Document ID: SEC-2007-0119-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: National Association of Securities Dealers, Inc.
Posted Date: 2007-01-25T05:00Z

[Federal Register: January 25, 2007 (Volume 72, Number 16)]
[Notices]               
[Page 3455-3462]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr25ja07-89]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-55127; File No. SR-NASD-2003-168]

 
Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Notice of Filing of Amendment No. 6 and Order Granting 
Accelerated Approval to Proposed Rule Change Relating to the Release of 
Information Through NASD's BrokerCheck

January 18, 2007.

I. Introduction

    On November 21, 2003, the National Association of Securities 
Dealers, Inc. (``NASD'') filed with the Securities and Exchange 
Commission (``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of 
the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to amend NASD Interpretive 
Material (``IM'') 8310-2 (as proposed, ``NASD BrokerCheck Disclosure'') 
and add IM-8310-3 (``Release of Disciplinary Complaints, Decisions and 
Other Information''). NASD filed Amendment Nos. 1, 2, and 3 to the 
proposed rule change on September 28, 2004, March 8, 2005, and April 
12, 2005, respectively. The proposed rule change, as amended by 
Amendment Nos. 1, 2 and 3, was published for comment in the Federal 
Register on June 30, 2005.\3\ In response to the First Notice, the 
Commission received eight comment letters.\4\ On June 6, 2006, NASD 
submitted a response to the comment letters \5\ and filed Amendment No. 
4 to the proposed rule change. On June 22, 2006, NASD filed Amendment 
No. 5 to the proposed rule change. The Commission published the 
proposed rule change, as further amended by Amendment Nos. 4 and 5, for 
comment in the Federal Register on July 5, 2006.\6\ In response to the 
Second Notice, the Commission received four comment letters.\7\ On 
August 30, 2006, NASD submitted a response to the additional comment 
letters \8\ and filed

[[Page 3456]]

Amendment No. 6 to the proposed rule change.\9\ The Commission received 
one comment letter on NASD Response Letter II.\10\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 51915 (June 23, 
2005), 70 FR 37880 (``First Notice'').
    \4\ See Letters from Barry Augenbraun, Senior Vice President and 
Corporate Secretary, Raymond James Financial, Inc., dated July 8, 
2005 (``Raymond James Letter''); Joseph D. Fleming, Managing 
Director and Chief Compliance Officer, Piper Jaffray & Co., dated 
July 13, 2005 (``Piper Jaffray Letter''); Ronald C. Long, Senior 
Vice President, Regulatory Policy and Administration, Wachovia 
Securities, LLC, dated July 18, 2005 (``Wachovia Letter''); Mario Di 
Trapani, President, Association of Registration Management, dated 
July 19, 2005 (``ARM Letter I''); John S. Simmers, CEO, ING Advisors 
Network, dated July 19, 2005 (``ING Letter''); Coleman Wortham III, 
President and CEO, Davenport & Company LLC, dated July 20, 2005 
(``Davenport Letter''); Jill Gross, Director of Advocacy, and 
Rosario M. Patane, Student Intern, Pace Investor Rights Project, 
dated July 21, 2005 (``Pace Letter); and Ira Hammerman, Senior Vice 
President and General Counsel, Securities Industry Association, 
dated July 27, 2005 (``SIA Letter I'') to Jonathan G. Katz, 
Secretary, Commission.
    \5\ See Letter from Richard E. Pullano, Associate Vice President 
and Chief Counsel, Registration and Disclosure, NASD, to Katherine 
A. England, Assistant Director, Division of Market Regulation 
(``Division''), Commission, dated June 6, 2006 (``NASD Response 
Letter I'').
    \6\ See Securities Exchange Act Release No. 54053 (June 27, 
2006), 71 FR 38196 (``Second Notice'').
    \7\ See Letters from Pamela S. Fritz, Chief Compliance Officer, 
MWA Financial Services, Inc., dated July 18, 2006 (``MWA Financial 
Letter''); Eileen O'Connell Arcuri, Executive Committee Member, ARM, 
dated July 20, 2006 (``ARM Letter II''); Stuart J. Kaswell, Senior 
Vice President and General Counsel, SIA, dated July 20, 2006 (``SIA 
Letter II''); and Patricia D. Struck, NASAA President, Wisconsin 
Securities Administrator, North American Securities Administrators 
Association, Inc. (``NASAA''), dated July 20, 2006 (``NASAA Letter 
I'') to Nancy M. Morris, Secretary, Commission.
    \8\ See Letter from Richard E. Pullano, Associate Vice President 
and Chief Counsel, Registration and Disclosure, NASD, to Katherine 
A. England, Assistant Director, Division, Commission, dated August 
30, 2006 (``NASD Response Letter II'').
    \9\ See Partial Amendment dated August 30, 2006. In Amendment 
No. 6, NASD indicated that it is amending its initial proposal which 
would have changed the manner in which it will measure the two-year 
time frame for customer complaint disclosures to begin on the date 
on which the member received the complaint. Accordingly, for 
purposes of disclosure pursuant to IM-8310-2, NASD will continue to 
disclose complaints through BrokerCheck for 24 months, beginning on 
the date that the complaint is reported to the Central Registration 
Depository (``CRD[supreg]'' or ``CRD System''), regardless of the 
date on which the member received the complaint. In addition, NASD 
clarified that it currently releases summary information concerning 
arbitration awards issued by NASD arbitrators and will continue to 
work with other regulators regarding disclosure of arbitration 
awards issued in other forums. In conjunction with this 
clarification, NASD proposed to amend the text of proposed IM-8310-
2(b)(3) to correct the placement of the word ``certain'' so that it 
modifies ``arbitration awards'' rather than ``summary information.''
    \10\ See Letter from Patricia D. Struck, NASAA President, 
Wisconsin Securities Administrator, NASAA, to Nancy Morris, 
Secretary, Commission, dated September 7, 2006.
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    This order grants accelerated approval to the proposed rule change, 
as amended by Amendment Nos. 1 through 6 and solicits comments from 
interested persons on the filing as amended by Amendment No. 6.

