==========================================START OF PAGE 1====== SECURITIES AND EXCHANGE COMMISSION 17 CFR Part 249 Release No. 34-37431; File No. S7-2-95 RIN 3235-AG25 Form BD Amendments AGENCY: Securities and Exchange Commission ACTION: Final Rule SUMMARY: The Securities and Exchange Commission is adopting amendments to Form BD, the uniform broker-dealer registration form under the Securities Exchange Act of 1934. The primary purpose of the amendments is to implement recommended changes to the Central Registration Depository system, a computer system operated by the National Association of Securities Dealers, Inc. that maintains registration information regarding broker-dealers and their registered personnel. Specifically, the amendments are intended to facilitate retrieval of broker-dealer registration and disciplinary information through the redesigned Central Registration Depository by eliciting more precise disclosure and by reorganizing disciplinary items into related categories. The changes to the disclosure section of Form BD are consistent with changes made by the North American Securities Administrators Association, Inc. to the analogous section in Form U-4, the uniform form for registration of associated persons of a broker-dealer. The Commission also is adopting clarifying amendments to Form BD, including instructions for filing Form BD electronically with the Central Registration Depository. ==========================================START OF PAGE 2====== DATES: Effective Date: [insert date thirty days following publication in the Federal Register]; Compliance Date: (i) July 29, 1996 for filings made on or after that date by broker-dealer participants in the redesigned Central Registration Depository pilot; (ii) September 9, 1996 for filings made on or after that date by new broker-dealer applicants; and (iii) no later than six months following receipt of notification of conversion to the redesigned Central Registration Depository system for filings made on or after that date by broker-dealers already registered as of September 9, 1996. FOR FURTHER INFORMATION CONTACT: Glenn J. Jessee, Special Counsel, (202) 942-0073, Office of Chief Counsel, Division of Market Regulation, Securities and Exchange Commission, 450 Fifth Street, N.W., Mail Stop 5-10, Washington, D.C. 20549. SUPPLEMENTARY INFORMATION: I. INTRODUCTION The Securities and Exchange Commission ("Commission") is adopting amendments to Form BD, the uniform application form for broker-dealer registration under the Securities Exchange Act of 1934 ("Exchange Act").-[1]- The amendments are expected to provide the Commission, self-regulatory organizations ("SROs"), and state securities regulators with better information about a registrant's disciplinary history by grouping disciplinary information into related categories and by customizing the corresponding Disclosure Reporting Pages ("DRPs") used to ---------FOOTNOTES---------- -[1]- 17 CFR 240.15b1-1; 17 CFR 249.501. ==========================================START OF PAGE 3====== disclose details of the registrant's disciplinary history. The amendments also are intended to elicit more precise information about the business activities of broker-dealer applicants. These amendments respond to certain recommended changes to the Central Registration Depository ("CRD"), a computer system operated by the National Association of Securities Dealers, Inc. ("NASD") that maintains registration information regarding broker-dealers and their registered personnel.-[2]- The redesigned system, which is expected to be operational beginning September 9, 1996, is expected to enhance its use by the Commission, SROs, and state securities regulators by providing for (i) streamlined capture and display of data; (ii) better access to information through the use of standardized and specialized computer searches; and (iii) electronic filing of uniform forms, including Forms BD, BDW, U-4, and U-5.-[3]- ---------FOOTNOTES---------- -[2]- In 1992, the Commission, as part of its ongoing effort to reduce the costs associated with broker-dealer registration, joined the CRD system and adopted amendments to the broker-dealer registration process. Those amendments required, among other things, that all broker-dealers file Form BD with the Commission through the CRD. Securities Exchange Act Release No. 31660 (Dec. 28, 1992), 58 FR 11. Direct participation in the CRD system has improved the efficiency of the registration process by creating a comprehensive, centralized database of all registrants, and by giving the Commission more immediate access to current data in broker-dealer filings. In addition, the new system has resulted in cost savings to registrants, who no longer are required to make multiple filings with the Commission, certain SROs, and state regulators. -[3]- In a separate release, the Commission is proposing amendments to Form BDW, the uniform request for broker-dealer withdrawal under the Exchange Act. See Securities Exchange Act (continued...) ==========================================START