Self-Regulatory Organizations; Notice of Filing and Order Granting Accelerated Approval of Proposed Rule Change by National Association of Securities Dealers, Inc. Relating to Availability of Disciplinary Complaints and Disciplinary Decisions Upon Request

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-37797; File No. SR-NASD-96-32]

Self-Regulatory Organizations; Notice of Filing and Order

Granting Accelerated Approval of Proposed Rule Change by National

Association of Securities Dealers, Inc. Relating to Availability of

Disciplinary Complaints and Disciplinary Decisions Upon Request

October 9, 1996.

Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934

(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on October

2, 1996, NASD Regulation, Inc. (``NASDR'') filed with the Securities

and Exchange Commission (``SEC'' or ``Commission'') the proposed rule

change as described in Items I, II, and III below, which Items have

been prepared by NASDR.\1\ The

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Commission is publishing this notice to solicit comments on the

proposed rule change from interested persons. For the reasons discussed

below, the Commission is granting accelerated approval of the proposed

rule change.

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\1\ The NASD initially submitted the filing on August 6, 1996.

On September 19, 1996, the NASD filed Amendment No. 1 with the

Commission. See letter from Alden S. Adkins, Vice President and

General Counsel, NASD, Inc., to Katherine A. England, Assistant

Director, Division of Market Regulation, SEC (September 19, 1996).

On October 2, 1996, NASDR filed Amendment No. 2 with the Commission.

See letter from Suzanne E. Rothwell, Associate General Counsel, NASD

Regulation, Inc., to Katherine A. England, Assistant Director,

Division of Market Regulation, SEC (October 2, 1996).

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I. Self-Regulatory Organization's Statement of the Terms of Substance

of the Proposed Rule Change

NASDR is proposing to amend the Interpretation on the Release of

Disciplinary Information, IM-8310-2 of the Procedural Rules of the

National Association of Securities Dealers, Inc. (``NASD'' or

``Association''), to permit the Association to provide a copy of any

disciplinary complaint or disciplinary decision upon request and to

require that such copy be accompanied by a disclosure statement in

certain circumstances. Below is the text of the proposed rule change.

Proposed new language is italicized; proposed deletions are in

brackets.

IM-8310-2. Release of Disciplinary Information

(a) The Association shall, in response to a written inquiry or

telephonic inquiry via a toll-free telephone listing, release certain

information as contained in its files regarding the employment and

disciplinary history of members and their associated persons, including

information regarding past and present employment history with

Association members; all final disciplinary actions taken by federal or

state or foreign securities agencies or self-regulatory organizations

that relate to securities or commodities transactions; all pending

disciplinary actions that have been taken by federal or state

securities agencies or self-regulatory organizations that relate to

securities and commodities transactions and [have been] are required to

be reported on Form BD or U-4 and all foreign government or self-

regulatory organization disciplinary actions that are securities or

commodities related and are required to be reported on Form BD or U-4;

and all criminal indictments, informations or convictions that are

required to be reported on Form BD or Form U-4. The Association will

also release information concerning civil judgments and arbitration

decisions in securities and commodities disputes involving public

customers.

(b) The Association shall, in response to a request, release to the

requesting party a copy of any identified disciplinary complaint or

disciplinary decision issued by the Association or any subsidiary or

Committee thereof; provided, however, that each copy of:

(1) a disciplinary complaint shall be accompanied by a statement

that the issuance of a disciplinary complaint represents the initiation

of a formal proceeding by the Association in which findings as to the

allegations in the complaint have not been made and does not represent

a decision as to any of the allegations contained in the complaint;

(2) a disciplinary decision that is released prior to the

expiration of the time period provided under the Code of Procedure for

appeal or call for review within the Association or while such an

appeal or call for review is pending, shall be accompanied by a

statement that the findings and sanctions imposed in the decision may

be increased, decreased, modified, or reversed by the Association;

(3) a final decision of the Association that is released prior to

the time period provided under the Securities Exchange Act of 1934 for

appeal to the Commission or while such an appeal is pending, shall be

accompanied by a statement that the findings and sanctions of the

Association are subject to review and modification by the Commission;

and

(4) a final decision of the Association that is released after the

decision is appealed to the Commission shall be accompanied by a

statement as to whether the effectiveness of the sanctions has been

stayed pending the outcome of proceedings before the Commission.

