[Federal Register Volume 62, Number 156 (Wednesday, August 13, 1997)]
[Notices]
[Pages 43385-43408]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-21330]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38908; File No. SR-NASD-97-28]
Self-Regulatory Organizations; National Association of Securities
Dealers, Inc.; Order Approving Proposed Rule Change and Amendment No. 1
to the Proposed Rule Change, Order Granting Accelerated Approval of
Amendment No. 2 to the Proposed Rule Change, and Notice of Filing and
Order Granting Accelerated Approval of Amendment Nos. 3, 4, and 5 to
Proposed Rule Change Regarding Membership Application Procedures,
Disciplinary Proceedings, Investigations and Sanctions Procedures, and
Other Conforming Changes
August 7, 1997.
On April 18, 1997, the National Association of Securities Dealers,
Inc. (``NASD'' or ``Association'') filed with the Securities and
Exchange Commission (``Commission'' or ``SEC'') a proposed rule change
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') 1, and Rule 19b-4 thereunder.2 The
Association originally proposed to amend: (1) The By-Laws of the NASD;
(2) the By-Laws of NASD Regulation, Inc. (``NASD Regulation'' or
``NASDR''); (3) the By-Laws of The Nasdaq Stock Market, Inc.
(``Nasdaq''); (4) the Plan of Allocation and Delegation of Functions By
NASD to Subsidiaries (``Delegation Plan''); (5) Rule 0120; (6) Rule IM-
2210-4; (7) the Rule 1010 Series; (8) the Rule 8000 Series; and (9) the
Rule 9000 Series.
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\1\ 15 U.S.C. Sec. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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On April 23, 1997, the NASD filed a technical amendment to the
proposed rule change.3 Notice of the proposed rule change,
including Amendment No. 1, was provided by issuance of a Commission
release on April 24, 1997 and by publication in the Federal Register on
May 8, 1997.4 On July 10, 1997, the NASD filed Amendment No.
2, pertaining to changes to the 9400 Series (Members Experiencing
Financial or Operational Difficulties), the 9500 Series (Summary and
Non-Summary Suspensions, Cancellation, Bar, and Limitation or
Prohibition on Access to NASD Services), and the 9600 Series
(Procedures for Exemptions from Certain NASD Rules). Notice of
Amendment No. 2 to the proposed rule change was provided by issuance of
a Commission release on July 11, 1997 and by publication in the Federal
Register on July 16, 1997.5 On July 11, 1997, the NASD filed
Amendment No. 3 to the proposed rule change, making several clarifying
changes to the investigations and sanctions, disciplinary, and member
admission procedures.6 Amendment No. 3 also withdrew the
proposed amendments to the by-laws of the NASD, NASD Regulation, and
Nasdaq, as well as proposed amendments to these entities' restated
Certificates of Incorporation and the Delegation Plan. These documents
will be amended to reflect the corporate restructuring recently
approved by the NASD Board of Governors and will be submitted in a
separate rule filing at a later date. On July 21, 1997, the NASD filed
Amendment No. 4 to the proposed rule change making several technical,
nonsubstantive amendments.7 On August 4, 1997, the NASD
filed Amendment No. 5 to the proposed rule change, which modified the
timing of the effectiveness of the proposed rule change and included
several technical amendments.8 The Commission received two
comment letters on the proposal.9
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\3\ Letter from Alden S. Adkins, General Counsel, NASD
Regulation, Inc. to Katherine A. England, Assistant Director,
Division of Market Regulation, Commission, dated April 23, 1997
(``Amendment No. 1'').
\4\ Securities Exchange Act Release No. 38545 (Apr. 24, 1997),
62 FR 25226 (May 8, 1997) (publishing notice of SR-NASD-97-28)
(``Original Proposal'').
\5\ Securities Exchange Act Release No. 38831 (July 11, 1997),
62 FR 38156 (July 16, 1997) (``Amendment No. 2'').
\6\ Letter from Alden S. Adkins, General Counsel, NASD
Regulation, to Katherine A. England, Assistant Director, Division of
Market Regulation, Commission, dated July 11, 1997 (``Amendment No.
3''). Except for technical, clarifying changes, a description of the
proposed changes set forth in Amendment No. 3 regarding the
investigations and sanctions, disciplinary, and member admission
procedures is provided below. In addition to the NASD's proposed
changes to the Original Proposal, the NASD included in Amendment No.
3 its response to the two submitted comment letters (``NASD
Response''). See also Colish Letter and ABA Letter, infra note 9.
\7\ Letter from Alden S. Adkins, General Counsel, NASD
Regulation, Inc. to Katherine A. England, Assistant Director,
Division of Market Regulation, Commission, dated July 21, 1997
(``Amendment No. 4'').
\8\ Letter from Alden S. Adkins, General Counsel, NASD
Regulation, Inc. to Katherine A. England, Assistant Director,
Division of Market Regulation, Commission, dated August 4, 1997
(``Amendment No. 5''). Certain minor modifications to the Delegation
Plan needed to ensure conformity to the changes in the rules of the
NASD contained in this rule filing are set forth in Amendment No. 5
to SR-NASD-96-29, which is being temporarily approved concurrently
with this filing. Securities Exchange Act Release No. 38909 (Aug. 7,
1997).
\9\ Letter from Faith Colish, Attorney, Faith Colish P.C., to
Jonathan G. Katz, Secretary, Commission, dated June 9, 1997
(``Colish Letter''); letter from George S. Frazza, Chair, Section of
Business Law and Barry F. McNeil, Chair, Section of Litigation,
American Bar Association, to Jonathan G. Katz, Secretary,
Commission, dated June 17, 1997 (``ABA Letter'').
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I. Introduction and Background
On August 8, 1996, the Commission issued an order (``SEC Order'')
pursuant to Section 19(h)(1) of the Act. This order made certain
findings about the NASD and conduct on Nasdaq and imposed remedial
sanctions, including ordering the NASD to comply with certain
undertakings (``Undertakings'').10 The Commission determined
that the NASD had not complied with the NASD's rules or satisfied its
obligations under the Act to enforce its rules and the federal
securities laws. In particular, the Commission determined that the NASD
failed to thoroughly investigate certain misconduct by dealers and to
take effective regulatory action. Moreover, the Commission determined
that the NASD failed to enforce market makers' obligations to trade at
their quotations, and report transactions on a timely and accurate
basis. The Commission also determined that the NASD processed
applications for membership of certain firms in a manner inconsistent
with its rules.
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\10\ Securities Exchange Act Release No. 37538 (Aug. 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 National Association
of Securities Dealers, Inc., Administrative Proceeding File No. 3-
9056. 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 (Aug. 8, 1996) (``21(a) Report'').
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In addition, the Commission found in its 21(a) Report, among other
things, that market making firms were afforded a disproportionate
representation on the boards and committees that govern the NASD,
administer its disciplinary process, and operate the Nasdaq market. The
Commission concluded in the 21(a) Report that market makers had unduly
exerted their influence over the disciplinary process through their
participation in the District Business Conduct Committees
(``DBCCs'').11 In
[[Page 43386]]
addition, the Commission noted that ``undue influence of market makers
and a lack of vigor and balance in the NASD's enforcement activities
with respect to market maker firms'' was inconsistent with the NASD's
statutory obligation 12 to oversee the Nasdaq market and to
enforce its rules and regulations fairly as to all member
firms.13
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\11\ The Commission found that the DBCCs performed a ``grand
jury'' function, in which the NASD staff were required to seek DBCC
authorization to initiate a disciplinary proceeding. In addition,
the DBCCs served as adjudicative bodies, ruling on disciplinary
proceedings and approving settlements. 21(a) Report, supra note 10,
at 35 n.91. As examples of the DBCCs' undue influence over the
disciplinary process, the Commission pointed to heightened
enforcement efforts regarding Small Order Execution System
violations and the NASD's laxity in enforcing firm quote
obligations, trade reporting rules, and excused withdrawal rules.
Id. at 36-39.
\12\ Section 19(g)(1)(B) of the Act, 15 U.S.C.
Sec. 78s(g)(1)(B).
\13\ 21(a) Report, supra note 10, at 39.
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Further, the Commission found that the NASD processed applications
for membership of certain firms in a manner inconsistent with its
rules.14 Specifically, the Commission found that the NASD
failed to process certain applications within a reasonable time,
required some applicants to satisfy criteria not enumerated in its
rules, placed improper restrictions on those firms' activities as a
condition to membership, and prevented such members, once admitted,
from seeking modifications to their restriction agreements as permitted
by the NASD's rules.
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\14\ SEC Order, supra note 10.
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Based on the Commission's specific findings, the NASD agreed to
certain undertakings, including, among other things, undertakings to
improve public representation on its Boards and committees, to
institute professional hearing officers, to confer sole discretion in
the regulatory staff of the NASD as to prosecutorial and regulatory
matters, and to promulgate and apply uniform standards for regulatory
and other access issues.15 Under the general terms of
certain of the Undertakings in the SEC Order, and in response to the
Commission's conclusions in the 21(a) Report, the NASD is proposing to
amend its Code of Procedure and Membership Application and Registration
Procedures.
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\15\ Undertakings one through six of the SEC Order require the
Association:
1. To implement and maintain at least fifty percent independent
public and non-industry membership in its Board of Governors, the
Board(s) of Governors or Directors of all of its subsidiaries and
affiliates that exercise or have delegated self-regulatory
functions, and the following committees: the National Nominating
Committee, the Trading/Quality of Markets Committee, the Arbitration
Committee, the Market Surveillance Committee (now the Market
Regulation Committee), the National Business Conduct Committee, the
Management Compensation Committee, and all successors thereto.
2. To provide that NASDR and any successor thereto has,
consistent with the NASD's By-Laws and Plan of Delegation, as
amended from time to time and as approved by the Commission, primary
day-to-day responsibility for the regulation, surveillance,
examination, and disciplining of NASD member firms and registered
persons, with respect to market activities as well as other self-
regulatory matters, with full access to the records of the Nasdaq
market.
3. To institute the participation of professional Hearing
Officers (who shall be attorneys with appropriate experience and
training) to preside over disciplinary proceedings.
4. To provide for the autonomy and independence of the
regulatory staff of the NASD and its subsidiaries such that the
staff, subject only to the supervision of the Board of Governors of
the NASD and the Boards of Directors of NASDR and Nasdaq, and any
successor thereto, (a) has sole discretion as to what matters to
investigate and prosecute, (b) has sole discretion to handle
regulatory matters such as approval of applications for membership
and the conditions and limitations that may be placed thereon, (c)
prepares rule proposals, rule interpretations and other policy
matters with any consultations with interested NASD constituencies
made in fair and evenhanded manner, and (d) is generally insulated
from the commercial interests of its members and the Nasdaq market.
Among other things, the District Business Conduct Committees and the
Market Surveillance Committee shall not have any involvement in
deciding whether or not to institute disciplinary proceedings, nor
shall the District Committees, or any subcommittee thereof, have any
involvement in the review or approval of applications for membership
in the NASD. Subject to the foregoing, the regulatory staff of the
NASDR engaged in the disciplinary process may, solely on their own
initiative, inform themselves on matters of market or other
securities industry expertise by consulting with representatives of
member firms or committees of the NASD or its subsidiaries.
5. To promulgate and apply on a consistent basis uniform
standards for regulatory and other access issues, such as admission
to the NASD as a member firm, and conditions to becoming a market
maker; and institute safeguards to ensure fair and evenhanded access
to all services and facilities of the NASD.
