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89-23 Proposed Amendment Re: Providing Terminated Employees With Form U-5 and Obtaining Prior Form U-5 for Potential Employees Deadline for Voting: April 3, 1989
*These are suggested departments only. Others may be appropriate for your firm.
IMPORTANT MAIL VOTE
The NASD invites members to vote on proposed amendments to Article IV, Section 3 of the NASD By-Laws and Article III, Section 27 of the Rules of Fair Practice. These amendments would require NASD members to provide a copy of the Form U-5 to persons who terminate or are terminated by the member. Members would provide the Form U-5 concurrently with the filing of the Form U-5 with the NASD. In addition, each NASD member would 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 EXPLANATION
The NASD Board of Governors, in implementing the recommendations of the NASD Regulatory Review Task Force, has determined 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 provide a copy to the employee who has been terminated.
Furthermore, the Board of Governors has determined that it is appropriate to require NASD members that employ persons previously registered with another NASD member to obtain a copy of the Form U-5 (and any amendments there to) filed by the person's most recent employer. The Board believes that, by making the Form U-5 available in this manner, members will be better able to meet their obligation under Article III, Section 27(e) of the Rules of Fair Practice to adequately investigate the background of potential employees.
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." Members now are not required to obtain the Form U-5 for the most recent employment with an NASD member.
The NASD believes, however, 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 for a situation in which the person was terminated for cause or in which 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 proposed amendments would 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.
Article IV, Section 3 of the NASD By-Laws does not now require NASD members to give terminated employees a copy of the Form U-5 filed with the NASD. 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. The proposed amendments would establish this requirement. In addition, the amendments would 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 proposed amendments to Article IV, Section 3 of the NASD By-Laws and Article III, Section 27 of the NASD Rules of Fair Practice were published for comment in NASD Notice to Members 88-68 dated September 1988. The NASD received 13 comments on the proposed amendment. Of these, 10 commenters were generally in favor of the proposed amendment and three were generally opposed.
Commenters identified three issues concerning the proposed amendment to the Rule of Fair Practice. The first dealt with the language of the proposed amendment, which imposes a different requirement on a member complying with the Rule of Fair Practice by using its FAQS computer connection to the NASD and a member requesting a hard copy of the Form U-5 from the applicant. As originally drafted, the FAQS firm would have been required to "obtain" the Form U-5 prior to the filing of an application for registration, while the non-FAQS firm would be required only to "request" a copy of the Form U-5.
Second, commenters raised concern about the two different time parameters required for compliance as contained in the proposed Rule of Fair Practice amendment. A member could have had either 30 days or 60 days to comply with the Rule of Fair Practice amendment depending on the date on which a registration application was filed. The Board determined that this requirement was both confusing and placed an unrealistic administrative burden on the member.
Finally, commenters noted that an associated person might change the Form U-5 prior to providing it to the prospective employer and thereby alter the nature of the reported information. The Board determined that both the issues of the differing requirements for FAQS and non-FAQS users and the variation in the time parameters in the proposed Rule of Fair Practice amendment would be resolved if there were a single uniform time frame for compliance with the proposed rule. The Board approved a uniform 60-day period for compliance.
Some commenters expressed concern that an unethical individual might change derogatory information contained on a Form U-5 from his or her previous employer before presenting it to a new firm. The NASD review process for both Form U-5 and Form U-4 includes a system of checks that alleviates these concerns, and no changes have been made relating to this issue.
The Board of Governors believes that the amendments to Article IV, Section 3 of the NASD By-Laws and Article III, Section 27 of the NASD Rule of Fair Practice are necessary and appropriate and recommends that members vote their approval. Prior to becoming effective, the rule change also must be approved by the Securities and Exchange Commission. Please mark the enclosed ballot according to your convictions and return it in the enclosed, stamped envelope to The Corporation Trust Company. Ballots must be postmarked no later than April 3, 1989.
Questions concerning this notice may be directed to Craig L. Landauer, Senior Attorney, NASD Office of General Counsel, at (202) 728-8291.
PROPOSED AMENDMENT TO ARTICLE IV, SECTION 3 OF 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.
PROPOSED 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).)