NASD should not change the way in
which it measures the two-year disclosure period for customer
complaints, which currently begins on the date the member reports the
complaint. This commenter was concerned that, if complaints were only
disclosed for two years from the date they were received by the member,
there would be an incentive to delay or even withhold the reporting of
customer complaints in order to shorten the disclosure period. The
Commission notes that in Amendment No. 6 NASD has withdrawn this
portion of its proposal. Accordingly, customer complaints will continue
to be disclosed for two years from the date on which they are reported.
With regard to all other issues raised by the commenters, the
Commission is satisfied that NASD has adequately addressed the
commenters' concerns. The Commission further notes NASD's planned
electronic distribution system should provide NASD with the flexibility
to provide a report delivery solution that is more user-friendly, and
that more efficiently meets investors' needs in light of changing
technology, while still providing safeguards against data piracy.
While BrokerCheck is a valuable tool for an investor to use to get
information about a firm or a registered person with whom the investor
is considering doing business, the Commission would urge investors to
check with each state where the firm has done business or where the
sales person has been registered to obtain a complete picture of his or
her disciplinary history.
Accelerated Approval
The Commission finds good cause for approving the proposed rule
change prior to the thirtieth day after the date of publication in the
Federal Register pursuant to Section 19(b)(2) of the Act.\69\ In
Amendment No. 6, NASD: (i) indicated that it was withdrawing its
original proposal to change the start date of the two-year period for
disclosure of a customer complaint to the date on which the member
receives the complaint; and (ii) clarified that it currently releases
summary information concerning certain arbitration awards issued by
NASD arbitrators and will continue to work with other regulators
regarding disclosure of arbitration awards issued in other forums, and
made a corresponding change to the proposed rule text. The Commission
[[Page 3462]]
notes that NASD's amendments were largely in response to comments that
the Commission received. The Commission believes that Amendment No. 6
adequately responds to commenters' concerns and notes that the proposed
changes raise no new issues of regulatory concern. Accordingly, the
Commission believes that granting accelerated approval to the filing is
appropriate.
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\69\ 15 U.S.C. 78s(b)(2).
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the filing, including whether the filing is
consistent with the Act. Comments may be submitted by any of the
following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml.
); or Send an e-mail to rule-comments@sec.gov. Please include
File Number SR-NASD-2003-168 on the subject line.
Paper Comments
Send paper comments in triplicate to Nancy M. Morris,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-NASD-2003-168. 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 the filing
also will be available for inspection and copying at the principal
office of the 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 File Number
SR-NASD-2003-168 and should be submitted on or before February 15,
2007.
VI. Conclusion
For the foregoing reasons, the Commission finds that the proposed
rule change, as amended, is consistent with the requirements of the Act
and rules and regulations thereunder applicable to a national
securities association, and, in particular, Section 15A(b)(6) of the
Act \70\ and 15A(i) of the Act.\71\
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\70\ 15 U.S.C. 78o-3(b)(6).
\71\ 15 U.S.C. 78o-3(i).
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It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\72\ that the proposed rule change (SR-NASD-2003-168) is hereby
approved on an accelerated basis.
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\72\ 15 U.S.C. 78s(b)(2).
\73\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\73\
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-1108 Filed 1-24-07; 8:45 am]
BILLING CODE 8011-01-P