6. To ensure the existence of a substantial, independent
internal audit staff which reviews all aspects of the NASD
(including the regulatory function, the disciplinary process and the
Nasdaq stock market and its systems) and reports directly to an
audit committee of the NASD Board of Governors which includes a
majority of public and non-industry Governors and is chaired by a
public Governor.
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II. Description of the Proposal
The proposed changes to the NASD's membership and registration
rules, investigations and sanctions rules, and the code of procedure
are summarized below in the order that they appear in the
rules.16
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\16\ For a more detailed description of the NASD's proposed rule
change, see Original Proposal, supra note 4; Amendment No. 2, supra
note 5; Amendment No. 3, supra note 6; Amendment No. 4, supra note
7; and Amendment No. 5, supra note 8.
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A. Changes to the Membership and Registration Rules
The Rule 1010 Series governs the procedures for becoming a member
of the NASD. The proposed changes to the Rule 1010 Series will
substantially alter the current procedures for membership application.
The proposed Rule 1010 Series provides that NASD Regulation staff,
rather than a District Committee, will make an initial decision on an
application for membership. An applicant may appeal a staff decision to
the National Business Conduct Committee (``NBCC''). The NBCC's decision
is subject to discretionary review by both the NASD Regulation Board
and the NASD Board. The proposed rule change also sets forth a more
detailed and comprehensive list of the documents and information that
must be submitted with a membership application and sets forth more
detailed, comprehensive, and objective standards to be used to
determine whether an applicant should be admitted to membership. The
proposed rule change provides more procedural rights to applicants to
ensure that applications are processed fairly and expeditiously,
including limitations on the time within which the NASD must issue
membership decisions.
B. Changes to the Investigations and Sanctions Rules
The Rule 8100 Series currently governs complaints against NASD
members. The Rule 8200 Series permits the NASD to investigate members'
books, and requires members or associated persons to provide
information in connection with investigations or proceedings conducted
by the NASD. The Rule 8200 Series also currently provides the NASD with
authority to suspend members or associated persons who do not comply
with the Rule 8200 Series. The Rule 8300 Series currently provides for
sanctions against members and persons associated with members for
violations of NASD rules.
The NASD proposes to amend the Rule 8000 Series to reflect the
proposed changes to the disciplinary procedures in the proposed Rule
9000 Series, discussed below, and to clarify and reorganize certain
rule provisions in order to make them easier to read and understand.
Currently, the decision to serve a complaint on a member pursuant to
Rule 8130 is made by the NBCC. In addition, current Rule 8120 allows
any person who believes he or she has been aggrieved by any act of any
member or associated person to institute a formal disciplinary
proceeding.
The NASD proposes to rescind current Rule 8120. The NASD believes
it is no longer necessary to give ``aggrieved persons'' the right to
invoke NASD processes to institute formal
[[Page 43387]]
disciplinary actions in view of the enhancements to the disciplinary
process, including the change to staff-initiated disciplinary
proceedings, enhancements to the arbitration process, and the
institution of an expanded and independent NASD internal review
function (including an Ombudsman Office). The NASD also proposes to
delete current Rule 8130, which authorizes the DBCCs to file
complaints, to comply with Undertaking 4, which prohibits DBCCs from
having any involvement in the decision whether or not to institute
disciplinary proceedings.
The NASD proposes significant changes to current Rule 8220, which
authorizes the suspension of a member for failure to furnish the NASD
with duly requested information or for failure to keep a membership
application and supporting documents current. The proposed changes
retain the NASD's summary suspension powers, but provide members and
persons associated with members with enhanced procedural protections in
connection with the suspension process. Under the proposed revisions to
Rule 8221, the NBCC must provide written notice of the suspension to
the member or associated person. The notice specifies the information
that must be provided or the action that must be taken, and states that
the failure to provide information or take the required action within
20 days after service of the notice constitutes grounds for suspension.
The NBCC must serve notice of the suspension through personal service
or commercial courier.
Proposed Rule 8222 makes explicit the right of a member or
associated person to request a hearing before a subcommittee of the
NBCC concerning the notice of suspension. Any subcommittee decision to
impose a suspension must state the grounds for the suspension and the
conditions for terminating it. Proposed Rule 8224 requires the NASD to
provide to the entire NASD membership notice of any suspension imposed
pursuant to Rule 8223, and proposed Rule 8226 requires that the NASD
also serve the suspended member with a copy of a notice or decision
served on the associated person.
Proposed Rule 8225 adds a new provision for termination of the
suspension. Upon request by the suspended member or associated person,
the head of the appropriate NASD Regulation department or office may
terminate a suspension if the member or associated person has fully
complied with a notice or decision issued under the Rule 8220 Series.
If the request is denied, the proposed rule provides the member or
associated person with the right to apply to the NBCC for relief from
the suspension on the grounds of full compliance with the notice issued
under proposed Rule 8221 or the conditions specified in a decision
issued under proposed Rule 8223.
Proposed Rule 8227 clarifies that any action taken under the Rule
8220 Series does not foreclose the NASD from taking action against the
member or associated person under any other rule. Finally, the NASD
also proposes to amend the Rule 8300 Series to make it conform with the
proposed Rule 9000 Series and to make it shorter, clearer, and easier
to understand.
C. Changes to the Code of Procedure
The NASD proposes numerous changes to the Code of Procedure. In
particular, the Rule 9100 Series sets forth rules of general
applicability to disciplinary proceedings and other proceedings brought
against a member or a person associated with a member. The Rule 9200
Series sets forth the specific procedures for disciplinary proceedings,
including settlements, letters of acceptance, waiver, and consent and
minor rule plan violation letters, and the Rule 9300 Series sets forth
the appeal or review procedures for a disciplinary proceeding. The Rule
9400 and 9500 Series set forth the procedures regarding members
experiencing financial or operating difficulties; summary and
nonsummary suspensions, cancellation, bar, and limitation or
prohibition on access to NASD services; and eligibility proceedings.
The Rule 9600 Series delineates the procedures for exemptions from
certain NASD Rules.
1. Application and Purpose
The proposed Rule 9100 Series contains twenty proposed rules,
setting forth a variety of important procedural modifications,
including a detailed list of defined terms used throughout the Code of
Procedure (proposed Rule 9120);17 a series of rules
regarding service 18 and notice of various papers and filing
requirements (proposed Rule 9130 Series); rules relating to the
appearance of counsel (or other person authorized to act in a
representative capacity) (proposed Rules 9141, 9142, 9150); a detailed
provision prohibiting ex parte communications generally (proposed Rule
9143) and a related provision regarding separation of functions
(proposed Rule 9144); a rule providing for a motions practice (proposed
Rule 9146); a provision for disqualification of an adjudicator
(proposed Rule 9160);19 and a provision prohibiting
interlocutory review (proposed Rule 9148).
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\17\ In Amendment No. 3, the NASD proposes to amend, add, and
delete several terms set forth in proposed Rule 9120. First,
unnecessary terms such as ``Practicing before the NASD'' and
``Complainant'' (because the only possible complainant is the
Department of Enforcement) were deleted. A related change was made
to the definition of ``Party'' now in proposed Rule 9120(v). Two new
definitions were added. In proposed Rule 9120(d), ``Counsel to the
National Business Conduct Committee'' was added to provide greater
clarity with respect to the other proposed changes to the Rule 9300
Series described below. In proposed Rule 9120(l), ``General
Counsel'' was defined in order to shorten several references in the
text to ``the General Counsel of NASD Regulation, or his or her
delegatee,'' and to make explicit that the delegation by the General
Counsel would extend only to certain persons directly reporting to
the General Counsel with certain titles and/or responsibilities
(e.g., an Associate General Counsel or an Assistant General
Counsel). In addition, minor changes were also made to the
definitions of ``Adjudicator,'' ``District Committee,'' ``Extended
Hearing Panel,'' ``Extended Proceeding Committee,'' ``Hearing
Panel,'' ``Interested Association Staff,'' ``Statutory
Disqualification Committee,'' and ``Subcommittee,'' found,
respectively, in proposed Rule 9120 (a), (f), (i), (k), (p), (q),
(y), and (z). Some of these changes were made to conform the
definitions to the proposed Rule 9400 Series and the proposed Rule
9500 Series. Amendment No. 3, supra note 6.
\18\ In Amendment No. 3, the NASD proposes to amend proposed
Rule 9134(b)(2) so that service on an entity may be made by service
on the contact person listed on the member's Form BD in addition to
those persons already listed in the rule.
\19\ The term ``Adjudicator'' means: (1) A body, board,
committee, group, or natural person that presides over a proceeding
and renders a decision; (2) a body, board, committee, group, or
natural person that presides over a proceeding and renders a
recommended or proposed decision which is acted upon by an
adjudicator described in (1); or, (3) a natural person who serves on
a body, board, committee, or group described in (1) or (2). The term
includes a ``Subcommittee'' as defined in paragraph (z), an
``Extended Proceeding Committee'' as defined in paragraph (k), and a
``Statutory Disqualification Committee'' as defined in paragraph (y)
(proposed Rule 9120(a)).
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2. Disciplinary Proceedings
The proposed Rule 9200 Series contains thirty proposed rules. Under
these rules, the roles of the District Committee and Market Regulation
Committee are greatly reduced. Neither may initiate a complaint;
instead, the Department of Enforcement may investigate a case and file
a complaint to initiate a disciplinary proceeding (proposed Rule
9211(a)). Further, NASD Regulation has established an Office of Hearing
Officers as an independent office within NASD Regulation. The Office of
Hearing Officers is headed by the chief hearing officer, who is an
executive vice president and reports directly to the president of NASD
Regulation. The purpose of the Office of Hearing Officers is to provide
a group of independent and professional hearing officers (comprised of
attorneys with
[[Page 43388]]
appropriate experience and training) to preside over all formal NASD
disciplinary proceedings.
Hearing panels or, if applicable, extended hearing
panels,20 are selected by a chief hearing officer, and are
composed of a hearing officer (a professional NASD Regulation staff
member) and two panelists, each selected from the securities industry
and drawn from a pool of persons associated with a member or retired
therefrom and who: (1) Currently serve or previously served on a
District Committee; (2) previously served on the National Business
Conduct Committee; (3) previously served on a disciplinary subcommittee
of the National Business Conduct Committee, including a subcommittee,
an extended proceeding committee, or their predecessor subcommittees;
or (4) previously served as a director of NASD Regulation, a director
of the Nasdaq Board of Directors, or a Governor of the NASD, but who do
not serve currently in any of these positions.21 In
addition, a person who currently serves on the Market Regulation
Committee (or who previously served on the Market Regulation Committee
not earlier than four years before the date the complaint was served
upon the respondent) 22 and who is associated with an NASD
member or retired therefrom may be chosen by the chief hearing officer
to serve as one of the panelists on a hearing panel or an extended
hearing panel when the chief hearing officer determines that the
complaint alleges at least one cause of action involving a violation of
a statute or a rule within the scope of proposed Rule
9120(r).23 The hearing panel, or, if applicable, the
extended hearing panel, issues the ``trial level'' decision in a
disciplinary proceeding (proposed Rule 9268).
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\20\ The chief hearing officer appoints an extended hearing
panel if upon consideration of the complexity of the issues
involved, the probable length of the hearing, or other factors, the
chief hearing officer determines that a matter shall be an extended
hearing (proposed Rule 9120(i) and proposed Rule 9120(h)).
Designation of a matter as an extended hearing provides the chief
hearing officer the ability to select, among other potential
panelists, persons who are retired and may have both time and
relevant experience to bring to an extended hearing (proposed Rule
9231(c)).
