Self-Regulatory Organizations; Order Granting Approval to Proposed Rule Change and Amendment Nos. 1 and 2, and Order Granting Accelerated Approval to Amendment No. 5 Thereto, by the National Association of Securities Dealers, Inc. Relating to Amendments to NASD Membership and Registration, Investigation and Sanctions, Conduct and Code of Procedure Rules
Federal RegisterJan 5, 1999
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40853; File No. SR-NASD-98-57]
Self-Regulatory Organizations; Order Granting Approval to
Proposed Rule Change and Amendment Nos. 1 and 2, and Order Granting
Accelerated Approval to Amendment No. 5 Thereto, by the National
Association of Securities Dealers, Inc. Relating to Amendments to NASD
Membership and Registration, Investigation and Sanctions, Conduct and
Code of Procedure Rules
December 28, 1998.
I. Introduction
On August 7, 1998, the National Association of Securities Dealers,
Inc. (``NASD'' or ``Association''), through its regulatory subsidiary,
NASD Regulation, Inc. (``NASD Regulation'') submitted to 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 the NASD
Membership and Registration, Investigation and Sanctions, Conduct and
Code of Procedures rules. The proposed rule change was amended on
August 17, 1998,\3\ and further amended on August 26, 1998.\4\ These
amendments both clarified and corrected the language of the
proposal.\5\ On November 13, 1998,\6\ the NASD further amended the
proposal, to respond to suggestions in a comment letter.\7\ \8\
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Letter from Joan C. Conley, Secretary, NASD Regulation to
Katherine A. England, Assistant Director, Division of Market
Regulation (``Division''), SEC, dated August 17, 1998 (``Amendment
No. 1'').
\4\ E-mail from Eric Moss, Attorney, NASD Regulation of Mandy
Cohen, Attorney, Division, SEC, dated August 26, 1998 (``Amendment
No. 2'').
\5\ In addition, on September 25, 1998 and October 30, 1998,
NASD Regulation filed nonstantive amendments granting extensions of
time for Commission action. See Letters from Eric Moss, Attorney,
NASD Regulation to Katherine A. England, Assistant Director,
Division, SEC, dated September 25, 1998 and October 29, 1998
(``Amendment No. 3 and Amendment No. 4,'' respectively). On December
22, 1998, the NASD filed another non-substantive amendment changing
the effective date of the proposed rule change to 30 days after
publication of the proposal in the NASD Notices to Members. Letter
from Alden S. Adkins, Sr. Vice President and General Counsel, NASD
Regulation to Katherin A. England, Assistant Director, Division,
SEC, dated December 22, 1998 (``Amendment No. 6'').
\6\ Letter from Alden S. Adkins, Sr. Vice President and General
Counsel, NASD Regulation to Katherine A. England, Assistant
Director, Division, SEC, dated November 10, 1998 (Amendment No.
5'').
\7\ This comment letter is more fully discussed below in Section
IV, Comments and Responses, See. Letter from Anne C. Flannery and
Ben A. Indek, Morgan Lewis & Bockius, LLP, to Jonathan G. Katz,
Secretary, SEC, dated October 6, 1998 (``Flannery Letter'').
\8\ The NASD again agreed to extend the time for Commission
action by letter from Eric Moss, Office of General Counsel, NASD
Regulation to Katherine A. England, Assistant Director, Division,
SEC, dated November 30, 1998.
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The proposed rule change was published for comment in the Federal
Register on September 3, 1998.\9\ One comment letter was received on
the proposal.\10\ This Order approves the proposed rule change, as
amended and grants accelerated approval to Amendment No. 5 to the
proposed rule change.\11\
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\9\ Securities Exchange Act Release No. 40378 (August 27, 1998),
63 FR 47064 (September 3, 1998). Amendment Nos. 1 and 2 were
included in this release.
\10\ See supra note 7, and infra Section IV, Comments and
Responses.
\11\ The Commission also solicits comments on Amendment No. 5.
Amendment Nos. 3 and 4, which extend the time for Commission action,
are non-sustantive, and therefore do not require publication for
notice and comment. Amendment No. 6 is also non-substantive, and
therefore does not require publication for notice and comment.
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II. Background
In November 1994, the NASD Board of Governors appointed the Select
Committee on Structure and Governance (``Select Committee'') to review
the NASD's corporate governance structure and to recommend changes to
enable the NASD to better meet its regulatory and business obligations,
including its oversight of the Nasdaq market.
On August 8, 1996, the Commission issued an order pursuant to
Section 19(h)(1) of the Act \12\ (``SEC Order''),\13\ including
fourteen undertakings (``Undertakings''), and a related report pursuant
to Section 21(a) of the Act (``21(a) Report'').\14\ In these documents,
the Commission indicated that the NASD had not complied with its own
rules and had failed to satisfy its self-regulatory obligations under
the Act to enforce such rules and the federal securities laws. Shortly
thereafter, following the recommendations of the Select Committee, the
NASD proposed to reorganize its corporate structure. The NASD retained
ultimate policymaking, oversight, and corporate authority as the parent
holding company and statutory self-regulatory organization, while
granting substantial deference to the operating subsidiaries in the
areas of their respective jurisdictions. Nasdaq was given sole
responsibility to operate and oversee the Nasdaq market and other over-
the-counter markets, while NASD Regulation was given responsibility for
regulation and member and constituent services. The Rules of the
Association (``Rules''), including those sections governing the conduct
and review of disciplinary proceedings, member admissions procedures
and denial of access decisions, were substantially revised. The
revisions to the corporate structure were first proposed and adopted in
mid-1996 and were approved by the Commission on August 7, 1997,\15\
Additional revisions to the corporate structure were approved on
November 14, 1997,\16\ and in the months following,\17\ while various
other proposals, including revision of the procedures governing the
automated systems, are still pending.\18\ The proposed amendments
supplement previous changes to the Rules of the Associations adopted in
response to the SEC Order and related documents.
