Park & Halpern

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NASD Notice to Members 04-23

NASD Seeks Comment On (1) Amending its Minor Rule Violation Plan
(MRVP) to Include Failure Timely to Submit Amendments to the Uniform
Termination Notice for Securities Industry Registration (Form U5); and (2)
Adopting a Rule to Create an Inactive Disclosure Review Registration Status;
Comment Period Expires April 19, 2004

Executive Summary

In July 2002, an NASD task force (the Public Information Review or PIR Task
Force) initiated a comprehensive review of disciplinary and other information
that NASD makes public, including the information released under NASD
Interpretive Material 8310-2 (IM-8310-2). NASD is requesting comment from
its members and other interested parties on two of the PIR Task Force's
recommendations: (1) expanding the coverage of NASD's MRVP to include
the failure to amend the Uniform Termination Notice for Securities Industry
Registration (Form U5) in a timely manner; and (2) creating an "Inactive
Disclosure Review" (Inactive DR) registration status that would require a
registered individual to cease all activities requiring registration and prohibit that
individual from functioning in any capacity requiring registration until the member
either reports or updates a disclosure item on a Uniform Application for
Securities Industry Registration or Transfer (Form U4) or provides the
disclosure documentation requested for that individual. These proposals are part
of a multi-pronged effort to help ensure that members make required
disclosures on all Uniform Forms in a timely manner.1

Action Requested

NASD encourages all interested parties to comment on these two proposals.
Comments must be received by April 19, 2004. Members and interested
persons can submit their comments using the following methods:

* mailing in the checklist (Attachment A)

* mailing in written comments

* e-mailing written comments to [e-mail]

* submitting comments using the online form at the NASD Web Site
(www.nasdr.com)

If you decide to submit comments using both the checklist and one of the other
methods listed above, please indicate that in your submissions. The checklist
and/or hard copy comments should be mailed to:

Barbara Z. Sweeney
Office of the Corporate Secretary
NASD
1735 K Street, N.W.
Washington, D.C. 20006-1500

Important Notes: The only comments that will be considered are those
submitted pursuant to the methods described above. All comments received in
response to this Notice will be made available to the public on the NASD Web
Site. Generally, comments will be posted on the NASD Web Site one week
after the end of the comment period. See Notice to Members 03-73.

Before becoming effective, a rule change must be authorized for filing with the
Securities and Exchange Commission (SEC) by the NASD Board, and then
must be approved by the SEC, following publication for public comment in the
Federal Register.

Questions/Further Information

As noted above, hard copy comments should be mailed to Barbara Z.
Sweeney. Questions concerning this Notice may be directed to Victoria M.
Pawelski, Assistant Chief Counsel and Assistant Director, Registration and
Disclosure, at [phone]; or Shirley H. Weiss, Associate General
Counsel, Office of General Counsel, Regulatory Policy and Oversight, at (202)
728-8844.

MRVP

In 1984, the SEC adopted amendments to Rule 19d-1(c) under the Securities
Exchange Act of 1934 (Exchange Act) to allow self-regulatory organizations to
adopt, with SEC approval, plans for the disposition of minor violations of
rules.2 In 1993, pursuant to this Rule, NASD established an MRVP.3 The
purpose of the MRVP is to provide for a meaningful sanction for the violation of
a rule when the initiation of a disciplinary proceeding through the formal
complaint process would be more costly and time-consuming than would be
warranted. The MRVP provides an efficient means by which to deter violations
of rules while maintaining procedural rights for disciplined persons. NASD's
MRVP currently is described in Rule 9216(b), which authorizes NASD to
impose a fine of $2,500 or less on any member or associated person for a
minor violation of the rules identified in NASD Interpretive Material 9216 (IM-
9216).4

Notwithstanding the inclusion of a particular violation in IM-9216, NASD staff
retains full discretion to institute disciplinary proceedings based on all of the
facts and circumstances. NASD staff reviews the number and seriousness of the
violations, as well as the previous disciplinary history of the respondent to
determine if a matter is appropriate for disposition under the MRVP and to
determine the amount of the fine. Further, once NASD has issued an MRVP
letter against an individual or member firm, it may, at its discretion, issue
progressively higher fines for all subsequent minor violations of rules within the
next 24-month period or initiate more formal disciplinary proceedings. Minor
rule violations currently are not reportable on an individual's Form U4 or U5 or
a member firm's Form BD and, accordingly, do not appear on their respective
Central Registration Depository (CRD) records.5

Among other things, the current MRVP includes failure timely to submit
amendments to the Form U4, as required by Article V, Section 2(c) of the
NASD By-Laws, and failure timely to submit amendments to the Form BD, as
required by Article IV, Section 1(c) of the NASD By-Laws. NASD proposes
to amend its MRVP to include failure timely to submit amendments to the Form
U5, as required by Article V, Section 3(a) of the NASD By-Laws. Sanctions
imposed pursuant to the proposed amendment to the MRVP would be in
addition to late fees that currently may be imposed for late filings, including the
recently adopted amendment to Schedule A of the NASD By-Laws, which
provides for a $10 per day late fee up to a maximum charge of $300 for
submitting late disclosure filings.