\21\ Amendment No. 3, supra note 6. In previously proposed Rule
9231, most but not all former members of a District Committee were
eligible to serve as a panelist on either a hearing panel or an
extended hearing panel; now all former District Committee members
are eligible. In addition, recently retired persons who were
previously associated with the securities industry were not eligible
to serve on hearing panels but were eligible to serve on extended
hearing panels. In Amendment No. 3, among other things, retired
persons may serve on both types of panels, and persons who have been
retired for more than four years remain eligible to serve as
panelists. Id.
\22\ The NASD states that the period of four years was
incorporated to define more clearly who is properly classified as a
Market Regulation Committee panelist. This is important because the
Code provides that only one Market Regulation Committee panelist may
be appointed to serve on a hearing panel or an extended hearing
panel. Amendment No. 3, supra note 6.
\23\ Proposed Rule 9120(r) (formerly proposed Rule 9120(q))
states that the term ``Market Regulation Committee'' means the
committee of NASD Regulation designated to consider the federal
securities laws and the rules and regulations adopted thereunder and
various rules of the NASD and policies relating to:
(1) the quotations of securities;
(2) the execution of transactions;
(3) the reporting of transactions; and
(4) trading practices, including rules prohibiting manipulation
and insider trading, and those Rules designated as Trading Rules
(Rule 3300 Series), the Nasdaq Stock Market Rules (Rule 4000
Series), other Nasdaq and NASD Market Rules (Rule 5000 Series), NASD
Systems and Programs Rules (Rule 6000 Series), and Charges for
Services and Equipment Rules (Rule 7000 Series).
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The NASD also proposes a number of procedural enhancements to the
disciplinary procedures. Proposed Rule 9215(c) provides for the filing
of a motion for a more definite statement (in addition to proposed Rule
9146, providing for the filing of motions generally), proposed Rule
9221 allows a hearing officer or a hearing panel to order a hearing if
the adjudicator determines a hearing is necessary, notwithstanding that
respondents have waived their rights to a hearing, and proposed Rules
9233 and 9234 set forth detailed disqualification provisions.
The proposed Rule 9240 Series and proposed Rule 9250 Series set
forth requirements that parties participate in pre-hearing conferences,
and exchange, before a hearing on the merits, documentary evidence, a
list of witnesses and expert witnesses, and an outline of the case or
defense. The same proposed rules also provide that the Department of
Enforcement must provide documents to a respondent, and set forth
procedures for doing so. Sanctions for not complying with requirements
regarding the production of documents, other provisions of the Rule
9200 Series, or an order of an adjudicator in the Rule 9200 Series, or
for other contemptuous conduct, are set forth in proposed Rule 9280.
24
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\24\ In proposed Rule 9280(b)(2), the NASD added an explicit
reference to the Rule 9240 Series because the NASD believes that the
parties' cooperation and timely disclosure of information in the
proposed Rule 9240 Series is of equal importance to their
obligations under the proposed Rule 9250 Series. Amendment No. 3,
supra note 6.
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Under proposed Rule 9262, a witness subject to the jurisdiction of
the NASD is required to testify under oath or affirmation. Proposed
Rule 9264 sets forth the rules allowing a party to file a motion for
summary disposition.
In the post-hearing time frame, under proposed Rule 9266, a hearing
officer may require a party to file proposed findings of fact,
conclusions of law, and post-hearing briefs. The hearing officer
prepares a decision representing the majority of the hearing panel or,
if applicable, the extended hearing panel, under proposed Rule 9268.
Proposed Rule 9268(c) allows a panelist or a hearing officer to write a
dissenting opinion. Finally, under proposed Rule 9270, the NASD
proposes to modify existing settlement procedures to provide specific
procedures for a respondent to execute an offer of settlement prior to
a determination on the merits.
3. Appeals and Reviews of Disciplinary Proceedings
In the current and proposed Rule 9300 Series, procedures are set
forth for the appeal of a case by a party or the review of a case by
the National Business Conduct Committee, the NASD Regulation Board and
the NASD Board. The proposed Rule 9300 Series contains nineteen
proposed rules. In the proposed Rule 9300 Series, changes include the
right of the Department of Enforcement to appeal a disciplinary
proceeding decision issued by a hearing panel or, if applicable, an
extended hearing panel (proposed Rule 9311(a)); 25 the
requirement that persons subject to the jurisdiction of the NASD
testify under oath or affirmation (proposed Rule 9346(h)); and the
requirement that members of the NASD Regulation Board or the NASD Board
shall have a specific period of time to review a disciplinary
proceeding decision in order to determine whether to call a case for
discretionary review by such board (proposed Rules 9351 and 9352).
Proposed Rule 9360 provides that a sanction imposed in a final
disciplinary action of the NASD becomes effective not earlier than
thirty days after the date of service of the decision. In a proposed
change designed to reflect current practice, proposed Rule 9370
provides that, in most cases, sanctions, other than a bar or expulsion,
are stayed when a person files with the Commission a request for review
of a final disciplinary action of the NASD.
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\25\ To provide the parties more time to file an appeal, the
NASD proposes to amend Rule 9311(a) to extend from 15 days to 25
days the time for noticing an appeal. The NASD states that this
conforms to the rules of the New York Stock Exchange and parallels a
provision in the Rule 1010 Series. The NASD also amended proposed
Rule 9311 to provide parties with prior notice and an opportunity to
brief an issue that was previously waived if that issue arises and
will be considered by the NBCC. Amendment No. 3, supra note 6.
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[[Page 43389]]
In Amendment No. 3 to the proposed rule change, the NASD added
proposed Rule 9313, authorizing a counsel to the NBCC to perform
various ministerial and administrative acts on behalf of the NBCC
during the course of an appeal or review. Because the role of the
counsel to the NBCC is purely administrative, counsel may not shorten
any period, postpone or adjourn a hearing, or otherwise limit a right
previously held by a party, without the consent of all of the parties
to the disciplinary proceeding. 26
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\26\ Amendment No. 3, supra note 6.
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4. Members Experiencing Financial or Operating Difficulties; Summary
and Non-Summary Suspensions Cancellation, Bar, and Limitation or
Prohibition on Access to NASD Services; and Eligibility Proceedings
The NASD proposes to renumber, consolidate, reorganize, and clarify
the procedures proposed for the Rule 9400 and 9500 Series. In the
Original Proposal, the NASD requested temporary approval for five
separate procedures for: (1) Regulating the activities of members
experiencing financial or operating difficulty; (2) approving a change
in business operations that will result in a change in exemptive status
under SEC Rule 15c3-3 under the Act; (3) summary suspension as
authorized by Section 15A(h)(3) of the Act; (4) non-summary suspension,
cancellation, and bar; and (5) eligibility proceedings. Also in the
Original Proposal, the NASD proposed eliminating the current expedited
remedial proceedings. 27 The NASD stated that it would
comprehensively review the proposed Rule 9400 and 9500 Series, as
submitted in the Original Proposal, and would consider submitting a
revision to the Original Proposal based on that review.
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\27\ The NASD also stated its intent to submit a separate rule
filing to amend its expedited remedial proceedings. Original
Proposal, supra note 4.
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As a result of its review of the Rule 9400 and 9500 Series, the
NASD submitted Amendment No. 2 to amend the Original Proposal to reduce
the number of separate proceedings from five to three, and to seek
permanent approval of these three procedures.28 First, the
NASD proposes that the current Rule 9510 Series, setting forth
procedures for limitations on operations for firms experiencing
financial or operational difficulties as specified in Rules 3130 and
3131, remain as a separate rule, and be renumbered as the Rule 9410
Series.29
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\28\ Amendment No. 2, supra note 5.
\29\ See current Rule 9510 Series.
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Second, the NASD proposes that the current Rule 9350 Series,
setting forth procedures for a member wishing to change its exemptive
status under SEC Rule 15c3-3, be eliminated. Under the proposed rules,
a member wishing to change its exemptive status must apply for a change
to its membership agreement, if the membership agreement covers the
member's exemptive status, or file a notice and application for
approval of a material change in the member's business operations if
the membership agreement does not specifically address the member's
exemptive status.30 Procedures for applying for a change to
a membership agreement or for approval of a material change in business
operations are now set forth in the proposed Rule 1010
Series.31
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\30\ See current Rule 9530 Series.
\31\ The NASD has stated it will inform its membership of this
change in procedure in a notice to members. Amendment No. 2, supra
note 5.
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Third, the NASD proposes to consolidate into the revised Rule 9510
Series summary suspension proceedings,32 non-summary
suspension, cancellation, and bar proceedings,33 and new
denial of access procedures. The new denial of access procedures permit
the NASD, after notice and opportunity for hearing, to deny a person
access to services offered by the NASD or a member of the NASD if the
NASD determines that the person does not meet the qualification
requirements or other prerequisites for such access, or the person
cannot be permitted to continue to have such access with safety to
investors, creditors, members, or the NASD.
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\32\ See current Rule 9610 Series.
\33\ See current Rule 9620 Series.
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Finally, eligibility proceedings will remain in a separate rule
series, and will be renumbered as the Rule 9520 Series.34
The eligibility proceedings will continue to permit a person to become
or remain associated with a member, notwithstanding the existence of a
statutory disqualification as defined in Section 3(a)(39) of the Act.
Further, the eligibility proceedings will continue to permit a current
member or associated person to obtain relief from the eligibility or
qualification requirements of the NASD By-Laws and Rules. Further, the
revisions to the Rule 9520 Series will provide members and associated
persons with enhanced procedural protections, and will conform these
proceedings to the current corporate structure.
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\34\ See current Rule 9640 Series.
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The NASD also proposes to amend the Rule 9400 and Rule 9500 Series
to provide participants with enhanced procedural protections in the
conduct of these proceedings and to expedite the hearing and review
processes, especially under the proposed Rule 9510 Series (which
governs procedures for summary and non-summary suspension,
cancellation, bar, and limitation or prohibition on access to the
NASD's services). Specifically, the proposal, as amended by Amendment
No. 2, adds a variety of new provisions, including provisions
governing: the time within which a hearing requested by a member must
be held; the disclosure of documents by NASD staff to the member prior
to hearing; the exchange of exhibit and witness lists; the rights of
parties at a hearing; the components of a written decision (including
conditions for terminating a limitation, where appropriate); the
preservation of evidence proffered but not accepted into the record;
and the contents of the record for each proceeding. In addition, the
proposal provides for discretionary review of lower decisions by the
NASD Regulation and NASD Boards that is substantially similar to the
procedures governing disciplinary proceedings.
5. Procedures for Exemptions From Certain NASD Rules
The NASD proposes a new Rule 9600 Series that requires members to
apply to the staff for an exemption under various rules, and provides a
right of appeal to the NBCC. The NASD also proposes to provide
additional rights for participants in the proceedings; conform the
series to the proposed Rule 9000 Series, as well as to the current
corporate structure; and delete the current Rule 9630 Series, which
governs expedited remedial proceedings.
Specifically, the NASD proposes a new Rule 9600 Series that would
require members to apply to NASD Regulation staff for an exemption
under various rules, and would provide a right of appeal to the NBCC.
Under current NASD rules, the authority to grant exemptions has been
granted to various standing committees. Pursuant to the proposal, a
member seeking an exemption would be required to file a written
application with the Office of General Counsel of NASD Regulation.
Members applying for exemptions could receive confidential treatment of
applications or decisions after a showing of good cause for
confidential treatment. The proposed rules provide for a right to
review before a subcommittee appointed by the NBCC. The NBCC's written
decision, which would constitute final action of the NASD, would be
based on the matters on appeal, the subcommittee's
[[Page 43390]]
recommendation, and the NBCC's findings and conclusions.
