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90-46 Reporting Disciplinary Information on Form BD

SUGGESTED ROUTING*

Legal & Compliance
Registration
Training

*These are suggested departments only. Others may be appropriate for your firm.

EXECUTIVE SUMMARY

The Central Registration Depository (CRD) was expanded in 1989 to enable firms to file one Form BD for both NASD membership and state licensing requirements. In the operation of this CRD system, it has become evident that states and the Securities and Exchange Commission (SEC) differ in their disclosure requirements related to pending disciplinary matters reportable on Form BD. This notice outlines these differences and provides an update as to the steps being taken to reconcile the differences.

ISSUE

There are two basic interpretations regarding the disclosure of pending matters classified under the term "proceeding" found on Form BD in Item 7G. The SEC interpretation of these matters as outlined in release number 12078 (February 6, 1976), and as restated in 1985, includes finally adjudicated criminal proceedings and finally adjudicated proceedings brought by the SEC, regulators, and self-regulators. The SEC does not require disclosure of investigations, arrests without convictions, or civil litigation not conducted by a regulatory or self-regulatory body.

Many states interpret the term "proceeding" in a much different way. In an effort to formalize the state interpretation, the North American Securities Administrators Association (NASAA) adopted a resolution that outlines a different interpretation of disclosure requirements. This 1989 resolution states that the term "proceeding" includes pending administrative and civil proceedings initiated by self-regulatory, regulatory, and governmental agencies as well as pending criminal charges and civil litigation.

The SEC is the oversight body of the NASD and, since the Form BD is an SEC form, its disclosure requirements are considered appropriate for NASD filing purposes. The NASD also operates the CRD system pursuant to a joint contract with the NASAA. Under the terms of the contract, the CRD captures and maintains all information submitted by members on Form BD. Hence, if states require disclosure of information and it is contained in a filing, it is captured and maintained on the CRD system.

The nature of the information found in the CRD system differs from member to member as a result of inconsistent disclosure causes by these differing interpretations. Because public inspection of this information is available through the states, the lack of standardized disclosure can result in comparisons of members that are misleading. Such a situation happened several months ago when The New York Times published an article attempting this kind of a comparison.

STATUS

To resolve these differences and to establish uniform disclosure of information, the NASD is participating in ongoing discussions with the SEC and the NASAA. Indications are that these discussions could result in a requirement that more information would need to be disclosed. Pending the resolution of this matter, members are advised that information provided on Form BD in Item 7G should continue to be filed as instructed by the state(s) with which a registration is maintained.

Questions regarding this notice should be directed to Jay Cummings, Director, Membership Department, at (301) 590-6733.


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