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88-68 Proposed Amendment Re Providing Terminated Employee with Form U-5 and Obtaining Prior Form U-5 for Potential Employees; Comment by October 1, 1988

SUGGESTED ROUTING*

Senior Management
Legal & Compliance
Operations
Registration

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

REQUEST FOR COMMENT

EXECUTIVE SUMMARY

The NASD requests comment 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. Further, each NASD member seeking to associate a person in a registered capacity would be required to obtain the most recent Form U-5 from any person seeking employment.

BACKGROUND AND ANALYSIS

The NASD Board of Governors, in implementing the recommendations of the 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 By-Laws, should provide a copy to the terminated employee.

Further, the Board of Governors has determined that it is appropriate to require NASD members who employ persons previously registered with an NASD member to obtain a copy of the Form U-5 (and any amendments thereto) 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 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 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 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 FAQS for FAQS subscribers or from the prospective employee for firms that do not subscribe to FAQS.

The present Article IV, Section 3 of the NASD By-Laws does not 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 can then take appropriate steps to have this information changed or corrected as necessary and 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 NASD also invites comments on whether it would be appropriate for the NASD to require that an NASD member, upon request by the hiring member, provide a copy of the Form U-5 directly to the hiring member, rather than through FAQS or the employee.

The NASD encourages all members and other interested persons to comment on the proposed amendments. Comments should be received no later than October 1, 1988 and should be sent to:

Mr. Lynn Nellius, Secretary National Association of Securities Dealers, Inc.
1735 K Street, N.W.
Washington, D.C. 20006-1506

Questions concerning this notice may be directed to Craig L. Landauer, NASD Office of General Counsel, at 202-728-8287.

PROPOSED AMENDMENTS TO ARTICLE IV, SECTION 3 OF NASD BY-LAWS AND ARTICLE III, SECTION 27 OF THE RULES OF FAIR PRACTICE.

(Note: New language is underlined.)

NASD BY-LAWS

ARTICLE IV

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, or 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 or person associated with such member is in process. The Corporation, however, may in its discretion declare the termination effective at any time.

(b) The member shall notify the Association in writing by means of an amendment to the notice filed pursuant to paragraph (a) above in the event that the member learns of facts or circumstances causing any information set forth in said notice to become inaccurate or incomplete. Such amendment shall be provided to the Association and to the person whose association with the member has been terminated not later than thirty (30) calendar days after the member learns of the facts and circumstances giving rise to the amendment.

RULES OF FAIR PRACTICE ARTICLE III, SECTION 27 SUPERVISION



Qualifications investigated.

Sec. 27(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 applicable, each member shall obtain from the Firm Access Query System (FAQS) or shall request and obtain from the applicant for registration 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(b) of the Association's By-Laws.

Where the member utilizes FAQS to comply with this paragraph, the Form U-5 shall be obtained (i) prior to the submission of the application for registration if such application is filed more than thirty (30) days following the termination of the applicant's most recent employment with an NASD member or (ii) not more than sixty (60) days following such termination if the application is filed less than thirty (30) days after the termination.

Where the member obtains a copy of the Form U-5 from the applicant for registration, the member shall request the Form U-5 (i) prior to the filing of the application if such application is filed more than thirty (30) days following the termination of the applicant's most recent employment with an NASD member or (ii) not more than sixty (60) days following such termination if the application is filed less than thirty (30) days after the termination. Any applicant for registration who receives a request for a copy of his or her Form U-5 from a member pursuant to this paragraph 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 the former employer has failed to provide the Form U-5 to the applicant for registration, such person shall promptly obtain the Form U-5 and shall provide it to the requesting member within two (2) business days of receipt thereof. Any subsequent amendments to a Form U-5 received by the applicant shall be promptly provided to the requesting member.

A member receiving a Form U-5 pursuant to the foregoing paragraphs shall review the Form U-5 and any amendments thereto and shall take such action as may be deemed appropriate.


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