II. Description of Proposed Rule Change

A. Background

    NASD established NASD BrokerCheck (``BrokerCheck'') in 1988 to 
provide investors with information on the professional background, 
business practices, and conduct of NASD members and their associated 
persons. In 1990, Congress passed legislation requiring NASD to 
establish and maintain a toll-free telephone number to receive 
inquiries regarding its members and their associated persons. In 1998, 
NASD began providing certain administrative information, such as 
approved registrations and employment history, online via NASD's Web 
site. In 2000, NASD amended IM-8310-2(a) which amendment: (1) 
Established a two-year period for disclosure of information about 
persons formerly registered with NASD; (2) authorized release of 
information about terminated persons and firms that is provided on the 
Form U6 (the form regulators use to report disciplinary actions), if 
such matters would be required to be reported on Form U4 (``Uniform 
Application for Securities Industry Registration or Transfer'') or Form 
BD (``Uniform Application for Broker-Dealer Registration''); and (3) 
provided for delivery of automated disclosure reports, which include 
information as reported by filers on the uniform forms. In 2002, NASD 
initiated a comprehensive review of the information that NASD makes 
publicly available under IM-8310-2, which included an evaluation of 
BrokerCheck from the perspective of public investors regarding their 
experience in obtaining information, as well as their assessment of the 
value of the information they received. NASD subsequently issued Notice 
to Members 02-74 in November 2002, seeking comment on, among other 
things, the possible expansion of information that NASD makes available 
to the public and Notice to Members 03-76 in December 2003, seeking 
comment on proposed enhancements to the existing approach for the 
electronic delivery of written reports used by BrokerCheck.\11\
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    \11\ See First Notice for a discussion on the comments received 
on Notice to Members 02-74 (November 2002) and Notice to Members 03-
76 (December 2003).
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B. Proposed Rule Change

Information NASD Proposes To Release
    While all disclosures would be subject to certain exceptions as 
described more fully below, NASD proposes to release through 
BrokerCheck certain information as applicable regarding current or 
former members, associated persons, or persons who were associated with 
a member within the preceding two years. Under proposed IM-8310-2, NASD 
would release any information reported on the most recently filed Form 
U4, Form U5 (``Uniform Termination Notice for Securities Industry 
Registration''), Form U6, Form BD, and Form BDW (``Uniform Request for 
Broker-Dealer Withdrawal'') (collectively, ``Registration Forms'').
    NASD also proposes to release currently approved registrations, 
summary information about certain arbitration awards against a member 
involving a securities or commodities dispute with a public 
customer,\12\ information with respect to qualification examinations 
passed by the person and the date passed,\13\ and, in response to 
telephonic inquiries via the BrokerCheck toll-free telephone listing, 
whether a member is subject to the provisions of NASD Rule 3010(b)(2), 
the Taping Rule. In addition, NASD proposes to release the name and 
succession history for current or former members.
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    \12\ NASD currently releases summary information concerning 
arbitration awards issued by NASD arbitrators and will continue to 
work with other regulators regarding disclosure of arbitration 
awards issued in other forums. See Amendment No. 6, supra note 9.
    \13\ NASD would not, however, release information regarding 
examination scores or examinations that the person failed.
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    The proposed rule change also would address the reporting of 
Historic Complaints, defined by NASD as the information last reported 
on Registration Forms relating to customer complaints that are more 
than two years old and that have not been settled or adjudicated, and 
customer complaints, arbitrations, or litigations that have been 
settled for an amount less than $10,000 and which are no longer 
reported on a Registration Form.\14\ NASD proposes to release Historic 
Complaints only if all three of the following conditions have been met: 
(1) Any such matter became a Historic Complaint on or after the 
implementation date of this proposed rule change; \15\ (2) the most 
recent Historic Complaint or currently reported customer complaint, 
arbitration, or litigation is less than ten years old; and (3) the 
person has a total of three or more currently disclosable regulatory 
actions, currently reported customer complaints, arbitrations, or 
litigations, or Historic Complaints (subject to the limitation that 
they became a Historic Complaint on or after the implementation date of 
this proposed rule change), or any combination thereof. Once all these 
conditions have been met, NASD would release all information regarding 
the person's Historic Complaints, again provided they became Historic 
Complaints on or after the implementation date of this proposed rule 
change.
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    \14\ NASD does not currently make Historic Complaints available 
to the public.
    \15\ NASD has indicated that the implementation date of this 
proposed rule change would be no later than 90 days following 
Commission approval.
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    NASD also proposes to provide persons with the opportunity to 
submit a brief comment, in the form and in accordance with procedures 
established by NASD, which would be included in the information NASD 
releases through BrokerCheck. Only comments relating to the information 
provided through BrokerCheck would be included.\16\ Persons who were 
associated with a member within the preceding two years but who are no 
longer registered with a member that wish to submit a comment

