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Rule 3070 Amended to require new disclosures on Forms BD, U-4 and U-5


Where, decades ago, there was a “Chinese Wall” between the SRO’s arbitration function and its regulatory activities, today arbitration and litigation activities are increasingly used to detect regulatory problems, as this rule filing underscores.

We covered this rule proposal last summer (see SAA 02-37), when the NASD announced in NTM 02-53 that it was proposing to amend its Rule 3070. Rule 3070 sets forth the requirements for members to file various required reporting forms and disclosures with NASD, including amendments to Forms BD, U-4 and U-5.

Under the proposed revisions, which were released for public comment by the SEC on December 27, 2002 (File No. SR-NASD 2002-112, dtd 8/14/02; SEC Rel. 34-47060, dtd 12/20/02; 67 Fed. Reg. 249, p. 79203), a new subsection (f) to Rule 3070 will require that members file copies of “(1) any indictment, information or other criminal complaint or plea agreement for conduct reportable under paragraph (a)(5) of this Rule; (2) any complaint in which a member is named as a defendant or respondent in any securities or commodities-related private civil litigation; and (3) any securities or commodities-related arbitration claim filed against a member in any forum other than the NASD Dispute Resolution forum.”

The exemption for NASD-DR filings is designed to prevent duplication of effort, since Regulation already gets the NASD claims directly from Dispute Resolution. Rule 3070 already requires the reporting of these events, but “[n]o existing rules require a member routinely to file copies with NASD of complaints filed against it in any legal proceedings.”

This information, NASD believes, will make its enforcement efforts more effective, as it will be alerted to problems more promptly and “such matters may also point to trends or otherwise flag conduct where regulatory action might be warranted.” Subsection (f) would also require the filing of copies of similar claims against associated person, where the member would be required to report under question 14 on Form U-4, “irrespective of any dollar thresholds Form U-4 imposes for notification….” January 17, 2003 is the deadline for comments. (SAC Ref. No. 03-02-02)



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