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\12\ 15 U.S.C. 78s(h)(1).
\13\ Securities Exchange Act Release No. 37538 (August 8, 1996),
SEC's Order Instituting Public Proceedings Pursuant to Section
19(h)(1) of the Securities Exchange Act of 1934, Making Findings and
Imposing Remedial Sanctions, In the Matter of the National
Association of Securities Dealers, Inc. Administrative Proceeding
File No. 3-9056. Section 21(a) of the Act is set forth at 15 U.S.C.
78u(a).
\14\ SEC, Report and Appendix to Report Pursuant to Section
21(a) of the Securities Exchange Act of 1934 Regarding the NASD and
the Nasdaq Stock Market (August 8, 1996).
\15\ Securities Exchange Act Release No. 38908 (August 7, 1997)
62 FR 43385 (August 13, 1997) (File No. SR-NASD-97-28).
\16\ Securities Exchange Act Release No. 39326 (November 14,
1997) 62 FR 62385 (November 21, 1997) (File No. SR-NASD-97-71).
\17\ Securities Exchange Act Release No. 39470 (December 19,
1997), 62 FR 67197 (December 30, 1997) (File No. SR-NASD-97-81);
Securities Exchange Act Release No. 39483 (December 22, 1997), 63 FR
117 (January 2, 1998) (File No. SR-NASD-97-90); Securities Exchange
Act Release No. 39494 (December 29, 1997), 63 FR 586 (January 6,
1998) (File No. SR-NASD-97-97); Securities Exchange Act Release No.
39671 (February 17, 1998), 63 FR 9893 (February 26, 1998) (File No.
SR-NASD-98-13); Securities Exchange Act Release No. 40213 (July 15,
1998), 63 FR 39619 (July 23, 1998) (File No. SR-NASD-98-36);
Securities Exchange Act Release No. 40026 (May 26, 1998), 63 FR
30789 (June 5, 1998) (File No. SR-NASD-97-34); Securities Exchange
Act Release No. 40252 (July 23, 1998), 63 FR 40759 (July 30, 1998)
(File No. SR-NASD-98-46).
\18\ See, e.g., File No. SR-NASD-98-88 (revising listing and
delisting procedures).
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[[Page 556]]
III. Description of the Proposal
NASD Regulation is proposing changes to the Rules of the
Association that include: (A) the amendment and consolidation of
certain non-summary procedures in the Rule 9510 Series, including those
related to failure to provide information, statutory disqualification
and failure to pay dues and fines; (B) the streamlining of default
decisions, by measures including the consolidation of various
procedures into a single rule series and the revision of review
procedures; (C) the modification of pre-use filing requirements for
advertising materials; (D) the refinement of certain elements of the
Association's non-summary disciplinary processes, including amendment
of complaints and the introduction of new evidence upon review; (E) the
revision of various procedural technicalities, including the issuance
of decisions in settled cases, the effective date of certain sanctions,
and several others.
A. Refinement of Non-Summary Procedures
According to NASD Regulation, in a summary proceeding, the
Association may impose a suspension, limitation, or prohibition before
holding a hearing. In a non-summary proceeding, a respondent is given
notice and an opportunity for a hearing before the Association takes
any action against a respondent. In this proposal, the NASD has
reorganized and simplified its rules by grouping procedures by type--a
``summary proceeding'' or a ``non-summary proceeding''--rather than by
the issue or malfeasance addressed by the particular rule.
1. Denials of Access, Failure To Pay Arbitration or Settlement Awards
and Imposition of Pre-Use Advertising Requirements
As approved today, the Rule 9510 Series will be simplified by
deleting certain non-summary proceedings, consolidating them with other
rules, and by replacing certain current procedures with simpler
measures located in other parts of the Rules. This proposal refines the
scope of the Rule 9510 Series and removes redundant provisions. As
revised, this series will govern summary proceedings authorized by
Section 15A(h)(3) of the Act, including statutory disqualification and
failure to provide information; and non-summary proceedings imposing
suspension or cancellation for failure to comply with an Association
arbitration award or a settlement agreement, limitation or denial of
access to Association systems, such as the Nasdaq workstation, and an
advertising pre-use filing requirement.\19\ Finally, the rule series
will be amended to clarify that the Association may, rather than shall,
initiate non-summary proceedings, to more accurately reflect the NASD's
prosecutorial discretion.\20\
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\19\ Proposed Rule 9511. The pre-use advertising requirements
are set forth in proposed Rules 2210 and 2220
\20\ See proposed Rule 9513. this rule is further amended to
make technical corrections to cross-references to Rule 9511.