Current paragraphs (b) through (k) are redesignated (c) through

(l).

II. Self-Regulatory Organization's Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule Change

In its filing with the Commission, NASDR included statements

concerning the purpose of and basis for the proposed rule change and

discussed any comments it received on the proposed rule change. The

text of these statements may be examined at the places specified in

Item III below. NASDR has prepared summaries, set forth in Sections

(A), (B), and (C) below, of the most significant aspects of such

statements.

(A) Self-Regulatory Organization's Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule Change

(a) In 1988, the NASD established a Public Disclosure Program

(``Program'') that, among other things, makes certain types of federal

and state disciplinary information on NASD members and associated

persons available to the public through the Central Registration

Depository (``CRD'') maintained by the NASD.\2\ This Program provides

investors, customers and the press with access to a number of

categories of information on an NASD member or any of the member's

associated persons, which are provided to inquiring persons in synopsis

form. Subsequent to the establishment of the Program, the Securities

Enforcement Remedies and Penny Stock Reform Act of 1990 \3\ mandated

that the NASD implement a toll-free telephone number to provide

employment history and disciplinary information about members and

associated persons to inquiring persons. The NASD complied with this

mandate in April 1992 and, since that time, has made periodic

improvements to the Program to expand the scope of information

available upon request. One of these improvements included the release

of information through the Program of information on pending NASD

disciplinary proceedings, which includes providing a synopsis of NASD

disciplinary complaints \4\ and disciplinary decisions on appeal to the

National Business Conduct Committee (``NBCC'').

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\2\ See Notice to members 93-37 (June 1993).

\3\ Public Law 101-429, 104 Stat. 931 (1990).

\4\ This rule change addresses only ``disciplinary complaints,''

not ``customer complaints.''

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Those individuals, including the press, who are aware of the

availability of information through CRD may obtain a description in

synopsis form of any disciplinary complaint or disciplinary decision

issued by the Association with respect to any member or associated

person of a member by requesting the synopsis from CRD through the

NASD's toll-free telephone number or by making a written inquiry. Such

persons sometimes, as part of their inquiry, request a complete copy of

the disciplinary complaint or decision from the Association. Under the

Interpretation on the Release of Disciplinary Information (``Rule''),

IM-8130-2,\5\ NASD Regulation provides notification to the membership

and the press of significant disciplinary decisions when time for

appeal and call for review has expired, but the Rule does not

specifically authorize the Association to provide copies of any

disciplinary complaint or disciplinary

[[Page 53986]]

decision, in its entirety, upon request. As a matter of practice, the

staff has not provided copies of disciplinary complaints in response to

requests. In contrast, the Association has, however, maintained a

policy since 1994 of providing complete copies of disciplinary

decisions upon request, pursuant to an interpretation of paragraph (a)

of the Rule, which permits the Association to release information upon

request regarding ``* * * all pending disciplinary actions * * * .''

Such decisions that are issued by a District Business Conduct Committee

or the Market Surveillance Committee prior to the expiration of the

time during which the decision can be appealed or called for review

within the Association are accompanied by a statement that the findings

and sanctions could be increased, decreased, or modified by the

Association if the matter is appealed to the NBCC or called for review.

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\5\ The Interpretation was previously cited as ``Resolution of

the Board of Governors--Notice to Membership and Press of

Suspensions, Expulsions, Revocations, and Monetary Sanctions and

Release of Certain Information Regarding Disciplinary History of

Members and Their Associated Persons'' and appeared after paragraph

2301 of the NASD Manual, following Article V, Section 1 of the Rules

of Fair Practice.