OF PAGE 4====== Planned improvements to the operation of the CRD system led to discussions among the Commission's staff, the Forms Revision and CRD Committee ("Forms Revision Committee") of the North American Securities Administrators Association, Inc. ("NASAA"), the NASD, the New York Stock Exchange, Inc., and representatives of the securities industry, which culminated in the proposed amendments to Form BD. In its release proposing amendments to Form BD ("Proposing Release"),-[4]- the Commission requested comment on specific changes to Form BD and whether such changes would provide more meaningful information to the Commission and other securities regulators without increasing the regulatory burden on broker-dealers. In response to the request for comment, the Commission received two comment letters expressing general support for the proposed amendments.-[5]- While the comments generally supported the proposed revisions, they also ---------FOOTNOTES---------- -[3]-(...continued) Release No. 37432. The proposed amendments to Form BDW are analogous to certain amendments to Form BD being adopted today, as well as amendments to Forms U-4 and U-5 that were adopted by the North American Securities Administrators Association, Inc. at its 1994 Spring Conference and that are the subject of a proposed rule change by the NASD. See Notice of Filing of Proposed Rule Change by National Association of Securities Dealers, Inc. Relating to Proposed Amendments to Forms U-4 and U-5, Securities Exchange Act Release No. 37289 (Jun. 7, 1996), 61 FR 30272 (File No. SR-NASD-96-19). -[4]- Securities Exchange Act Release No. 35224 (January 12, 1995), 60 FR 4040. -[5]- See Letters from Michael S. Caccese, Sr. Vice President, General Counsel, Association for Investment Management and Research and Joseph P. Karpinski, Chair, State Investment Adviser Advocacy Committee (March 1, 1995); and Jacqueline H. Hallihan, President, National Regulatory Services, Inc. (February 15, 1995), to Jonathan G. Katz, Secretary, SEC. ==========================================START OF PAGE 5====== suggested additional changes. After review of the comments and discussions with the NASAA Forms Revision and CRD Committee, the Commission is adopting the amendments to Form BD as proposed with minor modifications, as discussed below. II. DESCRIPTION OF THE AMENDMENTS The principal changes to Form BD concern amendments to current Item 7, which requests information about the disciplinary history of the applicant and its control affiliates, including information relating to statutory disqualifications,-[6]- other relevant history, and the applicant's financial soundness. In the Proposing Release, the Commission proposed renumbering Item 7 as Item 11 and grouping related information under four broad disclosure categories to allow for the reporting of more precise and accurate information from applicants and to facilitate enhanced retrieval of such information from the CRD.-[7]- The Commission also proposed amending three questions under new Item 11 relating to disclosure of criminal, regulatory, and financial information of the applicant ---------FOOTNOTES---------- -[6]- Sections 15(b)(4) and 15(b)(6) of the Exchange Act authorize the Commission to deny registration to a broker-dealer if the broker-dealer or an associated person of the broker-dealer has engaged in the activities listed in those sections. 15 U.S.C.  78o(b)(4) and (b)(6). See also Section 3(a)(39) of the Exchange Act. -[7]- The four disclosure categories proposed by the Commission are Criminal, Regulatory, Civil Judicial, and Financial. ==========================================START OF PAGE 6====== broker-dealer and its control affiliate.-[8]- In addition, the Commission proposed replacing the single generic DRP with four customized DRPs to reflect more accurately the different categories of disclosures that would be required to be reported under new Item 11.-[9]- Commenters supported the proposed amendments to Item 11 and the corresponding DRPs, but suggested further amendments.-[10]- The Association for Investment Management and Research ("AIMR"), for example, suggested that disciplinary actions taken by professional organizations, such as the American Bar Association, the American Institute of Certified Public Accountants, and the AIMR, also should be included in the "Regulatory Action Disclosure" section of Item 11. In AIMR's view, public sanctions taken by professional associations against ---------FOOTNOTES---------- -[8]- Under new Item 11, military court convictions would be added to Items 11A and B. Similarly, perjury and conspiracy to commit certain misdemeanor offenses would be added to Item 11B. Item 11H(1) would inquire about settlement agreements in investment-related civil actions brought against the applicant or its control affiliates by a state or foreign financial regulatory authority. In addition, Item 11I(1) would limit disclosure of bankruptcy proceedings to those that have occurred during the preceding ten years. -[9]- See