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2. Suspension and Cancellation for Failure To Provide Information
a. Procedural Changes. the procedures addressing a member or
associated person's failure to provide requested information are
currently located in both the Rule 9510 and 8220 Series. As proposed,
these sections will be consolidated in a revised Rule 8220 Series.
Currently, the Rule 8220 Series authorizes the national
Adjudicatory Council (``NAC'') to initiate a suspension proceeding for
failure to provide requested information, while the Rule 9510 Series
authorizes the Association staff to initiate similar action for the
same purpose. As amended, only the Department of Enforcement of NASD
Regulation, acting under Board-delegated authority, will be responsible
for initiating these proceedings, and will be designated as a party in
the subsequent proceedings.\21\ NASD Regulation points out that this is
consistent with the Department of Enforcement's authority in
disciplinary proceedings governed by the rule 9200 Series.\22\
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\21\ Proposed Rule 8221.
\22\ See Article VII, Section 2 of the NASD By-Laws and the
Delegation Plan.
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The proposed changes to the Rule 8220 series amend several hearing
procedures. First, under proposed Rule 8222(a), a member or associated
person may file a request for hearing directly with the NASD Regulation
Office of General Counsel, that is responsible for arranging such
hearings, rather than the NAC, as currently required.
Second, proposed Rule 8222(b)(1) expands the pool of persons
eligible for serving on the subcommittee conducting the hearings.
Previously, only former members of the NASD Regulation Board of
Directors, and the NASD Board of Directors could serve with current and
former NAC members on the subcommittee. The proposal adds current
members of these boards to the pool. At least one member, however, will
have to be a current NAC member.
Third, proposed Rule 8222(b)92) lengthens the period during which a
hearing must be held, from 20 to 30 days. NASD Regulation represents
that 20 days is not sufficient time to find panelists and coordinate
the schedules of the panelists, the parties, and their attorneys. NASD
Regulation asserts that the increased time period will not prejudice
the member or associated person because once a hearing is requested, a
suspension or cancellation is stayed pending completion of the
proceeding.
Fourth, Rule 8222(b)(3), as amended by the proposal, will allow the
Association to withhold certain privileged documents, such as attorney
work product.\23\
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\23\ The confidential documents are listed in Rule 9521. This
provision is based upon a provision currently found in Rule 9514(e).
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Fifth, the proposed Rule 8222(b)(7) requires that any additional
information required by a hearing subcommittee be distributed to the
parties not less than one business day before the subcommittee renders
its decision.
Finally, the Rule 8220 Series is revised to require service by
overnight commercial courier. NASD Regulation believes this will ensure
efficient service.
b. Call for Review. Proposed Rule 8223(b) revises the call for
review process by placing the authority to conduct a review with a
review panel, rather than the full NASD Board. NASD Regulation believes
the proposed rule change will permit suspension or cancellation
proceedings to be concluded in a more timely manner. The NASD Board
Executive Committee is a smaller body designed to meet on an as-needed
basis and can convene more easily than the NASD Board. A review by the
NASD Board is generally deferred until the next NASD Board meeting,
which could be as much as two months later.\24\ The review panel in
most cases could conveniently arrange its review around the Executive
Committee meetings because most of the participants would be the same.
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\24\ The NASD Board generally meets every two months.
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The ability of any Governor to call the proceeding for review
remains intact. The review panel will be composed of
[[Page 557]]
the members of the NASD Board Executive Committee and the Governor who
called the proceeding for review. The Governor who called the review
would serve in lieu of an Executive Committee member who has the same
classification (Industry, Non-Industry, or Public) as the calling
Governor. NASD Regulation states that it would design procedures for
selecting the Executive Committee member excused in such a way to
prevent his or her exclusion from every panel.
NASD Regulation believes the review panel composition is also
consistent with the SEC Order because a respondent in a proceeding will
still have the benefit of a balanced body conducting the review.
Pursuant to NASD By-Laws, as revised to be consistent with the SEC
Order, the NASD Board Executive Committee must reflect the percentages
of Non-Industry and Public Governors on the NASD Board. The percentage
would be maintained on the review panel by having the Governor
initiating the call for review serve as a substitute for an Executive
Committee member of the same classification.
c. Reinstatement Provisions. The reinstatement provisions set forth
in proposed Rule 8225 are amended to provide that requests to terminate
a suspension should be filed with the Department of Enforcement. If the
Department of Enforcement denies the request, a further request for
relief may be filed with the NASD Regulation Office at General Counsel.
If the request is filed within 30 days after service of the underlying
suspension decision, the review panel that made the underlying
suspension decision shall render the termination of suspension
decision. NASD Regulation notes that the review panel would be most
familiar with the decision and the issues during this period. If the
request is filed more than 30 days after service of the underlying
suspension decision, the NAC shall render the termination of suspension
decision. NASD Regulation believes this will ensure that the review
panel's responsibilities are concluded shortly after its decision is
rendered and will not continue for an indefinite period.
d. Public Disclosure. Proposed Interpretive Material 8310-2
provides for the release of disciplinary information to the public. The
proposed rule change is amended to permit the NASD to release
information about suspensions and cancellations imposed under the Rule
8220 Series, unless the NAC determines otherwise. NASD Regulation
explained that the NAC may determine not to release such information if
a member subject to a suspension quickly cures the failure to provide
information and the suspension is quickly terminated.