D. Effectiveness of the New Procedures 35
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\35\ See Amendment No. 5, supra note 8.
---------------------------------------------------------------------------
Because the proposed rule change is effective upon approval by the
Commission on the date of this release (``effective date''), the NASD
proposes to establish the following schedule to address the transition
from the current procedures to the proposed procedures approved in this
rule filing.
1. Membership Admission Rules; Investigations and Sanctions
The Rule 1010 Series, the membership admission rules, will take
effect on the effective date. Thus, if a membership application is
received by the NASD before the effective date, the application will be
considered under the current rules and procedures. However, if a
membership application is received by the NASD on or after the
effective date of the proposed Rule 1010 Series, the amended Rule 1010
Series will apply to the application process. In addition, the NASD
proposes that the Rule 8000 Series will take effect on the effective
date.
2. Complaints, Offers of Settlement
The proposed Rule 9100 Series through the Rule 9300 Series will
generally apply to a respondent when the NASD staff first attempted
service 36 of the complaint on or after the effective date.
If the complaint is authorized and the first attempted service occurs
prior to the effective date, a respondent will be subject to the
current Code of Procedure, 37 except that if the decision is
served on or after the effective date and the disciplinary proceeding
is subsequently appealed to the NBCC or the NBCC calls the disciplinary
proceeding for review, as described in greater detail below, the appeal
or review will proceed under the proposed rules. In addition, if a
respondent is negotiating an offer of settlement for a complaint
authorized and attempted to be served before the effective date, and
executes such offer of settlement after the effective date of this
proposal, the offer of settlement will be reviewed and accepted or
rejected under the current rules, rather than under proposed Rule
9270.38 A respondent subject to the current Code of
Procedure may not seek consideration of whether the complaint should
have been authorized under the proposed Code.
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\36\ First attempted service means the complaint has been mailed
by NASD staff or delivered by NASD staff to a courier for
transmission by the courier.
\37\ In a multiple respondent disciplinary proceeding, all
respondents will be subject to the current Code of Procedure if
service was attempted on any one respondent before the effective
date.
\38\ Supra note 37.
---------------------------------------------------------------------------
Conversely, a respondent is subject to the proposed Code if the
complaint is authorized before the effective date, but the first
attempted service occurs on or after the effective date of this
proposal. In a multiple respondent disciplinary proceeding, all
respondents will be subject to the proposed Code of Procedure if the
complaint is authorized before the effective date, but NASD staff does
not make the first attempted service as to any of the named respondents
until on or after the effective date. A respondent who is subject to
the proposed Code because the complaint was authorized before the
effective date, but the first attempted service occurred on or after
the effective date, may challenge the case for improper authorization
based only on the current (or old) Code. Accordingly, in such
circumstances, a respondent cannot challenge the authorization of the
complaint based on the fact that it was not authorized under the
proposed Code. 39 In any case in which the complaint is
authorized on or after the effective date of the proposed Code, the
respondents will be subject to the provisions of the proposed Code.
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\39\ Telephone conversation between John Ayanian, Special
Counsel, Division of Market Regulation, Commission, and Sharon
Zackula, Senior Attorney, Office of General Counsel, NASD
Regulation, on August 5, 1997.
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3. AWCs and MRVs
On the effective date of the proposed Rule 9100-9300 Series, the
Department of Enforcement will have the ability to accept letters
regarding acceptance, waiver, or consent (``AWCs''), and minor rule
violations (``MRVs''). The application of the proposed rules to AWCs
and MRVs is based upon when a member or an associated person executes
such letters. Thus, if a member or an associated person executes an AWC
or MRV before the effective date of this proposal, the AWC or MRV will
be subject to review and acceptance under the current Code of
Procedure. However, if a member or an associated person is engaged in
negotiations about the terms of an AWC or MRV and the effective date
occurs before the AWC or MRV is executed by the member or associated
person, the AWC or MRV will be subject to review and acceptance under
the proposed rules.
4. Appeals and Reviews--Application of Proposed Rule 9300 Series
The NASD also proposes that the proposed Rule 9300 Series, when
effective, apply to any appeal, call for review, or review of a
decision rendered under Rule 9268 and Rule 9269 if the decision is: (a)
served on a respondent on or after the effective date of the proposed
Code of Procedure and (b) appealed, called for review, or reviewed. By
doing so, the NASD notes that all of the new appellate and review
procedural enhancements, with one exception, would apply to a completed
``trial-level'' proceeding on appeal, subject to a call for review, or
reviewed on or after the effective date of the proposed Code of
Procedure. The one exception would be that the right of the Department
of Enforcement to appeal or cross-appeal a case would not apply. The
NASD proposes that this provision in the proposed Rule 9300 Series not
be applied to any disciplinary proceeding unless the disciplinary
proceeding is based upon a complaint served on or after the effective
date of the proposed Code because a respondent may believe that any
retroactive application of this procedure may be unfair. 40
---------------------------------------------------------------------------
\40\ Amendment No. 5, supra note 8.
---------------------------------------------------------------------------
5. A Fourteen Calendar Day ``Opt-In'' Period
In the Original Proposal, the NASD proposed that in certain cases a
respondent to a disciplinary proceeding be allowed to opt in to the
proposed procedures during a thirty-day period following Commission
approval of the new procedure.41 At the time the NASD
proposed the opt in procedure, the NASD expected that the Commission
would delay the effectiveness of the proposed Rule 9100-9300 Series for
approximately thirty days. The Commission, however, will make the
proposed Rule 9100-9300 Series effective on the same day that it
approves such rules. The NASD continues to believe that it is
appropriate or desirable to have a time period during which a
respondent subject to the current Code of Procedure could opt to have
the proceeding administered under the proposed (or new) Code of
Procedure.42 The NASD proposes that this time period should
be fourteen calendar days. Thus, a respondent who is named in a
complaint that is authorized prior to the effective date may opt to
have the disciplinary proceeding go forward under the proposed Code if
the first attempted service upon the respondent occurs not earlier than
fourteen calendar days before the effective date of this proposal. In a
disciplinary proceeding involving more than one respondent, all
[[Page 43391]]
respondents must opt to have the proceedings administered under the new
Code of Procedure for it to apply. NASD staff will specifically notify
all parties eligible to opt in of the existence of this right and the
limitations on this right.
---------------------------------------------------------------------------
\41\ Original Proposal, supra note 4.
\42\ Amendment No. 5, supra note 8.
---------------------------------------------------------------------------
6. Rule 9400-9500 Series
If a proceeding is initiated before the effective date, the
proceeding will be administered under the current provisions relating
to the proceeding. If a proceeding is initiated on or after the
effective date, the proceeding will be administered under the new
rules.
7. Rule 9600 Series
If a request for an exemption has been made before the effective
date, the request will be administered under the current provisions
relating to such proceedings. A request for an exemption initiated on
or after the effective date will be administered under the new rules.
III. Comments and NASD Responses
The Commission received two comment letters regarding the Original
Proposal. The Colish Letter generally addresses issues relating to
premembership application procedures set forth in the proposed Rule
1010 Series. The ABA Letter addresses proposed changes to the Rule 8000
Series and the proposed Rule 9100 Series through the Rule 9300 Series.
A. Rule 1010 Series
The Commission received one comment letter concerning the
membership application procedures.\43\ Overall, the commenter agrees
with the proposed rules, but believes the rules could be improved or
supplemented in certain respects.
---------------------------------------------------------------------------
\43\ Colish Letter, supra note 9.
---------------------------------------------------------------------------
1. New Member Review
The commenter recommends that the new member review process be
centralized at the NASD's headquarters.\44\ The commenter is concerned
that the examiners in the various District Offices may lack the
necessary experience and training to adequately discharge the new
responsibility of approving, disapproving, or setting conditions or
limits on membership applications. In addition, the commenter believes
that centralization would be the best way to ensure uniformity.
---------------------------------------------------------------------------
\44\ Colish Letter, supra note 9, at 4. The commenter agrees,
however, that the restriction and change in ownership/control/
operations processes should remain in the District Offices.
---------------------------------------------------------------------------
The NASD does not believe centralization is necessary.\45\ The NASD
believes that the District Offices obtain valuable insights into the
applicants' business through the new member review process. It notes
that significant initiatives are already underway to train examiners
for their new responsibilities and that new policies and procedures are
being established to ensure national uniformity and consistency in the
treatment of membership applications. For example, training sessions
focusing on the proposed rules have been conducted for supervisors and
assistant directors, a comprehensive training program is being
finalized for District Office examiners, and a staff steering committee
chaired by an NASD Regulation vice president and staffed by senior
District Office staff members is finalizing detailed procedures for
District Offices to follow to help ensure uniformity and consistency.
---------------------------------------------------------------------------
\45\ NASD Response, supra note 6, at 4.
---------------------------------------------------------------------------
2. Monthly Projections of Income and Expenses
The commenter asserts that it may be unrealistic for some
applicants to furnish a monthly projection of income and expenses for
the first twelve months of operations under proposed Rule
1013(a)(2)(A)(ii).\46\ She notes that this would be especially
difficult for firms that intend to engage in a significant amount of
dealer business.
---------------------------------------------------------------------------
\46\ Colish Letter, supra note 9, at 5.
---------------------------------------------------------------------------
The NASD believes this information is reasonable and necessary to
facilitate the NASD's ability to determine whether an applicant has a
reasonable expectation of being able to comply with the net capital
rule once the applicant commences business.\47\ The NASD also believes
it is not overly burdensome for applicants to prepare this information
because most new firms already project the revenues necessary to meet
fixed and other expenses for business reasons.
---------------------------------------------------------------------------
\47\ NASD Response, supra note 6, at 4.
---------------------------------------------------------------------------
3. Use of Forms BD, U-4, and U-5
The commenter maintains that the NASD should not require applicants
to submit Forms BD, U-4, and U-5 because the information contained on
those forms is available to the NASD through the Central Registration
Depository (``CRD'').\48\ The commenter does note, however, that it is
not particularly onerous for applicants to include this information as
part of their application materials. In any event, the commenter
suggests that the NASD should request an applicant's current composite
Form BD because the most recent filing may be a partial amendment.
---------------------------------------------------------------------------
\48\ Colish Letter, supra note , at 5.
---------------------------------------------------------------------------
The NASD agrees with the comment concerning the submission of an
applicant's current composite Form BD. Therefore, as part of Amendment
No. 3, the NASD has made technical changes to proposed Rule 1013 to
explicitly state that the original, signed, and notarized Form BD must
be filed with the Membership Department in Rockville, Maryland.\49\
With regard to submission of the forms, however, the NASD believes it
is appropriate to require applicants to submit them because including
the forms facilitates the NASD's ability to expeditiously process an
application.
---------------------------------------------------------------------------
\49\ Amendment No. 3, supra note 6; NASD Response, supra note 6,
at 4.
---------------------------------------------------------------------------
4. Capital Risks Posed by Proposed Business Activities
The commenter states that it is not clear what type of information
would be required to satisfy the requirement of a description of the
risk to capital presented by an applicant's proposed business
activities under proposed Rule 1013(a)(2)(J).\50\ In addition, the
commenter notes that there currently is considerable variation among
the District Offices regarding the application of this requirement.\51\
Finally, the commenter questions the relevance of this information.
---------------------------------------------------------------------------
\50\ Colish Letter, supra note 9, at 6.
\51\ For example, the commenter criticizes the high degree of
scrutiny given to the source of capital for an applicant she
recently represented. The NASD maintains that it will continue to
carefully review the source of each applicant's capital in order to
properly identify the true owners of an applicant and ensure that
the owners do not include improper parties (e.g., a person who has
been barred from the industry).