[[Page 3457]]

would be required to submit a signed, notarized affidavit in the form 
specified by NASD.\17\ Persons who are currently registered with a 
member firm would continue to be required to amend Form U4, where 
possible, instead of submitting a separate comment.\18\ These comments 
also would be made available through the CRD system to participating 
regulators, and to any member firms that the person who submitted the 
comment is associated with or is seeking to be associated with.\19\
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    \16\ Consistent with current practice, NASD would reserve the 
right to reject comments or redact information from a comment or a 
report, on a case-by-case basis, that contains confidential customer 
information, offensive or potentially defamatory language or 
information that raises significant identity theft, personal safety 
or privacy concerns, which concerns are not outweighed by investor 
protection concerns. NASD, in rare circumstances, has excluded or 
redacted information in cases involving stalking or terrorist 
threats.
    \17\ NASD would publish instructions for submitting comments on 
its Web site for such persons. NASD would review the affidavit to 
confirm relevance and compliance with the established instructions 
and, if it met the criteria, would add the comment to the written 
report provided through BrokerCheck. The person submitting the 
comment would be able to replace or delete the comment in the same 
way.
    \18\ NASD indicated that it would include instructions on how 
firms could amend archived disclosures in a Notice to Members 
announcing approval of this proposed rule change and also would post 
frequently asked questions and answers about this process on NASD's 
Web site. See NASD Response Letter I.
    \19\ The availability of comments submitted by persons who were 
associated with a member within the preceding two years but who are 
no longer registered with a member through the CRD system would 
parallel the availability of a report on a broker through 
BrokerCheck. For example, such comments would no longer be available 
through the CRD system if the broker has been out of the industry 
for more than two years.
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    NASD also proposes that, upon written request, NASD could provide a 
compilation of information about NASD members, subject to terms and 
conditions established by NASD, and after execution of a licensing 
agreement prepared by NASD. NASD expects to charge commercial users of 
such compilations reasonable fees as determined by NASD.\20\ Such 
compilations of information would consist solely of information 
selected by NASD from Forms BD and BDW and would be limited to 
information that is otherwise publicly available from the Commission.
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    \20\ The Commission notes that such proposed fees would need to 
be filed with the Commission pursuant to Section 19(b)(2) of the 
Act.
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Information NASD Proposes Not To Release
    Notwithstanding information that NASD proposes to release above, 
NASD would not release Social Security numbers, residential history 
information, physical description information, information that NASD is 
otherwise prohibited from releasing under Federal law or information 
provided solely for use by regulators. Additionally, NASD proposes to 
reserve the right to exclude, on a case-by-case basis, information that 
contains confidential customer information, offensive or potentially 
defamatory language, or information that raises significant identity 
theft, personal safety, or privacy concerns that are not outweighed by 
investor protection concerns.
    NASD also proposes not to release information about current or 
former members, associated persons or persons who were associated with 
a member within the preceding two years that has been reported on the 
Registration Forms relating to regulatory investigations or proceedings 
if the reported regulatory investigation or proceeding was vacated or 
withdrawn by the instituting authority. Additionally, NASD proposes not 
to release the most recent information reported on the Registration 
Forms if: (1) NASD has determined that the information was reported in 
error by a member, regulator, or other appropriate authority; or (2) 
the information has been determined by regulators, through amendments 
to the uniform Registration Forms, to be no longer relevant to 
securities registration or licensure, regardless of the disposition of 
the event or the date the event occurred.
    With respect to information reported on the Form U5, NASD proposes 
not to release Form U5 information for 15 days following the filing of 
such information with NASD, in order to give persons on whose behalf 
the Form U5 was submitted an opportunity to file a Form U4 or submit a 
separate comment to NASD for inclusion with the information released 
pursuant to BrokerCheck, regarding disclosure information reported on 
Form U5 and any amendments thereto. NASD would then release both the 
Form U5 disclosure and the person's comment, if any, to a requestor. 
However, NASD proposes to continue its current practice of not 
releasing ``Internal Review Disclosure'' information reported by 
members, associated persons, or regulators on Section 7 of Form U5 \21\ 
or the ``Reason for Termination'' information reported on Section 3 of 
Form U5. Nonetheless, under IM-8310-2, as proposed, information 
regarding certain terminations for cause (i.e., those that meet the 
criteria in current Question 7F on Form U5) would be disclosed through 
BrokerCheck. Finally, NASD currently does not release information 
reported on Schedule E of the Form BD.\22\ Under the proposed rule 
change, NASD would continue not to release this information.
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    \21\ Although the response to the internal review question and 
related information reported on the associated disclosure reporting 
page would not be released, if the matter subject to the internal 
review is or becomes reportable under the investigation, 
termination, or other disclosure questions, the disclosure made 
pursuant to these other disclosure questions would be released.
    \22\ The Commission notes the Division has granted no-action 
relief indicating that it will not recommend enforcement action to 
the Commission under Rules 15b1-1, 15b3-1, 15Ba2-2, and 15Ca2-1 
under the Act for broker-dealers that file the Uniform Branch Office 
Registration Form (``Form BR''), and do not complete Schedule E, or 
file amendments to Schedule E, of the Form BD, as of the date on 
which the transition to the Form BR began and the CRD[supreg] no 
longer accepted Schedule E filings, which occurred in October 2005. 
See Letter from Catherine McGuire, Chief Counsel, Division, 
Commission, to Patrice M. Gliniecki, Senior Vice President and 
Deputy General Counsel, NASD, dated September 30, 2005.
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Electronic Delivery of Written Reports
    Currently, NASD makes written reports available to the public by 
U.S. mail in printed form and by email in an electronic format upon 
receipt of a request via email or the established toll-free number. Due 
to a number of practical issues that have arisen regarding email 
delivery, NASD plans to replace the current delivery approach with a 
link to a controlled-access server that would allow access to the 
requested report through a secure Internet session in response to 
inquiries via email or through the established toll-free number. Access 
to the information would be limited to the written report requested, 
and only the individual making the request would be granted access to 
the database. A requestor also would be able to view investor education 
materials that would aid him or her in understanding the written 
report. NASD also would continue to provide hard copy reports to those 
requesting hard copies.
Other Changes
    NASD also proposes to make conforming changes to IM-8310-2, 
including making various numbering and lettering changes, moving former 
subsections (b) through (m) into new IM-8310-3, and updating references 
to ``the Association'' and ``NASD Regulation, Inc.''