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NASDR is proposing to amend the Rule to adopt new paragraph (b) to

clarify that the Association shall provide, on request, copies of any

NASD disciplinary complaint and disciplinary decision. In making a

request for a disciplinary complaint, the proposed rule change requires

that the requesting party ``identify'' the disciplinary complaint or

decision that is being requested. This language is intended to prevent

requests for ``all complaints'' or ``all decisions'' of the

Association.\6\ The language requiring that the party ``identify'' the

complaint or decision request will be satisfied where the requesting

party identifies a particular broker/dealer or a particular associated

person that is a respondent in an NASD disciplinary action (although

the date of any action may not be known) or identifies the issue or

rule that is the subject of a complaint (where the identity of the

member is not known). Although a request may identify a time period

when the requested complaint or decision was issued, it would be

permissible for the requesting party to obtain a copy of all complaints

and decisions related to an identified broker/dealer or associated

person without reference to a time period.

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\6\ The NASD believes that omnibus requests by commercial

organizations for copies of all complaints and decisions for a

particular year, for example, would impose a considerable burden on

NASDR, impeding the organization's ability to respond to the

individual requests of the investing public.

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In addition, the proposed rule change would require that copies of

disciplinary complaints and decisions be accompanied by certain

disclosures, in certain circumstances, that are set forth in

subparagraphs (b)(1)-(4) in order to advise the recipient of the status

of the disciplinary action. In particular, NASDR is concerned that

recipients of a copy of a disciplinary complaint understand that the

issuance of a complaint does not represent a decision as to any of the

allegations contained in the complaint. The proposed rule change,

therefore, would require that any copy of a disciplinary complaint be

accompanied by a statement that the issuance of a complaint represents

the initiation of a formal proceeding by the Association in which

findings as to the allegations in the complaint have not been made and

that this issuance does not represent a decision as to any of the

allegations contained in the complaint. Moreover, disciplinary

decisions are issued at the initial hearing level and at a number of

appellate review levels of the organization. It is important,

therefore, that a recipient of a disciplinary decision be advised when

a decision is not considered final by the Association because the time

for the respondent to appeal the matter or the time for a reviewing

body of the Association to call the matter for review has not expired,

or the review of a matter is pending. The proposed rule change

provides, therefore, that any copy of a disciplinary decision issued

pursuant to the Code of Procedure prior to the expiration of the time

for appeal to or call for review within the Association (i.e., by, as

applicable, the NBCC, Board of Directors of NASD Regulation, or Board

of Governors of the Association) or released while such an appeal or

review is pending, would be required to be accompanied by a statement

that the findings and sanctions imposed in the decision may be

increased, decreased, modified, or reversed by the Association if the

matter is appealed or called for review. This language is consistent

with the disclosures that currently are being provided with respect to

decisions issued by a District Business Conduct Committee or Market

Surveillance Committee prior to the expiration of the time for appeal

or call for review, or while an appeal is pending.

Similarly, any copy of a final decision of the Association released

prior to the expiration of the time period for the filing of an appeal

to the SEC or while such an appeal is pending would be required to be

accompanied by a statement that the findings and sanctions of the

Association are subject to review by the Commission if the decision is

appealed. Finally, any copy of a final decision of the Association

released after the decision is appealed to the Commission would be

required to be accompanied by a statement that the effectiveness of the

decision has or has not been stayed pending the outcome of proceedings

before the Commission. This language is drawn from current paragraph

(g) of the Rule.

NASDR is also proposing to amend paragraph (a) of the Rule.

Currently, the provision appears to prevent information from being

provided through the Program if it has not been reported on Form BD or

U-4, even though Form BD or U-4 would require the reporting of such

information. This was not the intent of the current rule language.

NASDR is, therefore, proposing to amend the provision to clarify that

information provided through the Program is that information that is

required to be reported on Form BD or U-4, regardless of whether the

information is actually provided to the NASD on these forms.