---------------------------------------------------------------------------
In responding to these comments, the NASD asserts that this
information is necessary to establish an appropriate level of net
capital for a particular applicant that ensures customers are
adequately protected.\52\ The NASD also notes, as described previously,
that it has taken steps to ensure an appropriate degree of consistency
and uniformity. For example, the NASD indicated that it will require
memoranda or public offering documents containing information
describing the risk to the applicant's capital.
---------------------------------------------------------------------------
\52\ NASD Response, supra note 6, at 5.
---------------------------------------------------------------------------
5. Applicant's Best Practices and Supervisory System
The commenter states that the standards in proposed Rule
1014(a)(8), regarding the industry's best practices, and proposed Rule
1014(a)(9), concerning an applicant's supervisory
[[Page 43392]]
system, are somewhat redundant.\53\ In addition, the commenter asserts
that those standards may be subject to wide differences of opinion and
subjective judgment.
---------------------------------------------------------------------------
\53\ Colish Letter, supra note 9, at 7.
---------------------------------------------------------------------------
The NASD maintains that these standards are distinct.\54\ It
explains that the standard in proposed Rule 1014(a)(8) is designed to
focus on whether an applicant is adopting the industry's best practices
in certain areas, while the standard in proposed Rule 1014(a)(9)
encompasses an applicant's overall supervisory system. The NASD states
that it does not anticipate that an applicant's failure to meet the
requirements of proposed Rule 1014(a)(8) would, by itself, be grounds
for denying an application. In contrast, the NASD expects that an
applicant's failure to meet the supervision requirements could be a
sole basis for denying an application.
---------------------------------------------------------------------------
\54\ NASD Response, supra note 6, at 5.
---------------------------------------------------------------------------
B. Rule 8000 Series
The ABA comment letter addresses the Rule 8000 Series.\55\ The
commenter notes that proposed Rule 8210, which requires the submission
of information, testimony and books to the NASD, does not differentiate
between the NASD's right to obtain information or documents prior to
the filing of a complaint and such requests once a proceeding has been
initiated.\56\ The commenter also suggests that post-complaint
discovery under proposed Rule 8210 should be reciprocal, and that
information and documents submitted to the NASD should be returned upon
completion of a disciplinary matter. In response, the NASD notes that a
change to proposed Rule 8210 to limit the NASD's ability to obtain
information and documents would impede the NASD in its performance of
its investigatory and enforcement functions.\57\ The NASD also points
out that pursuant to proposed Rule 9251(a), the Department of
Enforcement has an obligation to turn over certain documents to a
respondent. Further, under the Brady doctrine and the Jencks Act, the
Department of Enforcement has a continuing obligation to produce
documents to the respondent. The NASD also states it must retain
information and documents obtained for a disciplinary proceeding for a
number of reasons, including enabling the NASD to meet its regulatory
and enforcement obligations, and allowing the NASD to comply with SEC
Rule 17a-1(b), which requires the NASD to retain such documents for
five years.
---------------------------------------------------------------------------
\55\ ABA Letter, supra note 9.
\56\ ABA Letter, supra note 9, at 8.
\57\ NASD Response, supra note 6, at 6.
---------------------------------------------------------------------------
The commenter notes that proposed Rule 8210 does not differentiate
between parties and non-parties in requests for information or
documents. Finally, the commenter states that proposed Rule 8210 does
not address privileges otherwise available at law as a basis for
objecting to a request for information or documents by the NASD, and
suggests that the NASD create a mechanism to enable non-parties to
limit the use of submitted materials. The NASD states that it
interprets proposed Rules 9235 and 9146, setting forth the powers of a
hearing officer, to authorize a hearing officer in appropriate
circumstances to issue a protective order during the course of
disciplinary proceedings.58 The NASD has added subparagraph
(k) to proposed Rule 9146 to clarify that the hearing officer has
authority to issue a protective order upon the motion of a party or
other person. The NASD points out, however, that this authority would
not negate the NASD's obligation to respond to a subpoena, or the
NASD's right or obligation to provide information to federal, state,
and foreign regulatory authorities, as well as other self-regulatory
organizations (``SROs'').59
---------------------------------------------------------------------------
\58\ NASD Response, supra note 6, at 6-7.
\59\ Amendment No. 3, supra note 6.
---------------------------------------------------------------------------
The commenter adds that the comments made regarding proposed Rule
8210 above also apply to proposed Rules 8220 through 8225.60
Further, the commenter states that the proposed rules should explicitly
provide for less harsh sanctions than suspension in the case of a
failure to provide requested information under proposed Rule 8210. The
NASD states that most actions taken by the NASD in response to a
failure to provide requested information pursuant to a Rule 8210
request are not brought under proposed Rule 8220, but are instead
brought as disciplinary proceedings.61 The NASD adds that as
disciplinary proceedings, the Sanctions Guidelines apply, permitting a
less severe sanction than a suspension. The NASD also notes that it has
changed the verb in proposed Rules 8221 (a) and (b) from ``shall'' to
``may,'' clarifying that the NASD has other avenues, aside from
proposed Rule 8220, to address the failure to provide requested
information.
---------------------------------------------------------------------------
\60\ ABA Letter, supra note 6, at 13-14.
\61\ NASD Response, supra note 6, at 7.
---------------------------------------------------------------------------
The commenter also suggests that proposed Rule 8310, relating to
sanctions for violations of the NASD's rules, should contain a
reference to the NASD Sanctions Guidelines.62 The commenter
believes that use of and reference in the rule to the Sanctions
Guidelines would ensure consistency in the application of sanctions.
The NASD does not believe that the Sanctions Guidelines should be
incorporated into the Code of Procedure, noting that the Guidelines by
their terms are flexible guidelines and not absolute
rules.63
---------------------------------------------------------------------------
\62\ ABA Letter, supra note 9, at 18.
\63\ NASD Response, supra note 6, at 7.
---------------------------------------------------------------------------
Further, the commenter suggests that the period for payment of
fines, pursuant to proposed Rule 8320, should be extended to thirty
days from the seven days proposed in the rule.64 In its
response, the NASD points out that the notice to a respondent issued
pursuant to proposed Rule 8320 is actually the third communication a
respondent has received regarding a payment of fines, other monetary
sanctions, or costs. The first letter to the respondent (stating that
payment is due within ten business days from the date of the letter) is
prepared after the forty-sixth day after service of a disciplinary
decision that is not appealed or called for review. A second letter is
sent when payment has not been received within ten to fifteen business
days of the first letter. After ten additional business days, the NASD
prepares the Rule 8320 notice.
---------------------------------------------------------------------------
\64\ ABA Letter, supra note 9, at 19.
---------------------------------------------------------------------------
Finally, the commenter requests that the NASD's practice of
accepting installment payment plans for fines of $5,000 or greater be
continued and incorporated into the rule.65 The NASD
confirms in its response to the comment letter that it will inform its
members of the existence of payment plans through the inclusion of
information regarding installment plans in the NASD's Sanctions
Guidelines, which are publicly available.66
---------------------------------------------------------------------------
\65\ ABA Letter, supra note 9, at 20.
\66\ NASD Response, supra note 6, at 8.
---------------------------------------------------------------------------
C. Rule 9100 Through Rule 9300 Series
The ABA's letter also addresses the proposed Rule 9100 through the
Rule 9300 Series. The commenter expresses general support for the
NASD's proposed changes to its disciplinary process, but also sets
forth specific comments and recommends certain modifications, as
discussed below.67
---------------------------------------------------------------------------
\67\ ABA Letter, supra note 9.
---------------------------------------------------------------------------
1. Rule 9100 Series
The commenter makes several specific comments regarding the
proposed Rule 9100 Series. The commenter believes that the text of
proposed Rule 9136 regarding the filing of papers should be combined
with proposed Rule 9266 regarding proposed
[[Page 43393]]
findings of fact, conclusions of law and post-hearing briefs, and
include a twenty-five page limitation.68 The NASD believes
that reordering the special pagination requirement that is now set
forth in proposed Rule 9266 would introduce a level of detail well
beyond that appropriate for the Code of Procedure.69
---------------------------------------------------------------------------
\68\ ABA Letter, supra note 9, at 30-31.
\69\ NASD Response, supra note 6, at 8.
---------------------------------------------------------------------------
The commenter recommends that proposed Rule 9142 regarding the
withdrawal by an attorney or representative should be amended to allow
an attorney or representative the ability to withdraw from
representation of a party, upon notice, at any time. Proposed Rule 9142
requires an attorney or representative of a party to give at least 30
days notice of withdrawal, and show good cause for the withdrawal. The
commenter believes that these requirements do not provide sufficient
flexibility to withdraw in compliance with the Code when such
withdrawal is required under the Model Rules of Professional Conduct or
is otherwise necessary. The commenter also recommends that a separate
motion be required under Proposed Rule 9222(b), in the event that a
hearing panel becomes concerned that counsel is withdrawing as a
pretext to postpone or disrupt a hearing.70
---------------------------------------------------------------------------
\70\ ABA Letter, supra note 9, at 34.
---------------------------------------------------------------------------
The NASD agrees that the current version of proposed Rule 9142 does
not afford an attorney or representative with sufficient flexibility to
withdraw under the circumstances described above. The NASD therefore
proposes to amend the provision to allow an attorney to withdraw in
less than thirty days where circumstances do not permit thirty days
notice. Further, the NASD agrees with the approach suggested by the
commenter that a separate motion may be filed under proposed Rule
9222(b) to determine whether a hearing should be
postponed.71
---------------------------------------------------------------------------
\71\ NASD Response, supra note 6, at 8. See also Amendment No.
3, supra note 6.
---------------------------------------------------------------------------
The commenter agrees with the NASD's efforts to separate the
adjudicatory and prosecutorial functions, and prohibit ex parte
communication with adjudicators. The commenter recommends, however,
that proposed Rule 9143 regarding ex parte communications be amended to
allow participants to a proceeding to respond to allegations or
contentions contained in a prohibited ex parte
communication.72 The commenter also expresses concern that
the Office of Hearing Officers is accountable to the President of NASD
Regulation. The commenter recommends that, to avoid the perception of
unfairness and bias regarding the separation of functions provisions
set forth in proposed Rule 9144, the Office of Hearing Officers should
report to the President of the NASD, rather than to the ``senior
enforcer'' of NASD Regulation.73
---------------------------------------------------------------------------
\72\ ABA Letter, supra note 9, at 38.
\73\ ABA Letter, supra note 9, at 39-40.
---------------------------------------------------------------------------
In response to the commenter, the NASD proposes to incorporate into
proposed Rule 9143 a provision allowing participants to a proceeding to
respond to allegations or contentions contained in a prohibited ex
parte communication.74 The NASD has determined, however,
that the Office of Hearing Officers should report to the President of
NASD Regulation. The NASD notes that various measures have been
implemented to assure the independence of the chief hearing officer and
the hearing officers. For example, if the President of NASD Regulation
terminates a hearing officer, the hearing officer has the right to
appeal to the Audit Committee of the NASD Board of Governors. The NASD
also notes that measures have been adopted to ensure that if the
President of NASD Regulation participates in a discussion regarding a
proposed issuance of a complaint, he or she will recuse him or herself
and not attempt to influence an adjudicator or participate as an
adjudicator in that disciplinary action.75
---------------------------------------------------------------------------
\74\ NASD Response, supra note 6, at 8-9. See also Amendment No.
3, supra note 6.
\75\ NASD Response, supra note 6.