III. Comment Summary and NASD's Response

    As noted above, the Commission received eight comment letters with 
respect to the First Notice and four comment letters with respect to 
the Second Notice.\23\ After the First and Second Notices, NASD filed 
two response letters, respectively, to address the concerns raised by 
the commenters.\24\ The Commission then

[[Page 3458]]

received a second comment letter addressing NASD Response Letter 
II.\25\
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    \23\ See supra notes 4 and 7.
    \24\ See NASD Response Letters I and II.
    \25\ See NASAA Letter II.
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    Generally, the initial set of commenters took issue with the 
portion of the proposed rule change regarding disclosure of an 
individual's Historic Complaints, which includes information last 
reported on the Registration Forms relating to customer complaints that 
are more than two years old and that have not been settled or 
adjudicated and customer complaints, arbitrations, or litigations that 
have been settled for an amount less than $10,000 and are no longer 
reported on a Registration Form. Although one commenter suggested that 
all Historic Complaints should be disclosed to customers,\26\ most of 
the commenters argued that the proposed changes to NASD's rules 
relating to Historic Complaints would have harmful effects on member 
firms and investors, with several of the commenters requesting that the 
Commission not approve the proposed rule change because of this 
provision.\27\ For instance, several of the commenters believed that 
the release of a broker's Historic Complaints would give too much 
weight to unproven allegations and complaints and thereby could 
unfairly harm the broker's reputation.\28\ These commenters argued that 
disclosure of all the complaints could be misleading to investors and 
invite them to form conclusions based on allegations that may not have 
merit and are not necessarily representative of a pattern of 
misconduct.\29\ Two commenters also argued that disclosing archived 
complaints to the public would ignore the fact that this type of 
information was originally reported for regulatory purposes in 
connection with registration and licensing matters.\30\ Similarly, 
another commenter indicated that since the reporting process was 
``first and foremost a regulatory tool and not a public disclosure 
tool,'' firms had often reported events that were not clearly 
reportable. This commenter believed that the proposed rule change would 
now have the effect of discouraging firms from reporting questionable 
matters.\31\
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    \26\ See Pace Letter.
    \27\ See, e.g., Davenport Letter, Piper Jaffray Letter, Raymond 
James Letter, and Wachovia Letter. See also SIA Letter I (objecting 
to the proposed release of archived Historic Complaints).
    \28\ See, e.g., ARM Letter I, Davenport Letter, ING Letter, 
Piper Jaffray Letter, Raymond James Letter, SIA Letter I, and 
Wachovia Letter. One commenter believed this emphasis on 
unsubstantiated and unadjudicated customer complaints to be 
``fundamentally unfair'' and that NASD's proposal ``significantly 
erodes'' due process and undermines the customer arbitration 
process. This commenter also asserted that registered 
representatives should have the opportunity to defend against 
regulatory allegations before such allegations are used as the basis 
of expanded adverse disclosure. See Davenport Letter. Another 
commenter argued that, unlike the current system, NASD's proposal 
would make it possible for frivolous claims to remain reportable as 
a Historic Complaint potentially for years to come and could allow a 
``vexatious complainant'' to place a broker in the continuous status 
of having all of its Historic Complaints disclosed by repeatedly 
making frivolous claims to meet the ``three or more'' standard. See 
Wachovia Letter.
    \29\ See, e.g., ARM Letter I, Davenport Letter, ING Letter, 
Piper Jaffray Letter, Raymond James Letter, SIA Letter I and 
Wachovia Letter. See also SIA Letter II.
    \30\ See ARM Letter I and SIA Letter I (arguing that the 
disclosure of Historic Complaints ignores the inherent differences 
between the CRD system, which is used by regulators, and the 
BrokerCheck system, which discloses to the public a subset of the 
information contained within the CRD system). See also ING Letter.
    \31\ See ING Letter.
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    Furthermore, several commenters expressed concern that NASD's 
proposal would inhibit firms from settling minor claims, since these 
could be publicly disclosed, and thereby create an incentive for firms 