supra note 7. -[10]- National Regulatory Services, Inc. ("NRS") noted in its comment letter that instructions that direct applicants to use the reverse side of a DRP or a duplicate of a Schedule for providing additional comments do not appear appropriate for electronic filing of Form BD. While the Commission agrees that these instructions, in fact, are not appropriate for electronic filing, it is anticipated that new broker-dealer applicants will file revised Form BD in paper form with the CRD. These instructions, therefore, would be appropriate for those limited circumstances in which Form BD is filed in paper form. See discussion infra at Section IV. ==========================================START OF PAGE 7====== their members can be an important source of information about the integrity and competence of registered broker-dealers and their personnel. The Commission uses Item 11 to elicit information about regulatory actions that may constitute a statutory disqualification.-[11]- In this regard, Item 11 questions are narrowly tailored to elicit relevant information that would have a direct bearing on an applicant's request for broker-dealer registration with the Commission, the SROs, and state securities regulators. To serve the needs of state securities regulators, Item 11, which already requires applicants and their control affiliates to disclose whether the person's license as an attorney or accountant has ever been revoked or suspended, also has been expanded to include disclosure regarding the revocation or suspension of a federal contractor license. Based on discussions with the Forms Revision Committee, however, the Commission has determined that further information about public disciplinary sanctions is not necessary. Accordingly, the Commission has determined to adopt the revisions to Item 11 as originally proposed. Other amendments to Form BD proposed by the Commission include new Item 10B, which would elicit information concerning all financial institutions or organizations, including bank ---------FOOTNOTES---------- -[11]- See supra note 6. ==========================================START OF PAGE 8====== holding companies, that control the applicant.-[12]- The Commission also proposed certain clarifying amendments to Item 8 regarding arrangements under which another party maintains the applicant's books and records, or its accounts or the accounts of its customers.-[13]- In addition, the Commission proposed adding to the filing instructions of Form BD an "Explanation of Terms," containing definitions of the following words: charged, order, felony, misdemeanor, found, minor rule violation, and enjoined,-[14]- together with certain clarifying amendments to Form BD. These amendments, which are discussed in detail in the Proposing Release, are being adopted by the Commission as proposed. The Commission also is adopting, with minor changes, proposed amendments to Schedules A, B, and C to Form BD, which require applicants to disclose the identity of their executive officers, directors, partners, and direct and indirect owners; Schedule D, which provides for disclosure of supplemental information relating to various Form BD items; and Schedule E, ---------FOOTNOTES---------- -[12]- Specifically, new Item 10B would require the applicant to disclose whether it is controlled, directly or indirectly, by a bank holding company, national bank, state member bank of the Federal Reserve System, state non-member bank, savings bank or association, credit union, or foreign bank. -[13]- Items 8A(1) and (2) would be redesignated as Items 8A, 8B, and 8C. As amended, Item 8A would continue to inquire about arrangements to maintain books and records. Redesignated Items 8B and 8C would require disclosure of any arrangements to maintain the accounts, funds, or securities of the applicant, and the accounts, funds, or securities of customers of the applicant, respectively. -[14]- See Proposing Release, at 60 FR 4042. ==========================================START OF PAGE 9====== which provides for registration of branch offices or other business locations of the applicant.-[15]- In the Proposing Release, the Commission proposed to add to Item 3A Limited Liability Companies ("LLCs") as a choice of legal form of organization the applicant may select. The Commission is adopting that proposal, together with corresponding instructions in Schedules A, B, and C for disclosing direct and indirect owners of a broker-dealer applicant that is a LLC.