3. Statutory Disqualification
a. Member Obligations. The proposed amendments clarify certain
procedures and expedite statutory disqualification proceedings,
necessary to protect investors. Proposed Rule 9522(b) provides that a
member has an independent obligation to initiate a statutory
disqualification proceeding. Proposed Rule 9522 provides that if a
member fails to respond to a statutory disqualification notice by
filing a written request for relief within ten days, the member's
membership may be canceled and the associated person's registration may
be revoked, unless an extension of time is granted by the NAC for good
cause shown.
b. Expedited Review. Proposed Rule 9525 provides for expedited
review of statutory disqualification proceedings when the Statutory
Disqualification Committee requests an expedited review and the NASD
Board Executive Committee determines that such action is necessary for
the protection of investors. The review panel shall be composed of the
NASD Board Executive Committee, except that the Governor who called the
review shall serve on the review panel in lieu of an Executive
Committee member who has the same classification (Industry, Non-
Industry, or Public) as the Governor. The procedures for selecting the
Executive Committee member to be excused shall be designed in such a
way as to prevent his or her exclusion from every panel. NASD
Regulation believes this change will allow the eligibility proceeding
to be concluded in a more timely manner for the protection of
investors.
4. Failure To Pay Dues, Fines and Other Penalties
The proposed Rule 9530 Series sets forth procedures for suspending
or canceling the membership of a member or the registration of an
associated person for failure to pay fees, dues, assessments, or other
charges. Procedures for such a cancellation or suspension are currently
set forth in Rule 9510 Series. The proposed rule change provides that
the NASD Treasurer is authorized to initiate such proceedings by
sending a notice to the member or associated person. The hearing will
be conducted by a hearing officer, who will be authorized to suspend or
cancel the membership of a member or the registration of a person. The
hearing procedures are modeled after proposed Rule 8220 Series.
The proposed rule change does not include a call for review
because, according to NASD Regulation, the issues to be resolved in
this type of proceeding are narrow and largely administrative. NASD
Regulation believes that it is more efficient to have one hearing
officer conduct the hearing and render a final decision. Moreover, NASD
Regulation notes that hearing officers are well-suited to resolve the
issues presented in hearings for failure to pay fees due to their
training and experience in the NASD's disciplinary proceedings under
the Rule 9200 Series and in non-summary proceedings for failure to pay
arbitration awards under the Rule 9510 Series. Appeal to the Commission
following completion of this proceeding is still available,
however.\25\
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\25\ See Proposed Rule 9533.
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5. General Procedures
The hearing and decision provisions in proposed Rule 9514 are also
revised. First, proposed Rule 9514(a)(1) provides that a member or
person who requests a hearing must set forth specific grounds for
setting aside the notice rather than specifying the type of action the
member seeks to reverse or oppose at the hearing. Second, the proposed
rule provides that a member who receives notice of an advertising pre-
filing requirement under Rule 2210 or 2220 has 30 days to request a
hearing. Currently, Rule 9514 does not address pre-use filing
requirements and any request for a hearing in a non-summary proceeding
must be filed within seven days. According to NASD Regulation, the
additional time is provided in advertising pre-use filing requirements
because members may need additional time to consider whether to comply
with or contest the requirements. Third, proposed Rule 9514(f)(5)
authorizes the Office of Hearing Officers to act as custodian for non-
summary proceedings for a failure to comply with an arbitration award
or settlement agreement related to a NASD arbitration or mediation.
Under Rule 9514(b)(1), hearing officers serve as the adjudicators in
such proceedings, and according to NASD Regulation, the Office of
Hearing Officers is the appropriate custodian in place of the NASD
Regulation Office of General Counsel. Finally, proposed Rule 9514 has
been amended to contain cross references to Rules 2210 and 2220.
Proposed Rule 9516 is amended to provide that requests for
reinstatement may be made after either a summary or non-summary
proceeding under the Rule 9510 Series. Currently,
[[Page 558]]
reinstatement is available only after a non-summary proceeding.
B. Streamlining of Default Decisions
The proposed amendments to Rules 9215, 9241, 9269, and 9312 are
designed to clarify and consolidate the NASD Code of Procedure
(``Code'') default provisions, and to shorten the call for review
period for default decisions to 25 days.
1. Consolidation of Default Provisions
Currently, Rule 9269 is devoted exclusively to defaults resulting
from a failure to appear at a hearing. Defaults, however, also occur as
a result of failing to file an answer or as a result of failing to
appear at a pre-hearing conference. The proposed amendments consolidate
many of the default provisions in Rule 9269. Accordingly, proposed Rule
9269 will address defaults resulting from a failure to appear at a
hearing, as well as a failure to answer a complaint and a failure to
appear at pre-hearing conference.