to litigate customer complaints more often.\32\ Some of these 
commenters asserted that the settlement of customer complaints does not 
necessarily indicate an acknowledgement of improper behavior by the 
broker, but rather is frequently the result of a cost/benefit analysis 
or an effort to maintain client goodwill.\33\ Accordingly, several of 
the commenters believed that the adverse impact on settlements would 
not serve the interest of investors or advance the public interest.\34\ 
Additionally, believing that the proposal would encourage a broker to 
litigate customer complaints in order to protect its record, some 
commenters maintained that the increase in cost and time spent on 
customer complaints would adversely affect member firms and investors 
alike.\35\
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    \32\ See, e.g., ARM Letter I, Davenport Letter, ING Letter, 
Piper Jaffray Letter, Raymond James Letter, SIA Letters I and II, 
and Wachovia Letter. See also ARM Letter II.
    \33\ See, e.g., ARM Letter I, Davenport Letter, ING Letter, 
Piper Jaffray Letter, Raymond James Letter, SIA Letter I and 
Wachovia Letter.
    \34\ See, e.g., ING Letter, Piper Jaffray Letter, Raymond James 
Letter, SIA Letter I and Wachovia Letter.
    \35\ See, e.g., ARM Letter I, ING Letter and Wachovia Letter. 
One commenter predicted that NASD Dispute Resolution would be 
overwhelmed by having to handle cases which otherwise would have 
been settled. See SIA Letter I.
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    A few commenters also opposed NASD's proposed threshold which would 
trigger the release of all Historic Complaints, i.e., if the person has 
three or more currently disclosable regulatory actions, currently 
reported customer complaint, arbitration, or litigation disclosures, or 
Historic Complaint disclosures, and the most recent Historic Complaint 
or currently reported customer complaint, arbitration, or litigation is 
less than 10 years old.\36\ While most of these commenters appeared to 
incorrectly understand NASD's proposed application of the ten-year 
condition,\37\ these commenters generally believed that three 
disclosures over ten years would not necessarily be indicative of a 
pattern of conduct by the registered representative because it could 
include frivolous and baseless complaints filed against the 
representative.\38\ Three of these commenters suggested that the 
threshold for reporting Historic Complaints should be amended to be 
five reportable events within a three-year period,\39\ with one 
commenter also recommending that the look back for Historic Complaints 
should be limited to ten years.\40\ One commenter also believed that 
certain types of complaints should be excluded from the list of 
disclosable events that would trigger reporting of Historic Complaints, 
such as certain complaints filed by joint or related account holders, 
operational complaints or those alleging primarily a product failure or 
poor performance.\41\ Other commenters suggested that denied or 
unsubstantiated claims \42\ and unadjudicated regulatory allegations 
\43\ should not be counted towards the threshold requirement for 
disclosing Historic Complaints.
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    \36\ See, e.g., ING Letter, MWA Financial Letter, SIA Letter I 
and Wachovia Letter. But see Pace Letter (arguing that the ``three 
or more'' disclosed incident threshold for reporting all Historic 
Complaints was too high and that BrokerCheck should disclose all 
Historic Complaints to customers).
    \37\ The Commission notes that most of these commenters 
misunderstood NASD's proposal, believing that NASD would release all 
Historic Complaint information, regardless of age, if the registered 
person has a total of three of more disclosures within a ten-year 
period. The Commission clarifies that the ten-year condition of 
NASD's proposal would require that only the most recent of the 
Historic Complaint or currently reported customer complaint, 
arbitration, or litigation must be less than ten years old, which 
would trigger disclosure of all Historic Complaints, if the other 
conditions are met.
    \38\ See, e.g., ING Letter, MWA Financial Letter, and SIA Letter 
I. See also Wachovia Letter.
    \39\ See ING Letter, MWA Financial Letter, and SIA Letter I.
    \40\ See ING Letter.
    \41\ See SIA Letter I.
    \42\ See ARM Letter I.
    \43\ See Davenport Letter.
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    As part of their argument regarding the proposed rule's unfairness 
in disclosing trivial or frivolous claims, three commenters asserted 
that NASD's proposal to allow brokers to provide a brief commentary in 
response to the disclosed information would not provide an adequate 
safeguard for