---------------------------------------------------------------------------
The commenter also recommends that the NASD explicitly provide in
proposed Rule 9145 (regarding rules of evidence and official notice),
as well as proposed Rule 9263 (regarding evidence admissibility), and
Rule 9346(g) (regarding evidence in NBCC proceedings) that the Federal
Rules of Evidence will serve as a guide to adjudicators in ruling on
evidentiary matters that arise in disciplinary proceedings. The
commenter believes that this would promote both fairness and uniformity
in the disciplinary proceedings, while preserving the adjudicators'
flexibility in ruling on evidentiary matters. The commenter also
suggests that the official notice provision in Rule 9145 is vague and
overbroad and is not consistent with the Federal Rules of Evidence
provision stating that a judicially noticed fact must be ``not subject
to reasonable dispute.'' The commenter is concerned that, by allowing
an adjudicator to take official notice of ``other matters within the
specialized knowledge of the NASD as an expert body'' (proposed Rule
9145(b)), certain matters that may be subject to a reasonable dispute
and potentially the subject of expert testimony might be deemed to be
true under the standard set forth in the proposed rule.76
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\76\ ABA Letter, supra note 9, at 41.
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The NASD does not believe it is appropriate to incorporate a
reference to the Federal Rules of Evidence into proposed Rule 9145(a),
Rule 9263, or Rule 9346(g). The NASD notes that formal rules of
evidence traditionally have not been applied in SRO proceedings--e.g.,
hearsay may be admitted as evidence in SRO proceedings and the use of
telephone testimony is accepted. The NASD believes that hearsay and
telephone testimony should continue to be used as appropriate in a
disciplinary proceeding administered under the Code.
Further, the NASD does not believe it is appropriate for the NASD
to adopt the commenter's suggestion for proposed Rule 9145 regarding
official notice. The NASD notes that the official notice procedure will
not be a substitute for expert testimony, nor be frequently used. If a
technical matter is the subject of debate or controversy, the NASD
notes that it would not be officially noticed under proposed Rule 9145.
Moreover, the NASD states that a party has the right to oppose or
otherwise comment if an adjudicator proposes to take official
notice.77
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\77\ NASD Response, supra note 6, at 9.
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The commenter also proposes that the right to an interlocutory
appeal, as set forth in proposed Rule 9148, should be available to
contest any ruling denying a claim of attorney-client privilege or
work-product privilege and any situation in which a panelist refuses to
recuse him or herself. First, the commenter believes that the right to
an interlocutory appeal regarding privilege claims will ensure that
every effort has been taken to carefully examine the claim before
disclosure is compelled. Second, the commenter believes that the
interlocutory appeal of a panelist failing to recuse him or herself
will help to eliminate a possible perception of unfairness in the
proceeding.78
---------------------------------------------------------------------------
\78\ ABA Letter, supra note 9, at 46-48.
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In response to the commenter's recommendation, the NASD notes that
under the proposed Rule 9146 regarding general motions, a party and
certain non-parties may file a motion seeking relief or guidance with
regard to privilege issues. Further, the NASD notes that Rule 9251
authorizes the hearing officer to review relevant documents in camera.
The NASD
[[Page 43394]]
recognizes that privilege issues are very important, but believes that
to grant interlocutory review as a right regarding every contested
privilege issue would ``cripple the SRO's adjudicatory process from the
beginning.'' 79
---------------------------------------------------------------------------
\79\ NASD Response, supra note 6, at 10.
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The NASD also believes that the failure of a panelist to recuse him
or herself should not be the subject of an interlocutory appeal because
if a panelist fails to recuse him or herself, a party may challenge the
panelist through a disqualification motion. In addition, persons other
than parties may inform the chief hearing officer or hearing officer of
disqualifying factors, providing another avenue to remove a panelist
from a hearing panel. Further, the NASD believes that such appeals
would ``unduly burden the forum, would impose great costs, and would
not further the public interest in the fair and speedy resolution of
all disciplinary matters.'' \80\
---------------------------------------------------------------------------
\80\ NASD Response, supra note 6, at 10.
---------------------------------------------------------------------------
The commenter generally supports the provision in proposed Rule
9150 authorizing hearing panels to exclude persons if they engage in
contemptuous, unethical or improper professional conduct. \81\ The
commenter recommends that the NASD clarify that a representative
excluded under Rule 9150 may seek review as provided under proposed
rule 9280(c). The NASD has amended proposed Rule 9150 to clarify the
relationship between Rule 9150 and Rule 9280(c). \82\
---------------------------------------------------------------------------
\81\ ABA Letter, supra note 9, at 49-50. See infra discussion
regarding ABA comments on proposed Rule 9280.
\82\ NASD Response, supra note 6. See also Amendment No. 3,
supra note 6.
---------------------------------------------------------------------------
The commenter also recommends that proposed Rule 9160 regarding
recusal or disqualification set forth procedural steps that must be
followed in seeking disqualification of Governors, Directors, NBCC
Committee members, and certain NASD Regulation staff when serving an
adjudicatory role. \83\ The NASD believes this is unnecessary because
an adjudicator will recuse him or herself when he or she has a conflict
of interest or a bias, and other members of a board or committee have
the ability to suggest recusal or seek disqualification if the member
does not act promptly to recuse him or herself. Moreover, the NASD
generally does not believe that it is appropriate to codify internal
board procedures. With respect to paragraph (g) (now paragraph (h)),
the NASD also believes that the President of NASD Regulation may
consider disqualification issues as appropriate. For the same reasons,
the NASD does not believe specific procedures under which the President
of NASD Regulation must act are necessary. \84\
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\83\ ABA Letter, supra note 9, at 52.
\84\ NASD Response, supra note 6, at 11.
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2. Rule 9200 Series
The commenter also makes several specific comments regarding the
proposed Rule 9200 Series. The commenter agrees with the proposal to
transfer the authority to issue complaints to the Department of
Enforcement, as set forth in proposed Rule 9211. To ensure that the
process by which the Department of Enforcement authorizes and issues
complaints is open and fair, the commenter recommends that the NASD
provide guidance to the industry regarding the mechanics of the process
through the issuance of a resolution of the Board of Governors or
publication of a notice to members.
Further, the commenter suggests that the NASD should consider
developing a pre-complaint forum for discussions between enforcement
staff and counsel regarding any proposed charges. The commenter
believes that both the enforcement staff and the potential respondents
would benefit from discussions prior to the initiation of a formal
proceeding. In addition, the commenter recommends that the NASD adopt a
formal ``Wells-type submission'' process. The commenter also suggests
that the NASD should adopt procedures for notifying affected persons or
firms when an investigation has been terminated without the filing of a
complaint. \85\
---------------------------------------------------------------------------
\85\ ABA Letter, supra note 9, at 53-57.
---------------------------------------------------------------------------
The NASD agrees with the commenter's suggestion that the NASD
should provide guidance regarding the complaint authorization and
issuance process. The NASD proposes to do so in a notice to members,
which will describe the roles of the various parties in developing a
disciplinary proceeding, and authorizing and issuing a complaint. The
NASD notes that disciplinary proceedings are initiated in NASD district
offices, the Department of Market Regulation, and the national office
of the Department of Enforcement. The NASD states that the notice will
describe each department's role in identifying and organizing the
evidence that is the foundation of the disciplinary proceeding and
drafting a complaint, and the role of the national office of the
Department of Enforcement and the Office of Disciplinary Policy in
authorizing the complaint. The notice to members will also provide
guidance on the NASD's use of the ``Wells-type procedure'' by which a
potential respondent may make a written submission to the Department of
Enforcement prior to the issuance of a complaint. The NASD, however,
does not propose to codify the use of the ``Wells-type procedure,'' or
the use of letters informing affected persons that an investigation has
been terminated. \86\
---------------------------------------------------------------------------
\86\ NASD Response, supra note 6, at 11.
---------------------------------------------------------------------------
The commenter also suggests that proposed Rule 9216 regarding AWCs
should provide greater clarification concerning the pre-complaint
settlement process. In addition, the commenter recommends that the
proposed rule contain a provision explicitly permitting a potential
respondent to consent to the issuance of an AWC without admitting or
denying the facts or allegations contained in the AWC. \87\
---------------------------------------------------------------------------
\87\ ABA Letter, supra note 9, at 64-65.
---------------------------------------------------------------------------
The NASD agrees that the industry should be informed of how to
initiate settlement discussions or pre-complaint discussions, and
states that such guidance will be included in the notice to members
described above. Further, in response to the recommendation that the
Code contain a provision ``explicitly permitting a respondent to
consent to the issuance of an AWC without admitting or denying the
facts or allegations contained in the AWC'' and a second provision
``reflecting the fact that the settlement is being offered (and
accepted) without any prior adjudication or evidentiary hearing, so as
to minimize any potential collateral consequences,'' the NASD believes
that the terms of a settlement or an AWC should be based on the
applicable law and the particular facts and circumstances of each case.
The NASD notes that the terms of settlement documents or AWCs will
change as federal and state law evolves. Accordingly, the NASD does not
believe that it is appropriate to attempt to codify standardized
settlement language. \88\
---------------------------------------------------------------------------
\88\ NASD Response, supra note 6, at 11-12.
---------------------------------------------------------------------------
The commenter recommends that proposed Rule 9221 regarding requests
for hearing should require that at least one person serving as a
panelist on a hearing panel or extended hearing panel ``be engaged in
similar activities within the securities industry as the respondent.''
The commenter believes that this requirement will provide a higher
level of expertise and a better perspective to a hearing panel. In
addition, the commenter suggests that the minimum notice period prior
to a hearing as provided in proposed Rule 9221(d) should be expanded
from twenty-eight to sixty days. The commenter is concerned that
[[Page 43395]]
respondents will not have sufficient time to prepare for the hearing.
\89\
---------------------------------------------------------------------------
\89\ ABA Letter, supra note 9, at 67.
---------------------------------------------------------------------------
The NASD agrees that persons with securities industry expertise
should be fully represented on the hearing panels, and notes that
proposed Rules 9231 and 9232 provide that the chief hearing officer
will consider ``expertise'' and ``the absence of any conflict of
interest or bias, and any appearance thereof'' as factors in selecting
panelists. The NASD believes that these provisions ensure that the
panelist selection process will provide panelists with a sufficient
level of expertise and perspective. Accordingly, the NASD declines to
amend proposed Rule 9221(a) (or other related provisions) as
recommended above.
The NASD further believes that the commenter's recommendation to
expand the notice period prior to a hearing is not necessary. The NASD
notes that in most cases parties will be notified several months in
advance of the hearing, but that there will be occasions when it will
be in the public interest to proceed as quickly as possible. In
addition, very simple cases may be dealt with expeditiously to the
benefit of both parties.90
---------------------------------------------------------------------------
\90\ NASD Response, supra note 6, at 12-13.
---------------------------------------------------------------------------
In proposed Rule 9222(b)(1), the NASD proposed a list of factors
for a hearing officer when ruling on a motion for postponement or
adjournment of a hearing. The commenter suggests that the hearing
officer should not be required to consider any particular factors, but
to the extent that the NASD codifies specific factors, it should
include additional factors, such as ``the amount of time that has
passed since the commencement of the investigation and the issuance of
the complaint; whether there is any outstanding discovery; the amount
of notice the parties had of the hearing; the complexity of the case;
and prior commitments of counsel.'' 91
---------------------------------------------------------------------------
\91\ ABA Letter, supra note 9, at 69.