The default rules have also been clarified by the proposed rule
change. Proposed Rule 9269(b) clarifies that default decisions issued
by hearing officers should contain the same information as decisions
issued in litigated cases. Subsection (c) of proposed Rule 9269
provides that either the Review Subcommittee or the NAC may, upon
filing a motion and a showing of good cause, set aside a default
judgment. Furthermore subsection (d) of proposed Rule 9269 clarifies
that default judgments must be appealed within 25 days after service of
the decision, and that sanctions are effective 30 days after service of
the decision (other than bars and suspensions which are effective
immediately). These time periods are already set forth in Rules 9311(a)
and 9360, respectively.
2. Calls for Review by General Counsel
Proposed Rule 9312 is amended to shorten the period when the
General Counsel may call a default decision for review. Currently, the
General Counsel has 45 days to determine whether to call a default
decision for review, which is the same call period for litigated
decisions. Twenty-five days, however, is the period proposed for
calling for review a default decision. NASD Regulation believes that
the additional 20 days for the call decision is appropriate for
litigated decisions because the NAC or the Review Subcommittee may
prefer to wait and see if an appeal will be filed. According to NASD
Regulation, appeals of default decisions, however, are infrequent, and
the call decisions generally are made within the 25 day period. NASD
Regulation believes that shortening the call period for default
decisions is practicable, and will have the effect of putting default
decisions (which often involve bars and expulsions) into effect sooner.
C. Modification of Pre-Use Filing Requirements
In addition to amending the procedures under which pre-use filing
requirements are imposed, the NASD also proposes to amend the
substantive provisions in Rules 2210(c)(4) and 2220(c). These rules
require members to file advertisements, sales literature, and
educational materials before they are used. The Rules currently provide
that a District Business Conduct Committee (``DBCC'') may impose pre-
use filing requirements and may conduct a hearing if the member opposes
the pre-use requirement. These provisions, however, are consistent with
the SEC Order \26\ and therefore, have not been utilized since August
1996. The proposed rule change would vest authority to impose a pre-use
filing requirement solely with the NASD Regulation staff, specifically
the Advertising/Investment Companies Regulation Department. Moreover,
any hearing requested regarding the requirement would be conducted by a
hearing officer or other adjudicator, as set forth in the non-summary
proceedings of the Rule 9510 Series, rather than by DBCC.
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\26\ SEC Order, supra note 13.
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D. Refinement of Disciplinary Process
1. Amendment of Complaints Prior to Responsive Pleadings
The proposed change to Rule 9212 will enable the Department of
Enforcement to amend complaints once as a matter of course, without
hearing officer approval, prior to the filing of responsive pleadings.
The current rule requires the Department of Enforcement to file a
motion to amend any complaint, and the hearing officer must grant such
motion before a complaint can be amended. NASD Regulation notes that
generally such motions are granted if filed before responsive pleadings
are filed. NASD Regulation believes the motion requirement for the
first amendment can be eliminated without unfairness to respondents,
and that the change is consistent with most judicial practice.\27\
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\27\ Amendment No. 5 notes that this practice is consistent with
the Federal Rules of Civil Procedure.
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2. Introduction of New Evidence Upon Review
Proposed Rule 9346(b) would impose a requirement that motions to
introduce new evidence in appealed or called cases be made within 30
days of service of the index to the record as required under Rule 9321.
Rule 9346(b) currently requires that motions to introduce new evidence
in a NAC proceeding be made within 30 days of service of the notice of
appeal (or within 35 days of service of notice of a call for review).
NASD Regulations believes, however, that a motion to introduce new
evidence generally can be best made after the parties have received
copies of the official index to the record.
E. Miscellaneous Technical Revisions
1. Issuance of Decisions in Settled Cases
Proposed Rule 9270 establishes that the issuance of decisions, in
settled cases, is to be done by the General Counsel. Rule 9270
currently requires that decisions relating to accepted offers of
settlement be issued by the Office of Hearing Officers. According to
NASD Regulation, returning decisions relating to offers of settlement
to the Office of Hearing Officers after acceptance by the NAC only
introduces delay and the possibility of error. Moreover, NASD
Regulation believes the proposed rule change will clarify that the
Hearing Officers do not have authority to approve offers of settlement.
2. Effectiveness of Sanctions
The proposed amendments to Rule 9360 generally provide that
sanctions will continue to become effective 30 days after the date of
service of the decision constituting final disciplinary action. The
date, however, will no longer be established by the Chief Hearing
Officer. NASD Regulation is proposing this change because the Chief
Hearing Officer plays no part in the final stages of an appealed or
called disciplinary proceeding. Proposed Rule 9360 also incorporated
references to Rules 9349 and 9351 to clarify Proposed Rule 9360's
applicability.
3. Reference to National Adjudicatory Council
NASD Regulation is proposing to amend definition (m) of Association
Rule 0120 to reflect that the NAC has replaced the National Business
Conduct Committee (``NBCC''). The NAC is a committee of NASD Regulation
that acts on behalf of the NASD Regulation Board of Directors with
respect to disciplinary and related procedures.
NASD Regulation noted that the NAC replaced the NBCC pursuant to
[[Page 559]]
corporate reorganization. The revision to the corporate structure were
approved on November 14, 1997.\28\ Related changes to the rules
describing the NAC's functions in disciplinary proceedings and related
matters were approved on December 19, 1997.\29\
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\28\ Release No. 34-39326, supra note 10.
\29\ Securities Exchange Act Release No. 39470 (December 19,
1997), 62 FR 67297 (December 30, 1997) (File No. SR-NASD-97-81).
