Statutorily Disqualified Persons Who Obtain a Controlling Interest in an NASD Member Firm and Failure of NASD-Registered Persons Who Become Statutorily Disqualified to Timely Amend Form U-4
TO: All NASD Members and Other Interested Persons
EXECUTIVE SUMMARY
The NASD reminds members that the NASD By-Laws require a statutorily disqualified person who wishes to obtain a controlling interest in, or become a controlling person of, an NASD member firm must, before assuming such a position, apply to the NASD for approval through the Eligibility Proceedings described in the NASD By-Laws and Code of Procedure. In addition, the NASD By-Laws require members and their associated persons to make timely filings of amendments to Form BD and Form U-4 when changes occur in the information contained on the original applications.
BACKGROUND
The NASD Board of Governors has become aware that, in several instances, a statutorily disqualified 1/ person has obtained a "controlling interest" 2/ in an NASD member without approval through an NASD Eligibility Proceeding. The Board is also concerned by the failure of these registered persons to timely amend Form U-4 to reflect disciplinary actions taken against them by federal or state agencies or self-regulatory organizations, or to reflect certain criminal convictions.
Acquisition of Control by Disqualified Persons
Article II, Section 3(b) of the NASD By-Laws prohibits a member firm from continuing in membership if the firm has an associated person who is disqualified. Article II, Section 4 of the By-Laws specifies the conditions that disqualify a person. Section 3(a)(21) of the Securities Exchange Act of 1934 defines "associated person with a member" as ". . . any person directly or indirectly controlling, controlled by or under common control with such member, or any employee of such member." Therefore, if a disqualified person obtains a "controlling" interest in an NASD member, that person is considered an associated person of the member.
Before a disqualified person can obtain a "controlling interest" in an NASD member, that person must apply to the NASD for approval through the NASD's Eligibility Proceedings, found in Article II, Section 3(d) of the By-Laws and Article VII of the Code of Procedure. Failure to receive approval by the NASD Board of Governors prior to obtaining the "controlling" interest will result in the immediate institution of a Revocation Proceeding under Article VI of the Code of Procedure against both the disqualified person and the NASD member that allowed the disqualified person to obtain the "controlling interest."
Failure to Amend Form U-4
Associated persons of NASD members have an obligation to keep current and accurate the information on Form U-4 (Uniform Application for Securities Industry Registration or Transfer) on file with the NASD. Similarly, member firms are obligated to ensure that Form BD (Uniform Application for Broker-Dealer Registration) is amended to reflect current information.
Article IV, Section 2(c) of the By-Laws, which relates to registered representatives and associated persons, requires that "Every application for registration filed with the Corporation shall be kept current at all times by supplementary amendments to the original application."
The instructions to Form U-4 provide that "amendment filings are required to (1) correct deficiencies in a previous filing; (2) update and keep current the information required on the form. . . ." Form U-4 is signed by the registered person and a representative of the member firm and both have the responsibility to update Form U-4 in a timely manner.
Article III, Section l(d) of the By-Laws, which relates to membership applications, provides that "Each member shall ensure that its membership application with the Corporation is kept current at all times by supplementary amendments to the original application."
The instructions for Form BD provide that "... the applicant must update the Form BD information by submitting amendments whenever the information on file changes."
If a registered person becomes subject to a statutory disqualification, this fact must be reported promptly on an amended Form U-4 (and Form BD, if appropriate). The NASD Board of Governors has interpreted "promptly" to mean "within ten days of the occurrence of the disqualifying event." (The NASD must be notified so it can carry out its responsibilities under Section 15A(b)(6) of the Securities Exchange Act of 1934 and SEC Rule 19h-l.) Failure to file, or late filing, of an amended Form U-4 (or Form BD) may warrant disciplinary action with significant sanctions. In addition, failure to file, or failure to file in a timely manner, may be grounds to deny the application of the disqualified person to remain associated with the NASD member firm.
Questions concerning this notice may be directed to Craig L. Landauer, Attorney, NASD Office of General Counsel, at (202) 728-8291.
Sincerely,
Frank J. Wilson
Executive Vice President
Legal and Compliance
1/ "Statutory disqualifications" are defined in Sections 3(a)(39) and 15(b)(4) of the Securities Exchange Act of 1934, and Article II, Sections 3 and 4 of the NASD By-Laws.
2/ SEC Rule 19h-l, which governs the NASD's handling of applications from disqualified persons and firms, in paragraph (f)(2) defines "control" as, "the power to direct or cause the direction of the management or policies of a company whether through ownership of securities, by contract or otherwise; provided, however, that (i) any person who, directly or indirectly, (A) has the right to vote 10 percent or more of the voting securities, (B) is entitled to receive 10 percent or more of the net profits, or (C) is a director (or person occupying a similar status or performing similar functions) of a company shall be presumed to be a person who controls such company."