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89-57 SEC Approval of By-Law and Rule of Fair Practice Amendments on Providing Terminated Employees With Form U-5 and Obtaining Prior Form U-5 for Potential Employees — Effective September 1, 1989
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The Securities and Exchange Commission recently approved amendments to Article IV, Section 3, of the NASD By-Laws and Article III, Section 27, of the Rules of Fair Practice. These amendments require NASD members to provide a copy of the Form U-5 to persons who terminate or are terminated by the member. Members will be required to provide the Form U-5 concurrently with the filing of the Form U-5 with the NASD. In addition, each NASD member will be required to use its best efforts to obtain the most recent Form U-5 from any person seeking employment in a registered capacity.
BACKGROUND AND SUMMARY
The amendment to Article IV, Section 3, of the By-Laws will require that a member submitting to the NASD a Uniform Termination Notice of Securities Industry Registration (Form U-5), pursuant to Article IV, Section 3, of the NASD By-Laws, should also provide a copy to the employee who has been terminated. As in the past, the member is required to exercise good faith and to disclose the circumstances of the termination in a manner reasonably designed to inform the NASD and future employers of these circumstances. The NASD believes that the policy of providing broader access to the information on the Form U-5 requires that terminated persons be given the Form U-5 so they can verify the accuracy and completeness of the representations in the form. The terminated individual then can express any disagreement with the Form U-5 to his or her subsequent NASD member employer. In addition, the amendments codify the requirement that an amendment to the Form U-5 be filed if later-discovered information causes any statements in the form to be inaccurate or incomplete.
The amendment to Article III, Section 27, of the Rules of Fair Practice will require NASD members that employ persons previously registered with another NASD member to obtain a copy of the Form U-5 (and any amendments thereto) filed by the person's most recent employer. Article III, Section 27(e), requires that "each member shall have the responsibility and duty to ascertain by investigation the good character, business repute, qualifications and experience of any person prior to making such a certification in the application of such person for registration with this Association." The NASD believes that, by making the U-5 Form available in this manner, members will be better able to meet their obligation under this section of the Rules of Fair Practice to adequately investigate the background of potential employees.
The NASD believes that the circumstances of a termination, as disclosed on the Form U-5, may well be relevant to the hiring decision and that this information should be readily available to any NASD member for that purpose. This information is particularly pertinent in the situation where the person was terminated for cause or where affirmative answers have been provided to Items 13-15 of the Form U-5 regarding possible rule violations during the period of employment. As part of the hiring process, members should be allowed to compare the Form U-5 with any statements made by the potential employee regarding the termination. The amendments will establish the requirement to obtain the Form U-5, set forth timeliness standards for compliance, and provide for obtaining the Form U-5 through the NASD Firm Access Query System (FAQS) for FAQS subscribers or from the prospective employee for firms that do not subscribe to FAQS.
Questions concerning this notice may be directed to Craig L. Landauer, Senior Attorney, NASD Office of General Counsel, at (202) 728-8291.
AMENDMENT TO ARTICLE IV, SECTION 3, OF THE NASD BY-LAWS
(Note: New language is underlined.)
Registered Representatives and Associated Persons
Notification by Member to Corporation and Associated Person of Termination; Amendments to Notification.
Sec. 3(a). Following the termination of the association with a member of a person who is registered with it, such member shall promptly, but in no event later than thirty (30) calendar days after such termination, give written notice to the Association on a form designated by the Board of Governors of the termination of such association, and concurrently shall provide to the person whose association has been terminated a copy of said notice as filed with the Association. A member who does not submit such notification in writing, and provide a copy thereof to the person whose association has been terminated, within the time period prescribed shall be assessed a late filing fee as specified by the Board of Governors. Termination of registration of such person associated with a member shall not take effect so long as any complaint or action is pending against a member and to which complaint or action such person associated with a member is also a respondent, or so long as any complaint or action is pending against such person individually or so long as any examination of the member of person associated with such member is in process. The Corporation, however, may in its discretion declare the termination effective at any time.
AMENDMENT TO ARTICLE III, SECTION 27, OF THE RULES OF FAIR PRACTICE
(Note: New language is underlined.)
Qualifications investigated, (e) Each member shall have the responsibility and duty to ascertain by investigation the good character, business repute, qualifications and experience of any person prior to making such a certification in the application of such person for registration with this Association. Where an applicant for registration has previously been registered with the Association, the member shall obtain from the Firm Access Query System (FAQS) or from the applicant a copy of the Uniform Termination Notice of Securities Industry Registration ("Form U-5") filed with the Association by such person's most recent previous NASD member employer, together with any amendments thereto that may have been filed pursuant to Article IV, Section 3 of the Association's By-Laws. The member shall obtain the Form U-5 as required by this section no later than sixty (60) days following the filing of the application for registration or demonstrate to the Association that it has made reasonable efforts to comply with the requirement. A member receiving a Form U-5 pursuant to this section shall review the Form U-5 and any amendments thereto and shall take such action as may be deemed appropriate.
Applicant's Responsibility, (f) Any applicant for registration who receives a request for a copy of his or her Form U-5 from a member pursuant to this section shall provide such copy to the member within two (2) business days of the request if the Form U-5 has been provided to such person by his or her former employer. If a former employer has failed to provide the Form U-5 to the applicant for registration, such person shall promptly request the Form U-5, and shall provide it to the requesting member within two (2) business days of receipt thereof. The applicant shall promptly provide any subsequent amendments to a Form U-5 he or she receives to the requesting member.
(Current subsection (f) is renumbered as (g).)