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4. Location of Testimony
NASD Regulation proposes to amend Rule 8210 to clarify that
Association staff may specify the location at which a member,
associated person, or other person subject to the Association's
jurisdiction must testify for the purpose of an investigation,
complaint, examination, or proceeding. NASD Regulation stated that its
authority to specify a location has been recently questioned and
believes the proposed rule change will clarify the Association's
authority.
IV. Comments and Responses
The Commission received one comment letter regarding the proposed
rule change.\30\ Overall, the commenter agrees with the proposed rules,
but believes the rules could be improved or supplemented in certain
respects.
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\30\ Flannery, supra note 9.
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A. Proposed Rule 9212
The Flannery Letter suggested amending proposed Rule 9212. Proposed
Rule 9212, as originally submitted and noticed, sought to enable the
Department of Enforcement unlimited discretion to file amendments to
complaints before responsive pleadings have been filed. As originally
submitted, proposed Rule 9212 would have allowed the Department of
Enforcement to file unlimited amendments without hearing officer
approval.\31\ The Flannery Letter suggested that NASD Regulation be
limited to a single amendment before the filing of responsive
pleadings. The Flannery Letter noted that the Federal Rules of Civil
Procedure limit parties to one amendment of right before responsive
pleadings are filed.\32\
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\31\ Currently, the Department of Enforcement must move to amend
any complaint and a hearing officer must grant the motion before the
complaint can be amended.
\32\ See Federal Rule of Civil Procedure 15(a).
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NASD Regulation agrees with the Flannery Letter and proposes to
amend proposed Rule 9212 to limit the Department of Enforcement to one
amendment as a matter of course before responsive pleadings are
filed.\33\ The revised Rule 9212(b) follows. Additions are italicized;
deletions are [bracketed].
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\33\ See Amendment No. 5.
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9212. Complaint Issuance--Requirements, Service, Amendment,
Withdrawal, and Docketing
* * * * *
(b) Amendments to Complaint
The Department of Enforcement may file and serve an amended
complaint that includes new matters of fact or law once as a matter
of course at any time before the Respondent answers the complaint.
Otherwise [After the Respondent answers], upon motion by the
Department of Enforcement, the Hearing Officer may permit the
Department to amend the complaint to include new matters of fact or
law, after considering whether the Department of Enforcement has
shown good cause for the amendment.
B. Proposed Rule 9215
The Flannery Letter also suggested that Rule 9215 arguably could
shorten the time period by which responsive pleadings are to be filed.
Rule 9215(e) sets forth the time requirements for responsive pleadings.
Currently, Rule 9215(e) requires that upon amendment of a complaint,
the time for filing an answer is extended to 14 days after service of
the amended complaint. The commenter pointed out that this could lead
to the respondent having less time to respond than they would have been
allowed if the complaint had not been amended.\34\
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\34\ An answer must be served on all of the parties within 25
days of service of the complaint. Rule 9215(a).
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NASD Regulation agrees that Rule 9215(e) could have the effect
described by the commenter. NASD Regulation responds, however, that
this was not its intent. In response, NASD Regulation proposes to amend
Rule 9215(e) to clarify that the time period by which responsive
pleading are considered timely shall not be shortened by the filing of
an amended complaint by the Department of Enforcement. The text of
proposed rule 9215(e) follows. Additions are italicized: deletions are
[bracketed].
9215. Answer to Complaint
(a) Form, Service, Notice
Pursuant to Rule 9133, each Respondent named in a complaint
shall serve an answer to the complaint on all other Parties within
25 days after service of the complaint on such Respondent, and at
the time of service shall file such answer with the Office of
Hearing Officers pursuant to 9135, 9136, and 9137. The Hearing
Officer assigned to a disciplinary proceeding pursuant to Rule 9123
may extend such period for good cause. Upon receipt of a
Respondent's answer, the Office of Hearing Officers shall promptly
send written notice of the receipt of such answer to all Parties.
* * * * *
(e) Extension of Time To Answer Amended Complaint
If a complaint is amended pursuant to Rule 9212(b), the time for
filing an answer or amended answer shall be the greater of the
original time period within which the Respondent is required to
respond, or [extended to] 14 days after service of the amended
complaint. If any Respondent has already filed an answer, such
Respondent shall have 14 days after service of the amended
complaint, unless otherwise ordered by the Hearing Officer, within
which to file an amended answer.
* * * * *
C. Rule 9268
Finally, the Flannery Letter made a recommendation that was
unrelated to the proposed rule filing. The recommendation related to
the determination of the time period when a hearing panel shall
complete a decision. Currently, Rule 9268(a) provides that a hearing
officer shall prepare a majority decision within 60 days of the ``final
date allowed for filing proposed findings of fact, conclusions of law,
and post-hearing briefs, or by a date established at the discretion of
the Chief Hearing Officer.'' The Flannery Letter contends that when the
60 day period runs from a date established by the chief hearing
officer, a respondent has no way of knowing when a majority decision
will be rendered. The Flannery Letter suggested that the chief hearing
officer inform the parties of the date chosen to begin the 60 day
period if it is different from the final date for all post-hearing
filings.