-[16]- In order to elicit more accurate information concerning foreign control affiliates of a broker-dealer applicant, the Commission also is adopting proposed amendments requiring an applicant to check a box on Schedules A and B to indicate if its owner is a domestic entity, an entity incorporated or domiciled in a foreign ---------FOOTNOTES---------- -[15]- One commenter, NRS, addressed the proposed amendments to the Schedules to Form BD. While NRS supported the proposed amendments, it also suggested that the Commission provide additional clarifying instructions to Item 6 of Schedule B (ownership codes applicable to indirect owners) and Item 11 of Schedule E (branch office or other business locations). In response to NRS's comments, the Commission is adding clarifying instructions to these items. For example, Item 12 of Schedule E, previously proposed as Item 11, now will include an instruction for broker-dealer applicants to check the appropriate box(es) if the branch or other business location is (i) registering with the NASD or (ii) registering or reporting with a state. -[16]- Schedule A (direct owners) of Form BD will now include the following instruction: (d) in the case of an applicant that is a LLC, (i) those members that have the right to receive upon dissolution, or have contributed, 5% or more of the LLC's capital, and (ii) if managed by elected managers, all elected managers. Schedule B of Form BD will now include a similar instruction for indirect owners. ==========================================START OF PAGE 10====== country, or an individual. In addition, the Commission is adopting amendments to delete from Schedule I of Form X-17A-5, the Focus report, questions requiring broker-dealers to disclose their affiliations, if any, with U.S. banks. As discussed above, information about such affiliations will now be disclosed under Item 10B of Form BD.-[17]- III. ELECTRONIC FILING In the Proposing Release, the Commission noted that implementation of the redesigned CRD by the NASD ultimately is intended to enable broker-dealers and their associated persons to file electronically registration and licensing information with the CRD. Because the redesigned CRD is intended to operate in an electronic environment, paper filings eventually will no longer be submitted by broker-dealer applicants in most instances, nor will data be manually entered into the CRD system by the NASD.-[18]- Rather, in most instances, broker-dealers will file registration and licensing information with the NASD electronically by direct link with the CRD system through a variety of methods, including standard dial-up access.-[19]- Electronic filings submitted by or on behalf ---------FOOTNOTES---------- -[17]- See Proposing Release, at 40 FR 4042. -[18]- Applicant broker-dealers seeking to register with the Commission and the various states currently file a single Form BD with the NASD, which manually enters the information into the CRD system and then electronically forwards the information to the Commission and the appropriate states for review. -[19]- The NASD has developed software that will support personal computer entry of broker-dealer registration (continued...) ==========================================START OF PAGE 11====== of broker-dealers will be transmitted to the CRD either in batch transfers or in an on-line mode.-[20]- After the information has been transmitted electronically, the CRD system will disseminate the registration requests or updated information to the Commission, the SROs, and any states in which the broker-dealer is registering or has registered. After an electronic filing is processed, the CRD system will send the filer an electronic message or identification number indicating whether the filing has been accepted. The results of Commission, SRO, and state review of broker-dealer filings also will be handled electronically and will be transmitted directly to the broker-dealer applicant via the redesigned CRD system. The Commission is adopting as part of the amendments to Form BD instructions for filing Form BD electronically with the redesigned CRD system. A letter from one of the commenters, National Regulatory Services, Inc., addressed electronic filing. While this commenter supported electronic filing, it also expressed concern about timely access to, and the availability ---------FOOTNOTES---------- -[19]-(...continued) information. This software may be obtained from the NASD pursuant to a subscription agreement. -[20]- The redesigned CRD will provide for batch filings of registration and licensing information. Under the redesigned CRD, broker-dealers will be able to download data from their internal data bases into programmed formats for the CRD to process. In this regard, broker-dealers or persons acting on their behalf, such as service bureaus, will be able to create several CRD filings off-line and, when ready, transmit them collectively to the CRD. In comparison, in an on-line mode, broker-dealers or persons acting on their behalf, such as service bureaus, will enter information directly into the redesigned CRD through a windows-based interactive session. ==========================================START OF PAGE 12====== of, the interfacing specifications of the new CRD system. The Commission expects the NASD to work with service bureaus and other interested parties to ensure that the redesigned CRD will be hospitable to service bureaus seeking to file for their clients through electronic means. IV. EFFECTIVE and COMPLIANCE DATES The filing of revised Form BD is intended to coincide with