(b) NASDR believes that the proposed rule change is consistent with

the provisions of Section 15A(b)(6) \7\ of the Act in that the proposed

rule change to permit the Association to provide copies of NASD

disciplinary complaints and disciplinary decisions to persons upon

request will protect investors and the public interest by providing

more complete information to such persons than currently can be

obtained from the synopsis of disciplinary complaints and decisions

that is provided by the Program.

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\7\ 15 U.S.C. 78o-3.

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(B) Self-Regulatory Organization's Statement on Burden on Competition

NASDR does not believe that the proposed rule change will result in

any burden on competition that is not necessary or appropriate in

furtherance of the purposes of the Act, as amended.

(C) Self-Regulatory Organization's Statement on Comments on the

Proposed Rule Change Received From Members, Participants, or Others

Written comments were neither solicited nor received.

III. Solicitation of Comments

Interested persons are invited to submit written data, views, and

arguments concerning the foregoing. Persons making written submissions

should file six copies thereof with the Secretary, Securities and

Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549.

Copies of the submission, all subsequent amendments, all written

statements with respect to the proposed rule change that are filed with

the

[[Page 53987]]

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 such filing will also be

available for inspection and copying at the principal office of the

NASD. All submissions should refer to the file number in the caption

above and should be submitted by [insert date 21 days from the date of

publication].

IV. Commission's Findings and Order Granting Accelerated Approval of

Proposed Rule Change

NASDR has requested that the Commission find good cause pursuant to

Section 19(b)(2) of the Act, for approving the proposed rule change

prior to the 30th day after publication in the Federal Register. The

Commission has reviewed the NASDR's proposed rule change and believes,

for reasons set forth below, that the proposal is consistent with the

requirements of the Act and the rules and regulations thereunder

applicable to the NASD. Specifically, the Commission believes the

proposal is consistent with Section 15A(b)(6) of the Act, which

provides in pertinent part that the rules of the association be

designed to foster cooperation and coordination with persons engaged in

regulating, clearing, settling, processing information with respect to,

and facilitating transactions in securities and not to permit unfair

discrimination among customers, issuers, brokers or dealers.

The Commission finds good cause, pursuant to Section 19(b)(2) of

the Act, for approving the proposed rule change prior to the 30th day

after publication in the Federal Register.\8\ Paragraph (a) of IM-8310-

2 permits the Association to release information on ``all pending

disciplinary actions that have been taken by federal or state

securities agencies or self-regulatory organizations that relate to

securities and commodities transactions * * *'' in response to a

request. NASDR believes that this provision permits the Association,

upon request, to release copies of its disciplinary complaints and

decisions, as well as, providing, on request, a synopsis of such

complaints and decisions based on the information in the CRD. The

proposed rule change would codify this interpretation of Paragraph (a)

of the Rule. The Commission believes that the proposed rule change

would benefit the investing public by providing more complete

disclosure of information related to disciplinary complaints and

disciplinary decisions. Supplying this additional information would

benefit the subject of the complaint as well; instead of disseminating

a synopsis, lacking detail, a full account of the circumstances would

be made available.

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\8\ See, supra, note 1.

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Based on the foregoing, the Commission deems it appropriate to

approve the proposed rule change on an accelerated basis, pursuant to

Section 19 of the Act and the rules and regulations thereunder.\9\

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\9\ 15 U.S.C. 78o-3.

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It is therefore ordered, pursuant to Section 19(b)(2) of the

Act,\10\ that the proposed rule change SR-NASD-96-32 be, and hereby is,

approved.

\10\ 15 U.S.C. 78s(b)(2).

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For the Commission, by the Division of Market Regulation,

pursuant to delegated authority, 17 CFR 200.30-3(a)(12).

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 96-26396 Filed 10-15-96; 8:45 am]

BILLING CODE 8010-01-M