Obligation to Provide Accurate Information on Forms U-4 and U-5 and to Research Potential Employee's Background
*These are suggested departments only. Others may be appropriate for your firm.
The NASD reminds members that the NASD By-Laws and Rules of Fair Practice require that complete and accurate information be provided on Forms U-4 and U-5 and that members are responsible for investigating a potential employee's background prior to hiring such person.
The NASD Board of Governors, in implementing the recommendations of the Regulatory Review Task Force, has determined that it is appropriate to re-emphasize the NASD's policy with respect to complete and accurate disclosure on Forms U-4 and U-5 and with respect to a member's obligation to adequately research the background of its potential employees.
Complete and Accurate Forms U-4 and U-5
Associated persons of NASD members have an obligation to provide complete and accurate information on any Uniform Application for Securities Industry Registration or Transfer ("Form U-4") that is to be filed with the NASD. Article IV, Section 2(a)(3) of the By-Laws, which relates to registered representatives and associated persons, together with the instructions to Form U-4, clearly require that complete and accurate information be provided on this Form. In addition, Item 1 on page 4 of the Form U-4 requires each applicant for registration with the NASD to swear or affirm that the applicant has read and understood the items and instructions on the form and that the applicant's answers (including attachments) are true and complete to the best of the applicant's knowledge.
Member firms are also required to file complete and accurate information on any Uniform Termination Notice for Securities Industry Registration ("Form U-5") that is required to be filed with the NASD. Article IV, Section 3 of the By-Laws requires that a member firm file Form U-5 promptly, but not later than 30 calendar days after terminating a registered person. Items 13-15 on Form U-5 ask for information concerning apparent misconduct by a person while associated with the firm submitting the Form U-5. A "yes" answer to Items 13-15 must be accompanied by a detailed explanation of the apparent misconduct. Failure to provide accurate answers to Items 13-15 may deprive the NASD of its ability to detect violations and subsequently sanction persons for violations of the NASD's rules and other applicable federal statutes and regulations. Failure to provide this information may also subject members of the investing public to repeated misconduct and may deprive member firms of the ability to make informed hiring decisions.
The NASD would also point out that members and their associated persons may be subject to administrative, civil, and even criminal penalties for failing to provide complete and accurate information on Forms U-4 and U-5.
Researching a Potential Employee's Background
Member firms have an obligation to thoroughly research a potential employee's background before hiring such person. Article III, Section 27(e) of the Rules of Fair Practice provides that "[e]ach 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 last section of Form U-4 on page 4 also requires that the member firm cer tify that the member has communicated with all of the applicant's previous employers for the past three years and has taken appropriate steps to verify the items and attachments contained in the Form U-4. The NASD has brought disciplinary actions against member firms who have failed to properly research a potential employee's background prior to hiring such person. Members are reminded that they may use the Firm Access Query Systems (FAQS) or may file an information request through NASD Disclosure Program in order to comply with the investigation requirement.
Questions concerning this notice may be directed to Craig L. Landauer, Senior Attorney, Office of General Counsel, at (202) 728-8291.