NASD Regulation has agreed to adopt a written policy pursuant to
which it will send a letter to respondents informing them if a decision
will not be prepared approximately 60 days after receipt of the
transcripts or post hearing submissions, whichever is later. NASD
Regulation believes that the issue is when the parties will receive a
decision, not the starting date selected by the chief hearing officer.
V. Discussion
The Commission finds that the proposed rule change, as amended, is
consistent with the Act and the rules and regulations thereunder
applicable to a national securities association.\35\ In particular, the
Commission finds that the proposed rule change is consistent
[[Page 560]]
with the requirements of Sections 15A(b)(2), 15A(b)(6), 15A(b)(7), and
15A(b)(8) of the Act.\36\
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\35\ In reviewing this proposal, the Commission has considered
its impact on efficiency, competition, and capital formation. 15
U.S.C. 78c(f).
\36\ 15 U.S.C. 78o-3(b)(2); 15 U.S.C. 78o-3(b)(6); 15 U.S.C.
78o-3(b)(7); and 15 U.S.C. 78o-3(b)(8).
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Section 15A(b)(2) requires national securities associations to have
the capacity to enforce compliance by their members and persons
associated with members, with the provisions of the Act, the rules and
regulations thereunder, the rules of the Municipal Securities
Rulemaking Board, and the rules of the association.
Generally, the proposed rule change modifies the disciplinary
procedures of the Association to enhance its membership oversight
capabilities. For example, the proposed changes to Rules 2210 and 2220
pre-use filing requirements, which replace DBCC action with that of the
NASD Regulation staff, should provide a more independent and unbiased
regulation and oversight of these matters. The proposed changes to Rule
Series 8220 in providing and clarifying the procedures applied when
members or associated person fail to provide requested information
further the Association's ability to deal with these matters. Finally,
the proposed changes to Rule 9510 Series in simplifying and
consolidating the disciplinary procedures for summary and non-summary
proceedings similarly enhance the Association's capacity and authority
to enforce the provisions of the Act, the rules and regulations
thereunder, the rules of the Municipal Securities Rulemaking Board, and
the Rules of the Association.
Section 15A(b)(6) provides, among other things, that the Rules of
the Association must be designed to prevent fraudulent and manipulative
acts and practices, to 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.\37\ The proposed rule change is
consistent with the provisions of this section because, for example,
the changes to the Rule 9520 Series should enhance investor protection
by enabling more rapid identification of statutorily disqualified
individuals. The proposed amendments expressly identify a member's
obligation to initiate a statutory disqualification proceeding if it or
one of its employees is subject to a statutory disqualification; and
expedite review of statutory disqualification proceedings by
streamlining the process for requesting expedited review.\38\
Similarly, the enhanced statutory disqualification provisions should
help to prevent fraudulent and manipulative act and practices, to
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 by ensuring that members and associated persons are qualified
and eligible for membership and when necessary, seeks to ensure prompt
disqualification.
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\37\ 15 U.S.C. 78o-3(b)(6).
\38\ Under the Proposal, as approved, the Statutory
Disqualification Committee can request expedited review by the NASD
Executive Committee if such action is necessary for the protection
of investors.
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Moreover, proposed Interpretative Material 8310-2 is also
consistent with the provision of Section 15A(b)(6) because it allows
prompt release of disciplinary information to the public. The
Commission believes disseminating disciplinary information to the
public serves to prevent fraudulent and manipulative acts and practices
and protects investors and the public interest by acting as a deterrent
to violating the rules of the Association. The Commission also believes
that publication of disciplinary information also serves to notify the
public of those persons who have committed rule violations.
Section 15A(b)(7) requires that members and persons associated with
members be appropriately disciplined for violation of any provision of
the Act, the rules and regulations thereunder, the rules of the
Municipal Securities Rulemaking Board, or the rules of the
association.\39\ Proposed Rule 8220 Series provides for appropriate
discipline for the failure to provide requested information. If a
member fails to provide requested information, the NAC may suspend or
cancel the member. The proposed Rule 9510 Series also provides for the
appropriate discipline of members. This series governs certain summary
and non-summary proceedings such as, among other things, summary
proceedings authorized by Section 15A(h)(3) of the Act, non-summary
proceedings to suspend or cancel a member for failing to comply with an
arbitration award, or for failing to meet qualification requirements or
if a member cannot be permitted to continue to have access with safety
to investors, creditors, members, or the Association. The proposed rule
change is consistent with Section 15A(b)(7) of the Act, as shown by
these examples, because it provides an appropriate mechanism for
disciplining members and persons associated with members for violations
of the Act, the rules and regulations thereunder, the rules of the
Municipal Securities Rulemaking Board, and the rules of the
Association.
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\39\ 15 U.S.C. 78o-3(b)(7).
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Finally, Section 15A(b)(8) of the Act requires that the rules of
the association provide a fair procedure for the disciplining of
members and person associated with members.\40\ The proposed rule
change is consistent with the provisions of this section. For example,
the review procedures of the Rule 8220 Series, which addresses the
procedure for suspending or canceling a member for failing to provide
requested information, have been revised to enhance the fair discipline
of members.