the implementation of the redesigned CRD, which will be conducted by the NASD in phases. With the voluntary participation of several NASD member firms and one service bureau, the NASD began a two-month test of the redesigned CRD on May 20, 1996. During this period, the NASD will test the software that will enable broker-dealers to file Forms BD and BDW (and other uniform forms) with the redesigned CRD system and carry out other quality assurance testing. The NASD anticipates that on July 29, 1996, broker-dealers participating in the test will begin filing all of their registration and licensing information electronically with the redesigned CRD on a pilot basis. On September 9, 1996, following completion of the pilot, the NASD plans to implement Phase I of the transition to the redesigned CRD. During Phase I, the NASD will convert broker-dealer registration information contained in the old CRD system to the redesigned CRD. Also during Phase I, it is anticipated that the NASD will enter manually initial broker- dealer application information submitted on revised Form BD into the redesigned CRD system. During Phase II of the implementation ==========================================START OF PAGE 13====== process, the Commission, the SROs, and state securities regulators will be provided direct access to broker-dealer registration information contained in the redesigned CRD system. Prior to Phase II implementation, the Commission, the SROs, and state securities regulators will continue to gain access to broker-dealer registration information, including information filed on revised Form BD, through the old CRD system. Broker-dealers participating in the redesigned CRD pilot will begin to use revised Form BD on July 29, 1996. The amendments to Form BD become effective September 9, 1996 for all other broker-dealers. Thus, all applicants filing for initial broker-dealer registration on or after September 9, 1996 will be required to file revised Form BD in accordance with the instructions contained therein. It is anticipated that broker- dealers registered with the Commission as of September 9, 1996 will be required to file revised Form BD only after their registration information contained in the old CRD has been converted to the redesigned CRD system.-[21]- V. EFFECTS ON COMPETITION AND REGULATORY FLEXIBILITY ACT CONSIDERATIONS Sections 23(a)(2) of the Exchange Act-[22]- requires ---------FOOTNOTES---------- -[21]- Until a broker-dealer's existing registration information has been converted to the redesigned CRD system, it is expected that the broker-dealer will continue to file amendments to its registration on Form BD (as revised November 16, 1992) in paper form with the old CRD. See discussion of electronic filing and proposed amendments to Exchange Act rules for filing Form BD, Securities Exchange Act Release No. 37432. -[22]- 15 U.S.C.  78w(a)(2). ==========================================START OF PAGE 14====== that the Commission, when adopting rules under the Exchange Act, consider the anticompetitive effects of those rules, if any, and to balance any anticompetitive impact against the regulatory benefits gained in terms of furthering the purposes of the Exchange Act. The Commission is of the view that the adoption of the amendments to Form BD and Schedule I of Form X-17A-5, the FOCUS report, will not impose any burden on competition not necessary or appropriate in furtherance of the purposes of the Exchange Act. The Commission has prepared a Final Regulatory Flexibility Analysis ("FRFA"), regarding the revisions to Form BD and Schedule I of Form X-17A-5, the FOCUS report in accordance with 5 U.S.C.  604. The FRFA notes the initial costs of operational and procedural changes that may be necessary to comply with the amendments to Form BD and Schedule I of Form X-17A-5. The FRFA also notes that adoption of the amendments to Form BD and Schedule I of Form X-17A-5 not only will provide benefits to securities regulators by improving their ability to identify and flag problem brokers through the use of standardized and specialized computer searches, but also will ease the burden of registration by future registrants. A copy of the FRFA may be obtained from Glenn J. Jessee, Special Counsel, Office of Chief Counsel, Division of Market Regulation, Securities and Exchange Commission, 450 Fifth Street, N.W., Mail Stop 5-10, Washington, D.C. 20549, (202) 942-0073. VI. PAPERWORK REDUCTION ACT ANALYSIS ==========================================START OF PAGE 15====== The amendments to Form BD include "collection of information" requirements within the meaning of the Paperwork Reduction Act ("PRA") (44 U.S.C. Section 3501 et seq.). The Commission submitted the proposed amendments to the Office of Management and Budget ("OMB") for review in accordance with PRA requirements in effect at that time. OMB has approved the amendments to Form BD and has assigned Form BD OMB Number 3235- 0012, with an expiration date of March 31, 1998. The amendments to Form BD are expected to provide securities regulators with better information about a registrant's disciplinary history by grouping disciplinary information into related categories and by customizing the corresponding DRPs used to disclose details of the registrant's disciplinary history. The amendments also are intended to elicit more precise information about the business activities of broker-dealer applicants.