[[Page 3459]]

brokers.\44\ As evidence of the proposed rule's imbalance against 
brokers, these commenters pointed to the procedural obstacles that 
brokers would have to overcome in order to submit a comment.\45\
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    \44\ See Piper Jaffray Letter, Raymond James Letter, and 
Wachovia Letter. See also ARM Letter I and SIA Letter I (criticizing 
the expungement process as a viable remedy for a registered person 
to remove meritless claims from its record).
    \45\ For instance, two of these commenters believed that the 
comment process would be administered by a ``skeptical NASD staff'' 
that would have the right to reject any brief comment. See Piper 
Jaffray Letter and Raymond James Letter. The other commenter 
criticized the signed, notarized affidavit that certain brokers 
would have to provide in order to submit a comment. See Wachovia 
Letter. But see Pace Letter. This commenter supported NASD's 
proposed comment process for associated persons to respond to 
disclosed material and believed it provided an opportunity for them 
to explain any information they perceive to be incomplete.
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    In addition, to address the harm of disclosing potentially 
misleading information to investors and to protect against potential 
abuses by disgruntled customers, a few commenters suggested adding 
certain protections to the proposal,\46\ including changing the 
proposal so that Historic Complaints, by default, would not be 
disclosed unless NASD reviewed the matter to determine whether to 
disclose the Historic Complaints.\47\ To assist investors in evaluating 
information regarding unadjudicated claims and de minimis settlements, 
the same commenter suggested that NASD insert a clarifying statement 
indicating that a matter may have been unadjudicated because the 
customer declined to pursue the matter or that it was settled for a 
modest amount to avoid litigation and should not be considered an 
admission of liability or responsibility.\48\ Another commenter 
suggested that NASD require customers and their counsel to attest that 
they have a reasonable, good-faith basis for naming a registered person 
and that NASD provide to customers who are preparing to file claims 
additional investor education material explaining the implications of 
naming a particular registered person and the potential damaging 
implications.\49\
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    \46\ See, e.g., SIA Letter I and Wachovia Letter.
    \47\ See Wachovia Letter. The commenter believed that, if 
brokers were aware that NASD would exercise discretion and judgment 
in determining when Historic Complaints should be disclosed, then 
brokers would have less of an incentive to litigate. Id.
    \48\ Id.
    \49\ See SIA Letter I.
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    To address these concerns, NASD indicated that it has developed an 
educational component to the proposed BrokerCheck report and Web site 
that NASD believes would put Historic Complaints in the appropriate 
context and enable investors to give them appropriate weight when 
evaluating a particular firm or registered person.\50\ Specifically, 
NASD noted that there would be an introductory section preceding the 
BrokerCheck report explaining that certain reported items may involve 
pending actions or allegations that may be contested and not resolved 
or proven, and that these items may be withdrawn or dismissed, resolved 
in favor of the registered person, or concluded through a negotiated 
settlement with no admission or conclusion of wrongdoing. In addition, 
NASD noted that the BrokerCheck report would include certain status 
information for each Historic Complaint that would indicate whether or 
not the complaint was settled. NASD also indicated that it would advise 
readers through the BrokerCheck report and its Web site that they 
should not rely solely on the information available through BrokerCheck 
and should consult other sources to the extent possible for information 
about the registered person.
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    \50\ See NASD Response Letter I.
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    In response to commenter's criticisms against the brief commentary 
mechanism that individuals can use to respond to disclosed information, 
NASD emphasized that registered persons would be able to submit 
information providing context and perspective about any event, 
including Historic Complaints. NASD noted that individuals typically 
provide such information in a comment section on the Form U4 at the 
time the event is reported, and that the registered individual can add 
to its previously submitted comment or comment for the first time 
through its firm using the CRD system.\51\ In addition, NASD noted that 
individuals who are no longer registered would be able to provide 
comment through a signed affidavit to CRD. NASD also represented that 
it would not edit the comments, except that it reserved the right to 
reject or redact comments that contain confidential customer 
information, offensive or potentially defamatory language, or 
information that raises significant identity theft, personal safety or 
privacy concerns that are not outweighed by investor protection 
concerns.\52\
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    \51\ If the proposed rule change is approved by the Commission, 
NASD represented that it will provide instructions in a Notice to 
Members on how firms may amend archived disclosures and will also 
post frequently asked questions and answers about this process on 
NASD's Web site. See NASD Response Letter I.
    \52\ According to NASD, each person, whether registered or 
formerly registered, will be responsible for ensuring that a 
Historic Complaint that is not currently disclosed through 
BrokerCheck adequately reflects its comment about the matter in the 
event such matter becomes disclosed to the public. Id.
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    Furthermore, a few commenters expressed concern over the fairness 
of retroactively altering the rules regarding the disclosure of 
Historic Complaints, including the disclosure of settlements after such 
settlements have been made, since registered persons often agree to 
settlements based on the assumption that the settlement information 
would not become part of the public record or have long-term negative 
effects on their reputations or business relationships.\53\ Two 
commenters suggested that NASD should prospectively implement its 
proposed rules regarding the disclosure of Historic Complaints and only 
disclose complaints reported after the effective date of the proposed 
rule change.\54\
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    \53\ See, e.g., ARM Letters I and II, ING Letter and SIA Letters 
I and II.
    \54\ See ING Letter and SIA Letter I. See also ARM Letter II, 
discussed further below (requesting that NASD not apply the new 
guidelines to any matters that are currently pending as well).
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    In response to commenter's concerns that firms and registered 
persons may have made certain decisions relating to customer 
complaints, arbitrations, or litigations based on the current rules 
under which the CRD system and BrokerCheck operate, NASD proposed in 
Amendment Nos. 4 and 5 to provide that only Historic Complaints that 
become Historic Complaints on or after the implementation date of the 
proposed rule change (i.e., those that are archived on or after the 
implementation date) would be eligible for disclosure through 
BrokerCheck.\55\ NASD stated that such a change would be in the public 
interest. Under this proposed modification, NASD would disclose through 
BrokerCheck all of an individual's Historic Complaints that became 
Historic Complaints on or after the implementation date of the proposed 
rule change if: (1) The most recent Historic Complaint or currently 
reported customer complaint, arbitration, or litigation is less than 
ten years old, and (2) the person has a total of three or more 
currently disclosable regulatory actions, currently reported customer 
complaints, arbitrations, or litigations, or Historic Complaints 
(subject to the limitation that they became a Historic Complaint on or 
after the implementation date of the proposed rule) or any combination 
thereof. According to NASD, the revised approach would strike a fair 
balance between public investors' interests in the background of the 
individuals with

[[Page 3460]]