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\40\ 15 U.S.C. 78o-3(b)(8)
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Currently, decisions of the appointed subcommittee are reviewed by
the full NASD Board. Proposed Rule 8223(b) is revised to place the
review authority with the NASD Board Executive Committee. The call for
review by any governor, however, remains intact but is also revised. If
a governor calls a decision for review, that governor shall serve on
the NASD Board Executive Committee to review the decision. That
governor shall serve in place of an executive committee member who
shares the same classification (Industry, Non-Industry, or Public) as
the calling governor. The Commission believes that by having the
calling governor serve on the review committee, the governor should be
able to more fully develop and investigate the reasons why he or she
called the decision for review.
The Commission also notes that the procedure for the calling
governor to serve on the review panel ensures that a balanced panel
will conduct the review. The percentages of executive committee members
remain intact as the calling governor is appointed to serve as a
substitute for an executive committee member of the same
classification. These revisions should provide members with more
balanced and fair procedures for reviewing cancellation and suspension
decisions.\41\
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\41\ The Commission notes that the changes in the procedures of
a call for review by a governor set forth in Rule 8223 are also
proposed in Rule 9525. Proposed Rule 9525 addresses expedited
reviews of statutory disqualifications and contains the same
procedures as proposed Rule 8223. The Commission finds that the
proposed changes to Rule 9525 are also consistent with Section
15A(b)(8) for the reasons set forth above for proposed Rule 8223.
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In addition, the proposed change of the review panel should also
foster fairness in disciplinary proceedings. By placing the review
authority with the NASD Board Executive Committee,
[[Page 561]]
proceedings should be concluded in a more timely manner. As NASD
Regulation noted, the NASD Board Executive Committee is a smaller body
designed to meet on an as-needed basis that can convene more easily
than the NASD Board.
Proposed Rule 9212 is also consistent with the requirements of
Section 15A(b)(8). The rule is amended to provide that the Department
of Enforcement is entitled one amendment of a complaint, as a matter of
course, before responsive pleadings are filed. The Commission finds
that this ensures fairness of disciplinary procedures by expediting
pre-hearing proceedings by deleting the requirement of hearing officer
approval for the first amendment. Respondents are also protected. By
requiring hearing officer approval of all subsequent amendments,
respondents will not be subject to unchecked delays caused by unlimited
amendments.
The proposed changes to the Rule 9530 Series also help ensure that
disciplinary procedures are fair. The proposed Rule 9530 Series sets
forth the procedures for suspending or canceling the membership of a
member or the registration of an associated person who fails to pay
fees, assessments, or other charges. Under this rule series, a hearing
officer conducts the hearing and makes the final decision as to
canceling or suspending the membership of a member or the registration
of a person. NASD Regulation notes that there is no call for review of
a hearing officer decision because the issues resolved are narrow and
largely administrative.
The Commission finds that the procedures set forth in the proposed
Rule 9530 Series promote fair disciplinary procedures. The proposed
rule change consolidates and clarifies the procedures for failure to
pay dues, assessments, or other charges. Having the same hearing
officer conduct the hearing and render the decision provides members
with expedited review and prompt resolution of claims.
The Commission finds good cause for approving Amendments No. 5 to
the proposed rule change before the thirtieth day after the date of
publication of notice thereof in the Federal Register.\42\ As discussed
in Section IV above, Amendment No. 5 revises proposed Rules 9212 and
9215. The amendment to proposed Rule 9212 states that the Department of
Enforcement shall be able, once as a matter of course, to amend
complaints with hearing officer approval before a respondent files an
answer. The original proposal allowed the Department of Enforcement
unlimited amendments to complaints without hearing officer approval.
The amended proposed rule should prevent unnecessary delays in
proceedings and ensure fairness by providing hearing officer oversight
of multiple amendments.
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\42\ The Commission notes that Amendment Nos. 3 and 4 are non-
substantive amendments granting the Commission extensions of time to
act which do not require publication for notice and comment.
Amendment No. 6 is also a non-substantive amendment changing the
effective date of the proposed rule change which does not require
publication of notice and comment.
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The amendment to proposed Rule 9215 provides that if the Department
of Enforcement amends a compliant the respondent shall not be affected
by a shorter time period in which to answer. The amended proposal
clarifies that the respondent will either be afforded the full
remaining period allowed under Rule 9215(a) or fourteen days from
service of the amended complaint, whichever is greater. The amended
proposed rule change promotes fairness because it protects a
respondent's ability to adequately answer complaints by ensuring that
he has sufficient time.
For these reasons, the Commission believes that good cause exists,
consistent with Section 19(b) of the Act,\43\ to approve Amendment No.
5 to the proposed rule change on an accelerated basis.
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\43\ 15 U.S.C. 78s(b).
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VI. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning Amendment No. 5. Persons making written submission
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 Commission, and all written communications relating to the proposed
rule change between the Commission and any other 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 at 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 file No.
SR-NASD-98-57 and should be submitted by January 26, 1999.
VII. Conclusion
It is therefore Ordered, pursuant to Section 19(b)(2) of the
Act,\44\ that the proposed rule change, as amended, (SR-NASD-98-57) is
approved.
\44\ 15 U.S.C. 78s(b)(2).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\45\
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\45\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-77 Filed 1-4-99; 8:45 am]
BILLING CODE 8010-01-M
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.