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92-61 Revised Form BD Goes Into Effect November 16, 1992

SUGGESTED ROUTING:*

Legal & Compliance
Registration
*These are suggested departments only. Others may be appropriate for your firm.

EXECUTIVE SUMMARY

The Securities and Exchange Commission (SEC) has approved changes to Form BD, the Uniform Application for Broker/Dealer Registration. The amendments, developed in consultation with the NASD, North American Securities Administrators Association (NASAA), and industry representatives, seek to clarify certain reporting requirements, including the definition of what "proceedings" are disclosable under Item 7(G). The scope of ownership disclosure required by the schedules to the Form BD has been changed to require that only 25 percent indirect owners and contributors be disclosed rather than the current 5 percent threshold. Additionally, the amendments update the disciplinary history reporting requirements to reflect changes implemented under the 1990 amendments to the Securities Exchange Act of 1934. The new form will be effective November 16, 1992. NASD members should begin to use the revised form when making their next Form BD amendment. The NASD will accept amendments on the old Form BD through January 10, 1993. After that date, amendments not filed on the revised Form BD cannot be accepted.

CHANGES TO FORM BD

The principal changes to the Form BD relate to Item 7 disclosures of disciplinary history of broker/dealers and their control affiliates. The requirements for disclosure of "proceedings" under Item 7 (G) represent the joint NASD, SEC, and NASAA interpretation first announced in Notices to Members 91-81 (December 1991). That interpretation requires firms to report formal administrative and civil actions initiated by self-regulatory and governmental agencies and formal criminal charges, including felony indictments, felony criminal informations, and formal felony criminal charges equivalent to a criminal indictment or information, and any formal misdemeanor criminal information (or equivalent) involving matters listed in Item 7(A)(1)of Form BD.

The joint interpretation does not require reporting of criminal arrests effected in the absence of a formal written charge. Finally, the new definition does not require disclosure of informal investigations by regulators or pending private civil litigation.

Item 7(E)(2) has been amended to the extent that broker/dealers will no longer be required to disclose on Form BD any violation of a self-regulatory organization (SRO) rule deemed "minor" pursuant to a plan, approved by the SEC. To date, the American Stock Exchange, the Boston Stock Exchange, the Cincinnati Stock Exchange, the New York Stock Exchange, the Pacific Stock Exchange, the Philadelphia Stock Exchange, and the Chicago Board Options Exchange have approved plans on file. All other 7(E)(2) violations must be reported until the SRO bringing the action has its plan approved. The NASD has filed with the SEC its proposed minor violations reporting plan. To date, the plan has not been approved.

Other Item 7 amendments expand requirements to comply with the changes contained in the International Securities Enforcement Cooperation Act and the Securities Enforcement Remedies and Penny Stock Reform Act of 1990. Item 7(A) has been amended to require disclosure of similar convictions of the firm or its control affiliates by a foreign court. A new question, Item 7(c)(5), has been added to report fines or orders to cease and desist issued by the SEC or the Commodity Futures Trading Commission (CFTC). SEC Release Number 34-30958 requests that firms file an amendment on or promptly after November 16, 1992, if they determine additional Item 7 disclosures are appropriate.

The instructions for Item 10 have been revised to require that firms check all types of business activities, but exclude those which account for less than one percent of the applicant's securities related revenue. This de minimis exception will not apply to those activities that trigger specific SRO or SEC requirements, such as those involving municipal and government securities or options, which must be reported in Item 10 even if volume of activity is insignificant. Item 10 also was amended to include new categories of activity, including broker dealers selling corporate debt securities and interests in mortgages or other receivables, or selling tax shelters or limited partnerships in the secondary market.

Other less dramatic changes to the Form BD include an instruction in Item 1 (C) requesting that firms doing business under other names disclose them on Schedule D and a clarifying instruction to Item 5 reminding firms that they should only supply successor details when reporting a succession on the current filing.

AMENDMENTS TO SCHEDULES AND ATTACHMENTS

Schedules for disclosure of the applicant's ownership have been totally redesigned, and requirements have been redefined. Existing schedules required firms to file an appropriate schedule based on their filing entity type. The revised schedules are not based on this categorical distinction. Schedule A will now be used to report executive officers, directors, or all general partners and 5 percent direct owners or limited partners contributing 5 percent or more of the partnership's capital. The SEC has revised the instructions to define beneficial stock ownership of an applicant to include securities owned by the immediate family living in the same residence.

Regardless of the filing entity type, Schedule B will be used for applicants to report their indirect ownership. For each direct owner not a person or public reporting company under Section 12 or 15 (d) of the Exchange Act reported on Schedule A, the applicant must disclose on Schedule B all 25 percent owners or contributors of (to) the direct owners. Instructions indicate that each successive 25 percent owner be disclosed until a person or public reporting company is reached. In determining beneficial ownership, the same attribution requirement applies to indirect owners that applied to direct owners. Schedule C has been completely revised to be used to report additions, deletions, and other changes to Schedules A and B. Approved NASD member firms should review their existing schedules to determine if an amendment is deemed appropriate. The approved firm should file the new Schedule A and B once, then submit all subsequent amendments on revised Schedule C. Applications for initial broker/dealer registration must now be made on the revised Form BD.

Other schedules, namely D and E, have also been revised, and a Form BD Disclosure Reporting Page (DRP) has been added. Schedule DRP for Form BD, modeled after the U-4 DRP, must now be used to provide details for Item 7 responses. For each new event or to update an event previously reported, a DRP must be filed. The DRP should be the only filing necessary; no attachments are necessary. Details to other Form BD items will continue to be reported on Schedule D.

Schedule E used to report branch office additions, deletions, or changes has been redesigned in a more structured format for required information.

The format change was undertaken to help facilitate the implementation of electronic Schedule E. Beginning November 16, 1992, Firm Access Query System (FAQS) subscribers will be able to file branch office additions, deletions, and changes via the ELECFILE command. The changes to the form will help insure that hard-copy filers include all relevant data about the branch location. Questions concerning this feature or other FAQS subscriber services should call the FAQS line at (301)590-6862.

FILING INSTRUCTIONS

NASD members will not be required to file the amended form at any particular time. Member firms should, nevertheless, review their existing filing and determine whether an amendment is required due to this revision. If so, they should make their amended filing on the new form. If, as a result of the ownership disclosure changes, an amendment is necessary, a complete Schedule A and B (if applicable) should be filed. Thereafter, ownership and control changes will be made by filing the revised Schedule C.

If you determine an amendment is not necessary at this time, you would begin to use the revised form when an amendment was necessary. After January 10, 1993, only the revised Form BD will be accepted.

For additional details, refer to the revised Form BD (enclosed) or SEC Release Number 34-30959. To obtain copies or ask questions regarding the form or the instructions, call Member Services (301) 590-6500. Questions regarding this Notice should be directed to John F. Vaughn, Assistant Director, Membership, at (301) 590-6865 or Belinda Blaine, Attorney, at (202) 504-2418, Office of Chief Counsel, Division of Market Regulation (SEC).


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