---------------------------------------------------------------------------
The NASD believes that the standards as originally proposed are
appropriate, and consistent with Commission standards. The NASD
believes that there is a bias in favor of denying postponements and
adjournments because of the need to proceed expeditiously toward a
resolution in order to further the public interest and benefit the
parties involved in such proceedings. The NASD also states that the
proposed rules relating to timing, including postponements, will be
applied fairly, but postponements will not be granted each time a
motion is made.92
---------------------------------------------------------------------------
\92\ NASD Response, supra note 6, at 13.
---------------------------------------------------------------------------
The commenter makes several recommendations regarding proposed Rule
9231 (Appointment by the Chief Hearing Officer of Hearing Panel or
Extended Hearing Panel) and proposed Rule 9232 (Criteria for Selection
of Panelists and Replacement Panelists). First, the commenter supports
the concept of hearing panels, as set forth in the rules, as
``appropriate to achieve a balance between `peer justice' and more
uniform and professional rulings.'' 93 The commenter
believes, however, that the criteria used by the chief hearing officer
to select panelists is ``unclear and open-ended.'' 94 In
particular, the commenter believes that proposed Rule 9232 provides the
chief hearing officer with too much discretion to choose panelists from
anywhere in the country, rather than selecting members from the primary
district committee.95 The commenter also states that it is
unclear under proposed Rule 9232(d) whether someone who has served
frequently or infrequently on hearing panels is more likely to be
selected.96 In addition, the commenter is concerned that the
Department of Enforcement may be able to ``pre-select'' panelists from
the Market Regulation Committee (current or former members) by alleging
at least one violation set forth in proposed Rule 9120(r),97
thereby affecting the selection process.98
---------------------------------------------------------------------------
\93\ ABA Letter, supra note 9, at 71.
\94\ ABA Letter, supra note 9, at 73.
\95\ Proposed Rule 9232 sets forth criteria for the chief
hearing officer to consider when designating a particular district
committee as the primary district committee.
\96\ ABA Letter, supra note 9, at 74-75.
\97\ Supra note 23.
\98\ ABA Letter, supra note 9, at 75.
---------------------------------------------------------------------------
The NASD believes that it is necessary to provide the chief hearing
officer with flexibility to both appoint panelists with expertise and
to avoid selecting panelists with perceived or real bias or conflicts
of interest. In addition, the NASD states that the chief hearing
officer will attempt to ensure broad-based participation by all
segments of the securities industry; the NASD desires that more people
be involved in the adjudicatory process so the perception and the
reality is that disciplinary proceedings are fair.99 The
NASD also proposes to amend Rule 9232(d)(4) to clarify that the Office
of Hearing Officers will be less likely to select a person who has
served frequently on a disciplinary panel than a person who has
not.100
---------------------------------------------------------------------------
\99\ NASD Response, supra note 6, at 13-14.
\100\ Amendment No. 3, supra note 6.
---------------------------------------------------------------------------
Further, the NASD points out that the comment reflects a
misunderstanding of the scope of proposed Rule 9120(r), the definition
of the Market Regulation Committee. The NASD notes that proposed Rule
9120(r) does not intend to place all federal and state securities laws,
rules, and regulations under the advisory jurisdiction of the Market
Regulation Committee. A current or former member of the Market
Regulation Committee will serve on a panel only when the matter relates
to certain subjects, including: quotations of securities; execution of
transactions; reporting of transactions; and trading practices. The
NASD further notes that the chief hearing officer, while provided with
flexibility to choose panelists nationwide under proposed Rule 9232
(c), (d), and (e), cannot pre-select panelists and will not allow the
Department of Enforcement to pre-select panelists.101
---------------------------------------------------------------------------
\101\ NASD Response, supra note 6, at 13-14.
---------------------------------------------------------------------------
Pursuant to proposed Rule 9241, pre-hearing conferences are
discretionary upon a motion by a party or at the request of the hearing
officer. The commenter believes that the pre-hearing conference, in
most cases, should be mandatory. In addition, the commenter recommends
that the time period from the date of the answer to the pre-hearing
conference be extended from twenty-one to forty-five days. The
commenter also suggests that the list of subjects to be covered at the
pre-hearing conference be expanded to include ``non-party discovery,
confidentiality, and privilege issues and the issuance of protective
orders.'' 102
---------------------------------------------------------------------------
\102\ ABA Letter, supra note 9, at 81.
---------------------------------------------------------------------------
The NASD does not believe it is appropriate to change proposed Rule
9241 so that a pre-hearing conference takes place within forty-five
days after the answer has been filed instead of the twenty-one day
period, as currently proposed. The NASD must ensure that disciplinary
proceedings move forward as expeditiously as is possible while
maintaining a fair forum for the parties. The NASD believes that for
disciplinary proceedings where simple issues are involved, or with
multiple pre-hearing conferences, creating a delay beyond twenty-one
days is not a proper use of NASD or panelist resources and imposes an
unnecessary cost on a respondent. The NASD also believes that it is
unnecessary to include additional subjects to be covered at the pre-
hearing conference because proposed Rule 9241(c)(10) encourages the
parties to request that the hearing officer consider any issue not
specifically listed in the rule.103
---------------------------------------------------------------------------
\103\ NASD Response, supra note 6, at 14.
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Proposed Rule 9242 regarding pre-hearing submissions indicates that
the
[[Page 43396]]
appropriate adjudicator may, at his or her discretion, order the
exchange and/or furnishing of information prior to a hearing. The
commenter believes that this should be mandatory. In addition, the
commenter argues that such an exchange of information should be made at
least thirty days before the hearing.104 The NASD does not
believe that it is appropriate in every case to require a hearing
officer to order the parties to furnish information regarding the case.
The NASD believes that the hearing officer has been provided
appropriate discretion to control the proceeding, and determine if a
pre-hearing exchange of the information is necessary.105
---------------------------------------------------------------------------
\104\ ABA Letter, supra note 9, at 82.
\105\ NASD Response, supra note 6, at 14.
---------------------------------------------------------------------------
The commenter recommends several changes to the discovery rules set
forth in proposed Rule 9251. First, the commenter believes that the
proposed rule should not include a standard regarding materiality and
relevance in the post-complaint time frame. If a relevance standard is
required, the enforcement staff should be required to provide a list of
all documents it obtains to the respondent, and the hearing officer,
not the enforcement staff, should make determinations of
relevance.106 The commenter also recommends that if the
staff fails to make documents available, the staff, rather than the
respondent, should have the burden to prove that such failure
constituted harmless error.107
---------------------------------------------------------------------------
\106\ ABA Letter, supra note 9, at 85.
\107\ ABA Letter, supra note 9, at 89.
---------------------------------------------------------------------------
The commenter also believes that the only documents that the staff
should be able to withhold pursuant to proposed Rule 9251(b) are
privileged documents or documents constituting attorney work product.
The commenter also believes that the proposed rule should contain a
provision that addresses privilege and work-product immunity for both
the staff and respondents. Further, the commenter suggests that Federal
Rule of Evidence 501 (for privilege issues) and Federal Rule of Civil
Procedure 26(b)(3) (for work-product immunity issues) should be used as
a model. The commenter suggests that if the staff wants to withhold
documents on any other basis, a motion for protective order should be
required. In addition, the commenter recommends that the NASD consider
the impact of Fifth Amendment claims before the NASD. The commenter
believes that expulsion from the NASD for asserting the Fifth Amendment
is too severe and will continue to result in constitutional challenges
to the self-regulatory system.108
---------------------------------------------------------------------------
\108\ ABA Letter, supra note 9, at 89-90.
---------------------------------------------------------------------------
The NASD believes that a secondary production of documents should
be subject to a material relevance standard so that the Department of
Enforcement only has to turn over documents that are relevant to the
proceeding initiated and not other documents that may relate to a
potential, but yet-to-be named respondent as part of the same
investigation file. In addition, in the NASD's view, its enforcement
efforts would be impaired if all internal memoranda were required to be
produced. The NASD notes that not all examinations are done by lawyers,
and therefore the resulting documents and reports may not be
privileged.109
---------------------------------------------------------------------------
\109\ Further, the NASD proposes to expand the category of
documents that may be withheld by the Department of Enforcement from
the respondent under proposed Rule 9251(b)(1)(C), to exclude from
production, among other things, correspondence between the NASD and
a state, federal, or foreign regulatory authority or an SRO.
Amendment No. 3, supra note 6.
---------------------------------------------------------------------------
Further, the NASD believes it would be inappropriate to mandate a
withheld document list in every case. The NASD notes that a withheld
document list in certain cases could enable a reader to trace the
course of an investigation, forcing improper disclosure about the
investigation and the investigatory process in circumstances that could
impede a continuing investigation of another member or associated
person. The NASD notes, however, that the hearing officer may request
in camera inspection of documents, and may order the production of a
list of withheld documents, on a case-by-case basis. In the NASD's
view, requiring a list in every case would be burdensome and
costly.110 Accordingly, the NASD has added a sentence to
proposed Rule 9251(c) stating: ``[a] motion to require the Department
of Enforcement to produce a list of documents withheld pursuant to
paragraph (b) shall be based upon some reason to believe that a
document is being withheld in violation of the Code.'' 111
---------------------------------------------------------------------------
\110\ NASD Response, supra note 6, at 14-15.
\111\ Amendment No. 3, supra note 6.
---------------------------------------------------------------------------
The NASD also believes it would be undesirable to adopt Federal
Rule of Evidence 501 for privilege issues and Federal Rule of Civil
Procedure 26(b)(3) regarding work-product immunity. The NASD states
that it must provide a fair process but is not limited by the specific
evidentiary rules relating to privilege in the Federal Rules of
Evidence and the Federal Rules of Civil Procedure.
In addition, the NASD believes that the suggested change to the
harmless error provision is unnecessary. The NASD notes that the
provision is based upon the Commission's rule and recognizes that
proposed Rule 9251 affords the respondent the right to receive the
documents and information in preparation for his defense in a
disciplinary matter.
The NASD further states that it would be inappropriate to change
its position that there is no Fifth Amendment privilege in an SRO
disciplinary investigation or proceeding. A respondent therefore may
not claim the Fifth Amendment without sanction.112
---------------------------------------------------------------------------
\112\ NASD Response, supra note 6, at 14-15.
---------------------------------------------------------------------------
The commenter recommends that the minimum time for pre-hearing
exchange of proposed exhibits and witness lists, as set forth in
proposed Rule 9261, should be expanded from ten to thirty days. The
commenter believes that ten days will not provide parties enough time
to prepare for a hearing.113
---------------------------------------------------------------------------
\113\ ABA Letter, supra note 9, at 93.
---------------------------------------------------------------------------
The NASD believes it would be inappropriate and unnecessary to
amend the minimum period for pre-hearing exchange of proposed exhibits
and witness lists. As noted earlier with respect to the NASD's comments
regarding the twenty-eight day notice given prior to a hearing in
proposed Rule 9221(d), there are cases in which a hearing may or should
proceed expeditiously in order to serve the interest of all the
parties, to protect the public interest, or to preserve resources. With
respect to difficult or large cases, the NASD's Office of Hearing
Officers has indicated that parties will be required to exchange such
information much earlier than ten days before the
hearing.114
---------------------------------------------------------------------------
\114\ NASD Response, supra note 6, at 15-16.
---------------------------------------------------------------------------
The commenter notes that proposed Rule 9262 regarding testimony
does not address whether telephone testimony will be permitted. The
commenter believes that the use of telephone testimony raises fairness
issues.115 Accordingly, the commenter recommends that the
proposed rule should prohibit telephone testimony unless all parties
agree to such testimony. As an alternative, the commenter recommends
that for good cause shown, a witness should be able to present a pre-
hearing videotaped testimony.116
---------------------------------------------------------------------------
\115\ The commenter believes that it would be difficult to
cross-examine and to determine the demeanor of a witness during
telephone testimony. ABA Letter, supra note 9, at 95.