-[23]- As discussed above, the amendments to Form BD respond to certain recommended changes to the CRD system that have led to its redesign. The redesigned CRD system is expected to enhance ---------FOOTNOTES---------- -[23]- The Commission uses the information disclosed by applicants in Form BD to: (i) determine whether broker-dealer applicants meet the standards for registration set forth in the provisions of the Exchange Act; (ii) develop and maintain a central information resource where members of the public may obtain relevant, current information about broker-dealers, municipal securities dealers, and government securities brokers or government securities dealers, and where the Commission and other securities regulators may obtain information for investigatory purposes; and (iii) develop statistical information concerning broker-dealers, municipal securities dealers, and government securities brokers or government securities dealers. ==========================================START OF PAGE 16====== its use by securities regulators and will allow broker-dealers to file Form BD and other uniform registration forms electronically. Because the redesigned CRD is intended to operate in an electronic environment, paper filings eventually will no longer be submitted by broker-dealer applicants in most instances, nor will data be manually entered into the CRD system by the NASD. Rather, broker-dealers will file registration and licensing information with the NASD electronically by direct link with the CRD system through standard dial-up access and other electronic means. Broker-dealers already are required pursuant to Rule 15b1- 1-[24]- under the Exchange Act to file for registration on Form BD and, pursuant to Rule 15b3-1(b),-[25]- to promptly file an amendment to Form BD if any information contained therein becomes inaccurate. The amendments to Form BD primarily relate to the disciplinary history sections. Thus, unless a broker- dealer has an extensive disciplinary history, the amendments to Form BD, as adopted, will not impose any significant additional recordkeeping or other compliance requirement on broker- dealers.-[26]- The Commission is of the view, however, ---------FOOTNOTES---------- -[24]- 17 CFR 240.15b1-1. -[25]- 17 CFR 240.15b3-1(b). -[26]- It is expected that a broker-dealer would be required to file new information solicited by revised Form BD at the time it files its first amendment to Form BD after its registration information has been converted to the redesigned CRD, but, in any event, no later than six months from its date of conversion to the redesigned CRD. See discussion of proposed (continued...) ==========================================START OF PAGE 17====== that the benefit to regulators in obtaining more precise information regarding a broker-dealer's activities and disciplinary history will outweigh the burden on broker-dealers imposed by this additional reporting requirement. Moreover, the Commission expects that when the redesigned CRD system is fully implemented, electronic filing will further reduce the regulatory burden on broker-dealers for filing Form BD and amendments thereto. VII. LIST OF SUBJECTS IN 17 CFR PART 249 Reporting and recordkeeping requirements, Securities, Broker-Dealers STATUTORY BASIS AND TEXT OF FINAL AMENDMENTS In accordance with the foregoing, Title 17, Chapter II of the Code of Federal Regulations is amended as follows: PART 249 - FORMS, SECURITIES EXCHANGE ACT OF 1934 1. The authority citation for Part 249 continues to read in part as follows: Authority: 15 U.S.C. 78a, et seq., unless otherwise noted; * * * * * 2. By revising Form BD (referenced in  249.501) to read as set forth below: Note: Form BD does not and the revisions will not appear in the Code of Federal Regulations. Revised Form BD is attached as an Appendix to this document. 3. By amending Schedule I to Form X-17A-5 (referenced in  ---------FOOTNOTES---------- -[26]-(...continued) amendments to Exchange Act rules for filing Form BD, Securities Exchange Act Release No. 37432. ==========================================START OF PAGE 18====== 249.617) by removing Specific Instructions 19a, b and c and Question 19, redesignating Questions 20 through 24 as Questions 19 through 23, and revising newly designated Question 19 to read as follows: Note: Form X-17A-5 does not and the revisions will not appear in the Code of Federal Regulations. Form X-17A-5 * * * * * Schedule I * * * * * 19. Respondent is an affiliate or subsidiary of a foreign broker-dealer. * * * * * By the Commission. Jonathan G. Katz Secretary July 12, 1996 NOTE: The Form is available in the Commission's Public Reference Room.