whom they do business and the concerns of participants in the 
securities industry.
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    \55\ See NASD Response Letter I. See also Amendment No. 4.
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    In reaction to NASD's proposed changes in Amendment Nos. 4 and 5, 
the Commission received four additional comment letters. After the 
Second Notice, two commenters expressed support for this recent change 
by NASD to provide that Historic Complaints will not be eligible for 
disclosure if the matter became a Historic Complaint before the 
implementation date of the proposed rule change.\56\ Another commenter 
wanted NASD to go even further by recommending that the new BrokerCheck 
program disclose only those matters that commence following the rule 
change and not include any matters that are currently pending.\57\ 
According to this commenter, current matters entered into before the 
rule change should be archived after two years as the current 
guidelines allow.\58\
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    \56\ See MWA Financial Letter and SIA Letter II.
    \57\ See ARM Letter II.
    \58\ Id.
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    However, one commenter expressed serious reservations regarding the 
proposed limitation on the disclosure of Historic Complaints.\59\ 
Specifically, this commenter argued that the effect of the recent 
amendment is that Historic Complaint information that currently exists 
within CRD would never be released to the public through BrokerCheck, 
while the only Historic Complaints that would be disclosed are those 
that become Historic Complaints after the proposal's effective date. 
This commenter was not persuaded by other commenters' arguments that 
the proposed rule should be implemented prospectively because firms and 
registered persons might have relied on the current rules under which 
CRD and BrokerCheck operate when they decided to settle certain 
customer complaints, arbitrations, or litigations. First, the commenter 
maintained that these other commenters did not substantiate their 
argument with any specific cases, surveys, or studies in which 
registered representatives actually settled customer disputes because 
they would not be publicly disclosed after two years.\60\ Second, the 
commenter disagreed with other commenters' assertions that NASD members 
had settled matters without the knowledge that the rules might change 
in the future. In support of its argument, the commenter indicated that 
NASD's Notice to Members 02-74 that was issued in 2002 put NASD members 
on notice that the rules regarding the public disclosure of customer 
complaints and, more specifically, the rules regarding Historic 
Complaints might be revised and modified.\61\ This commenter asserted 
that if NASD wanted to strike a balance between the industry and 
investors, NASD should have considered that its membership was aware of 
the proposed changes to BrokerCheck since its Notice to Members in 2002 
and should have proposed the earlier date as the date for measuring 
which complaints would fall within the definition of Historic 
Complaints under the proposed rule change. Furthermore, this commenter 
argued that, if the proposal were implemented as proposed in Amendment 
No. 4, more comprehensive information could be available for the same 
financial services professional in the Investment Adviser Public 
Disclosure--Individual (``IAPDI'') system, which is currently being 
developed, than in BrokerCheck. The commenter maintained that this 
would go against NASD's original intent of providing the same level of 
information through BrokerCheck that the states provide and could lead 
to investor confusion.\62\ Finally, this commenter took issue with 
NASD's proposal to alter the way it would measure the two-year 
reporting and disclosure period for customer complaints. While NASD 
currently calculates the two-year period for disclosure of customer 
complaints as of the date the complaint was reported on Forms U4 and 
U5, NASD had proposed to consider this two-year period to begin on the 
date on which the member received the complaint, both for purposes of 
reportability on Forms U4 and U5 and for disclosure purposes. This 
commenter believed this change could encourage registered persons and 
their firms to manipulate the amount of time the complaint would be 
publicly disclosed by delaying the reporting or perhaps withholding the 
reporting of customer complaints while the two-year period is running.
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    \59\ See NASAA Letter I.
    \60\ The commenter criticized NASD for agreeing with other 
commenters that ``stockbrokers would rather litigate customer 
disputes than settle them because the complaint would be publicly 
disclosed.'' Id.
    \61\ The commenter cited to the 58 plus comment letters that 
NASD received in response to this Notice to Members as evidence that 
NASD's membership was aware that the rules regarding the release of 
historic information might change. Id.
    \62\ The commenter was concerned that the same person would be 
treated differently for disclosure purposes depending on which 
system, BrokerCheck or IAPDI, an investor searches, and that the 
public would have to check multiple sources for disclosure on the 
same person. Id.
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    In response to this commenter's objection to NASD's proposal to 
disclose a Historic Complaint only if the item became a Historic 
Complaint on or after the implementation date of the proposal, NASD 
maintained that its proposal is an evenhanded approach that would 
provide investors with additional information about brokers who have 
demonstrated a pattern of conduct of accumulating complaints, 
regulatory actions, arbitrations, or litigations, and that would also 
address the fairness concerns of participants in the securities 
industry by not retroactively changing the rules governing the 
disclosure of such events.\63\ To address the commenter's concern over 
measuring the two-year time period for disclosing customer complaints 
through BrokerCheck from the date the complaint is filed with the firm, 
rather than the date the complaint is reported to the CRD system, NASD 
stated that, to the extent a firm may not timely amend a registered 
person's Form U4 to report a customer complaint, the event should still 
be disclosed through BrokerCheck for two years. Accordingly, NASD 
decided not to amend the manner in which it currently measures the two-
year time frame for complaint disclosures and provided that complaints 
will continue to be disclosed through BrokerCheck for 24 months 
beginning on the date that the complaint is reported to the CRD 
system.\64\
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    \63\ See NASD Response Letter II and Amendment No. 6. But see 
NASAA Letter II. Continuing to object to NASD's proposal to disclose 
only those items that become a Historic Complaint after the 
implementation date, the commenter criticized NASD Response Letter 
II in failing to specifically respond to issues the commenter raised 
in its initial comment letter and urged the Commission to not 
approve the proposed rule change.
    \64\ See NASD Response Letter II.
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IV. Discussion and Commission's Findings

    After careful consideration of the proposal, the comment letters, 
and NASD's responses to the comment letters, the Commission finds that 
the proposed rule change, as amended, is consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to a national securities association.\65\ The Commission 
believes that the proposed rule change, as amended, is consistent with 
Section 15A(b) of the Act,\66\ in general, and furthers the objectives 
of Section 15A(b)(6),\67\ in particular, in that it is designed to 
prevent fraudulent and manipulative acts and practices, to

[[Page 3461]]