Inactive Disclosure Review Registration Status

Currently, when a member fails after repeated requests to report or update a
disclosure item on a Form U4 on behalf of a registered person or to provide
adequate disclosure documentation in response to NASD staff requests, the
registered person continues to have an "Approved" registration status and may
continue to function as a registered person, notwithstanding that his or her Form
U4 may not be current or complete.

To address this situation, the PIR Task Force recommended that NASD
implement an "Inactive Disclosure Review" registration status (also referred to
as Inactive DR) that would place the registration of a person whose firm has
failed to meet a Form U4 reporting requirement, or to provide requested
disclosure documentation, in an inactive status and, as a result, such person
would be prohibited from engaging in sales or other activities that require
registration until the reporting deficiency is cured or information request is met.

Article V, Section 2(c) of the NASD By-Laws requires every application for
registration filed with NASD to be kept current at all times by supplementary
amendments. Amendments to Forms U4 must be filed not later than 30 days
after learning of facts or circumstances giving rise to a reporting obligation. If the
amendment being filed involves a statutory disqualification as defined in
Exchange Act Sections 3(a)(39) and 15(b)(4), it must be filed not later than 10
days after the disqualification occurs.

Under the proposed rule, failure to make a timely report would initiate the
Inactive DR process. The member would receive notice from NASD staff that it
has 30 days to comply with a request by NASD staff to report a disclosure
event, update a previously reported disclosure event, or provide documentation
of a potential or actual disclosure event as requested. Staff would continue its
current policy of exercising discretion to grant extensions of time in exceptional
cases or accept, in lieu of required documentation, correspondence that
provides NASD staff with an adequate explanation as to why compliance with a
request is not feasible within that time frame (e.g., difficulty in obtaining court
documents despite good faith efforts). If a member fails to comply with a
request (or provide an adequate explanation as to why compliance is not
feasible) within 30 days, NASD staff would send the member a final notice
giving the member an additional 10 days to comply.

If the member fails to comply within the additional 10 days, the registered
person would be placed in an inactive status.6 Members will also receive notice
when an individual becomes inactive. Any person whose registration has been
deemed inactive under the proposed rule will be required to cease all activities
as a registered person and will be prohibited from performing any duties and
functioning in any capacity requiring registration until such time as the employing
member either updates the person's Form U4 as required or provides the
requested documentation to NASD staff. NASD would administratively
terminate an individual whose registration has been inactive for two years.

The proposed Inactive Disclosure Review registration status is part of a multi-
pronged effort by NASD to help ensure that firms timely update Forms U4 and
U5, as required by the NASD By-Laws. The proposed 30-day and additional
10-day notice provisions are designed to give firms adequate notice and time to
resolve or cure any deficiencies before the person at issue is deemed inactive.
NASD staff also plans to provide members with information about this process
on the NASD Web Site. Although the proposed rule will address only the
registration status of the registered person, the noncompliant member also will
be subject to imposition of late filing fees and potential disciplinary action, as
appropriate, based on the facts and circumstances presented.


Endnotes

1 This effort includes the newly established late disclosure fee, which was
another recommendation of the PIR Task Force. See Exchange Act Rel. No.
49224 (Feb. 11, 2004), 69 Fed. Reg. 7833 (Feb. 19, 2004) (File No. SR-
NASD-2003-192). See also Notice to Members 04-09 (March 2004).

2 See Exchange Act Rel. No. 21013 (June 1, 1984), 49 Fed. Reg.
23833 (June 8, 1984).

3 See Exchange Act Rel. No. 44512 (July 3, 2001), 66 Fed. Reg. 36812
(July 13, 2001) (File No. SR-NASD-00-39).

4 NASD recently filed a rule change to expand the MRVP by adding six
additional violations. The proposed additions are: (1) violation of the
Intermarket Trading System (ITS) trade-through rule; (2) violation of the locked
and crossed markets rule; (3) violation of the Trade Reporting and Compliance
Engine (TRACE) system transaction reporting requirement; (4) violation of the
Alternate Display Facility (ADF) transaction reporting requirement; (5) violation
of the standards applicable to communications with the public; and (6) failure to
provide or update firm contact information as required by NASD rules. See
SR-NASD-2004-25 (Feb. 10, 2004). NASD also recently issued guidance
concerning the application of NASD's MRVP to each of the rules specified in
the MRVP. See Notice to Members 04-19 (March 2004).

5 Firms and individuals should consult with their own legal counsel as
needed to determine whether any particular matter must be reported on Forms
BD, U4, or U5.

6 The Inactive DR status would be similar to the existing Continuing
Education (CE) Inactive status (Rule 1120) and the Fingerprint Inactive status
(Rule 1140).


Attachment A

Request For Comment Checklist

(1) MRVP

Should NASD amend IM-9216 (MRVP) to include failure timely to submit
amendments to the Form U5 (as required by Article V, Section 3(a) of the
NASD By-Laws), to be consistent with existing provisions regarding the failure
timely to submit amendments to Forms U4 and BD?

(1) Inactive Disclosure Review

(a) Should NASD adopt a rule creating an Inactive Disclosure Review
registration status for registered persons whose employing member fails timely
to report or update a disclosure item on behalf of the registered person and/or
fails to provide requested documentation to NASD staff (and fails to provide
adequate justification for failing to make such report)?

(b) If so, do the proposed 30-day and supplemental 10-day notice provisions
provide adequate time for members to report matters or otherwise resolve
deficiencies?

(c) Do you have any additional comments or suggestions?


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