promote just and equitable principles of trade, to remove impediments 
to and perfect the mechanism of a free and open market and a national 
market system, and in general, to protect investors and the public 
interest. In addition, the Commission believes that the proposed rule 
change, as amended, is consistent with Section 15A(i) of the Act,\68\ 
which requires that NASD establish and maintain a toll-free telephone 
listing, and a readily accessible electronic or other process, to 
receive and promptly respond to inquiries regarding registration 
information on its members and their associated persons.
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    \65\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
    \66\ 15 U.S.C. 78o-3(b).
    \67\ 15 U.S.C. 78o-3(b)(6).
    \68\ 15 U.S.C. 78o-3(i).
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    The Commission believes that investors must be given the 
information necessary to make an informed decision about whether or not 
to conduct business with a particular broker-dealer or associated 
person. At the same time, the Commission recognizes that broker-dealers 
and their associated persons have legitimate concerns related to the 
harm their reputations could suffer from inaccurate or misleading 
information being made available to the public, as well as from the 
release of confidential personal information. The Commission believes 
that the proposed rule change would adequately balance the needs of 
investors with the interests of broker-dealers and their associated 
persons by increasing the amount of information available through 
BrokerCheck, while adopting certain protections for broker-dealers and 
their associated persons. For instance, under the proposed rule change, 
NASD would not release certain confidential personal information or 
other information about an associated person or a member which is 
irrelevant or misleading.
    Many of the commenters expressed concern regarding the release of 
Historic Complaints. Commenters argued, among other things, that the 
proposal would give too much weight to unproven allegations and 
complaints and could be misleading to investors, that the proposed 
threshold for disclosure of Historic Complaints is too low and over-
inclusive, and that firms would be inhibited from settling minor 
claims, which are often settled as the result of a cost/benefit 
analysis or in an effort to maintain client goodwill, since they could 
be publicly disclosed.
    The Commission notes that NASD has protections in place that should 
address the issues raised by the commenters. First, NASD would allow 
associated persons to submit relevant comments for inclusion with the 
information provided by BrokerCheck. While some of the commenters 
disputed the protections that the ``brief comment'' process would 
provide, the Commission notes that, as NASD reiterated in its response 
to comments, NASD would only reject or redact comments in very limited 
circumstances and, furthermore, would only do so if the concerns raised 
by the comments are not outweighed by investor protection concerns. In 
addition, NASD will include an introductory section preceding the 
BrokerCheck report that would provide a context within which to 
consider complaints, status information in the report that would make 
clear whether or not a Historic Complaint was settled, and advisories 
in the BrokerCheck report and on the Web site that would indicate that 
the reader should not rely solely on the information available through 
BrokerCheck.
    Some commenters were concerned that altering the rules regarding 
disclosure of settlements after such settlements had been made would be 
unfair. The Commission believes NASD's decision to only release 
information on Historic Complaints that become Historic Complaints on 
or after the implementation date of the proposed rule change is a 
reasonable response to that concern. For instance, under the proposal, 
as amended, persons entering into new settlements would be fully aware 
that, if such settlements were for less than $10,000 and are no longer 
reported on a Registration Form, they would be disclosed as Historic 
Complaints if the threshold requirements for disclosure were met.
    One commenter argued strongly against NASD's proposal to only 
release Historic Complaints that become Historic Complaints on or after 
the implementation date of the proposed rule change. This commenter 
asserted, among other things, that there had been sufficient notice of 
this proposal since November 2002 and that a better approach would be 
to release Historic Complaints that became Historic Complaints on or 
after that date. The Commission recognizes that differing judgments 
could be made as to the relevance of various Historic Complaints and 
the appropriate balance between the informational needs of investors 
and the interests of broker-dealers and their associated persons in 
assuring misleading information about them is not disseminated. The 
Commission believes NASD has struck a reasonable balance, and notes 
that, even using the implementation date as the ``cutoff'' for 
disclosure of Historic Complaints, the amount of information that would 
be disclosed through BrokerCheck would increase under this proposed 
rule change.
    The same commenter argued that NASD should not change the way in 
which it measures the two-year disclosure period for customer 
complaints, which currently begins on the date the member reports the 
complaint. This commenter was concerned that, if complaints were only 
disclosed for two years from the date they were received by the member, 
there would be an incentive to delay or even withhold the reporting of 
customer complaints in order to shorten the disclosure period. The 
Commission notes that in Amendment No. 6 NASD has withdrawn this 
portion of its proposal. Accordingly, customer complaints will continue 
to be disclosed for two years from the date on which they are reported.
    With regard to all other issues raised by the commenters, the 
Commission is satisfied that NASD has adequately addressed the 
commenters' concerns. The Commission further notes NASD's planned 
electronic distribution system should provide NASD with the flexibility 
to provide a report delivery solution that is more user-friendly, and 
that more efficiently meets investors' needs in light of changing 
technology, while still providing safeguards against data piracy.
    While BrokerCheck is a valuable tool for an investor to use to get 
information about a firm or a registered person with whom the investor 
is considering doing business, the Commission would urge investors to 
check with each state where the firm has done business or where the 
sales person has been registered to obtain a complete picture of his or 
her disciplinary history.
Accelerated Approval
    The Commission finds good cause for approving the proposed rule 
change prior to the thirtieth day after the date of publication in the 
Federal Register pursuant to Section 19(b)(2) of the Act.\69\ In 
Amendment No. 6, NASD: (i) indicated that it was withdrawing its 
original proposal to change the start date of the two-year period for 
disclosure of a customer complaint to the date on which the member 
receives the complaint; and (ii) clarified that it currently releases 
summary information concerning certain arbitration awards issued by 
NASD arbitrators and will continue to work with other regulators 
regarding disclosure of arbitration awards issued in other forums, and 
made a corresponding change to the proposed rule text. The Commission

[[Page 3462]]

notes that NASD's amendments were largely in response to comments that 
the Commission received. The Commission believes that Amendment No. 6 
adequately responds to commenters' concerns and notes that the proposed 
changes raise no new issues of regulatory concern. Accordingly, the 
Commission believes that granting accelerated approval to the filing is 
appropriate.
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    \69\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the filing, including whether the filing is 
consistent with the Act. Comments may be submitted by any of the 
following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml.
); or     Send an e-mail to rule-comments@sec.gov. Please include 

File Number SR-NASD-2003-168 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-NASD-2003-168. This file 
number should be included on the subject line if e-mail is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml
). Copies of the submission, all subsequent amendments, all 

written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for inspection and 
copying in the Commission's Public Reference Room. Copies of the filing 
also will be available for inspection and copying at the principal 
office of the NASD. All comments received will be posted without 
change; the Commission does not edit personal identifying information 
from submissions. You should submit only information that you wish to 
make available publicly. All submissions should refer to File Number 
SR-NASD-2003-168 and should be submitted on or before February 15, 
2007.

VI. Conclusion

    For the foregoing reasons, the Commission finds that the proposed 
rule change, as amended, is consistent with the requirements of the Act 
and rules and regulations thereunder applicable to a national 
securities association, and, in particular, Section 15A(b)(6) of the 
Act \70\ and 15A(i) of the Act.\71\
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    \70\ 15 U.S.C. 78o-3(b)(6).
    \71\ 15 U.S.C. 78o-3(i).
---------------------------------------------------------------------------

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\72\ that the proposed rule change (SR-NASD-2003-168) is hereby 
approved on an accelerated basis.
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    \72\ 15 U.S.C. 78s(b)(2).
    \73\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\73\
Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E7-1108 Filed 1-24-07; 8:45 am]

BILLING CODE 8011-01-P