\116\ ABA Letter, supra note 9, at 95.
---------------------------------------------------------------------------
The NASD states that to fulfill its SRO enforcement
responsibilities, it must rely upon the voluntary cooperation of firm
customers. The NASD needs to
[[Page 43397]]
remain flexible in obtaining the cooperation of customers, including
obtaining testimony to be used in a disciplinary proceeding. Thus, the
NASD believes it would be undesirable to ban telephone testimony from
use in a disciplinary proceeding. The NASD notes that the circumstances
of each case will be reviewed and considered in determining whether to
allow telephone testimony and how to weigh the testimony. To address
credibility issues, the hearing officer may request that the party on
whose behalf the telephone testimony is sought provide a notary at the
site of the witness to swear in the witness, or obtain an affidavit or
declaration from the witness, acknowledging that the testimony will be
given under oath. The hearing officer may alternatively require that
the witness review the transcript of his or her telephone testimony,
attach it to an affidavit or declaration, and swear to the veracity of
the attached testimony. Finally, in certain cases, unsworn testimony
will be admitted, but its weight shall be considered in light of the
circumstances in which it was taken.
In response to the comment regarding video-taped testimony, the
NASD interprets the proposed Code in appropriate circumstances to
authorize a hearing officer to order a party to video-tape the pre-
hearing testimony of a person who will not be physically present at the
hearing. The NASD notes, however, that extensive use of video-taped
testimony would be costly and, therefore, will not occur
routinely.117
---------------------------------------------------------------------------
\117\ NASD Response, supra note 6, at 16.
---------------------------------------------------------------------------
The commenter commends the incorporation of proposed Rule 9264
regarding motions for summary disposition, but suggests that NASD make
several modifications. First, the commenter recommends that hearing
panels be instructed that the option to defer a decision on a proposed
Rule 9264 motion for summary disposition not be used to avoid
determining whether the Department of Enforcement staff has a case that
it can prove. Second, the commenter recommends that the Department of
Enforcement should not have the ability to move for summary disposition
after a hearing on the merits has commenced, or after the Department of
Enforcement has completed its case. Third, the commenter recommends
that the rules should expressly state that dispositive motions against
respondents should be granted only in ``completely clear-cut
circumstances.'' Fourth, the commenter recommends a technical revision
to proposed Rule 9264(d) which provides that, in ruling on motions for
summary disposition, the hearing panel shall take as true ``the facts
alleged in the pleadings against whom the motion is made'' unless those
facts are contradicted by ``uncontested affidavits'' or ``stipulations
or admissions made by the non-moving party.'' The commenter suggests
that the word ``uncontested'' should be deleted and the moving party be
required to support its motion with affidavits or other materials
showing that there is no genuine issue for trial.118
---------------------------------------------------------------------------
\118\ ABA Letter, supra note 9, at 98-103.
---------------------------------------------------------------------------
The NASD agrees that hearing panels be instructed that the option
to defer a decision on a proposed Rule 9264 motion for summary
disposition should not be used to avoid determining whether the
Department of Enforcement has a case that it can prove. Dispositive
motions play a valuable role in cases where the evidentiary basis is
lacking or where a legal claim is not set forth in the complaint.
However, the NASD does not believe that it is appropriate to codify
such instructions.
In addition, the NASD states that it will amend proposed Rule
9264(b) to eliminate the ability of the Department of Enforcement to
move for summary disposition after a hearing on the merits has
commenced. While the NASD recognizes that in the pre-hearing context of
proposed Rule 9264(a) such dispositive motions should be granted
against a respondent only in very clear cases, it does not propose to
codify this policy. Further, the NASD agrees with the commenter that
paragraph (d) of proposed Rule 9264 should be amended.119
---------------------------------------------------------------------------
\119\ NASD Response, supra note 6, at 16-17. See also Amendment
No. 3, supra note 6.
---------------------------------------------------------------------------
The commenter recommends that the NASD adopt changes to proposed
Rule 9270 to provide guidance as to what constitutes a frivolous offer,
to apply the Sanctions Guidelines to such offers, and to specify the
procedures that should govern an offer of settlement once a hearing has
begun. The commenter also recommends that the NASD consider designating
hearing officers as a ``Duty Officer'' on a rotating basis to consider
settlement offers to eliminate any appearance of unfairness from
hearing officers being allowed to reject offers of settlement and later
conduct the hearing on the merits.120
---------------------------------------------------------------------------
\120\ ABA Letter, supra note 9, at 112-114.
---------------------------------------------------------------------------
The NASD does not believe that it is necessary or appropriate to
adopt these proposed changes to proposed Rule 9270. First, the NASD
does not believe it is appropriate to codify ``standardized language''
to be used routinely in settlement documents. Second, in the NASD's
view, the application of the Sanctions Guidelines to a particular
disciplinary proceeding should not be codified. Third, the NASD does
not believe it is appropriate to amend proposed Rule 9270(c) based on
the commenter's concern that a hearing panel or an extended hearing
panel may view with prejudice some aspect of a respondent's case if the
respondent previously submitted an offer of settlement that the hearing
panel or the extended hearing panel rejected. The NASD notes that
although some jurisdictions provide settlement judges, in most
jurisdictions, a judge continues to preside over the case throughout
the disciplinary process, even after approving or disapproving a
settlement. The NASD notes further that it is the duty of the hearing
officer sitting on the hearing panel or the extended hearing panel to
instruct the panelists to disregard the proposed settlement therefore
allowing the respondent to obtain a fair hearing on the
merits.121
---------------------------------------------------------------------------
\121\ NASD Response, supra note 6, at 17-18.
---------------------------------------------------------------------------
Proposed Rule 9280 sets forth a list of sanctions that may be
imposed upon a party and/or a party's attorney for conduct in violation
of an order or ``other contemptuous conduct during a proceeding.'' The
commenter recommends that the NASD define ``contemptuous conduct'' in
the proposed rule.122 The commenter does not believe it is
clear to what extent the hearing panel must consider an attorney's
ethical obligation to vigorously represent a client in determining the
limits of acceptable conduct. Further, the commenter suggests that an
attorney subject to an exclusion order should have the right to an oral
argument before the NBCC.123
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\122\ In a previous comment regarding proposed Rule 9150
(Exclusion from Rule 9000 Series Proceeding), the commenter also
recommends that the NASD ensure that an attorney's obligations under
the Model Rules of Professional Conduct are not compromised by the
application of this proposed rule.
\123\ ABA Letter, supra note 9, at 116.
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The NASD believes it is unnecessary to define ``contemptuous
conduct.'' The NASD does not believe that the use of proposed Rule 9280
against a counsel will compromise zealous advocacy of a client; in any
case, the NASD will analyze any interpretive questions on a case-by-
case basis. Further, the NASD does not believe it is appropriate to
codify that an attorney has the right to oral argument before the NBCC
in every case as a matter of right if the attorney is appealing a
proposed Rule 9150 exclusion order. The NASD notes that under proposed
Rule 9150 and
[[Page 43398]]
proposed Rule 9280, attorney exclusion is the only contested order
following which an interlocutory appeal is granted as a matter of
right. The NASD states that the Code need only provide that an attorney
(or a representative) may request oral argument before the NBCC when he
or she is appealing a proposed Rule 9150 exclusion order, as the
proposed Rule currently does.124
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\124\ NASD Response, supra note 6, at 18.
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3. Rule 9300 Series
The rules provide for two levels of discretionary review of
disciplinary proceedings by the NASD Regulation Board of Directors
(proposed Rules 9351) and the NASD Board of Governors (proposed Rule
9352). The commenter recommends that the proposed rules should restrict
a call for review to either the NASD Regulation Board, or the NASD
Board, but not both.\125\ The NASD generally agrees with the comment
regarding the two levels of discretionary review of disciplinary
proceedings. The NASD states that a central feature of the corporate
restructuring recently approved by the NASD Board of Governors, and
shortly to be submitted to the Commission, is to eliminate such
unnecessary levels of discretionary review.\126\
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\125\ ABA Letter, supra note 9, at 135-36.
\126\ NASD Response, supra note 6, at 18-19.
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The commenter also recommends that a bar or expulsion become
effective thirty days after service rather than effective upon service
as set forth in proposed Rule 9360. In addition, the commenter
recommends that the bar or expulsion be effective only upon personal
service on the member.\127\
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\127\ ABA Letter, supra note 9, at 137.
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The NASD proposes to amend proposed Rule 9360 to reflect the
concern of the commenter that a person subject to a sanction of a bar
or an expulsion be personally served. Because such persons are often
very difficult to serve, the NASD proposes to amend proposed Rule 9360
to provide that the NASD shall take reasonable steps to obtain personal
service of a respondent when the sanction is a bar or an
expulsion.\128\ A bar or expulsion will continue to be effective upon
service. The NASD states that a party may seek a stay of the
effectiveness of the sanction from the Commission or from the
appropriate federal court.\129\
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\128\ Amendment No. 3, supra note 6.
\129\ NASD Response, supra note 6.
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The commenter notes that proposed Rule 9370 stays the effectiveness
of any sanction other than a bar or an expulsion upon application for
review by the Commission pursuant to Section 19(d)(2) of the Act. The
commenter recommends that bars and expulsions should also be stayed
pending appeal under proposed Rule 9370.\130\ The NASD, however,
believes that a bar or an expulsion should not be stayed automatically
upon an application for review by the Commission pursuant to Section
19(d)(2) of the Act.\131\ As noted in the NASD's response to proposed
changes to proposed Rule 9360, an aggrieved person may seek a stay from
the Commission or from the appropriate federal court.\132\
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\130\ ABA Letter, supra note 9, at 138-39.
\131\ Under proposed Rule 9370, other sanctions are stayed when
an application for review is filed.
\132\ NASD Response, supra note 6, at 19.
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IV. Discussion
As discussed more fully herein, the Commission has determined at
this time to approve the NASD's proposed rule change. The standard by
which the Commission must evaluate a proposed rule change is set forth
in Section 19(b) of the Act. The Commission must approve a proposed
NASD rule change if it finds that the proposal is consistent with the
requirements of the Act and the rules and regulations thereunder that
govern the NASD.\133\ In evaluating a given proposal, the Commission
examines the record before it and all relevant factors and necessary
information. In addition, Section 15A of the Act establishes specific
standards for NASD rules against which the Commission must measure the
NASD proposal.\134\
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\133\ 15 U.S.C. Sec. 78s(b).
\134\ 15 U.S.C. Sec. 78o-3.
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As discussed below, the Commission has evaluated the NASD's
proposed change in light of the standards and objectives set forth in
the Act and, in particular, Sections 15A \135\ and 3(f) \136\ of the
Act. The Commission believes the NASD's proposed rule change is
consistent with the Act. The Commission also believes the rule change
proposed by the NASD is consistent with the NASD's Undertakings in the
SEC Order and is reasonably taken in furtherance of the Undertakings.
The Commission expects that the NASD's rule change should strengthen
the NASD's operational and disciplinary procedures, which are important
in governing its members in a free, open, and competitive market.
Further, in the Commission's view, the proposed change should enhance
the dispassionate application of rules and fairness in the disciplinary
process and bring greater consistency and fairness to the membership
application and other regulatory processes.
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\135\ For example, Section 15A(b)(8) requires that the rules of
an association provide a fair procedure for the disciplining of
members and persons associated with members, the denial of
membership, the barring of any person becoming associated with a
member thereof, and for the prohibition or limitation by the
association of any person with respect to access to services offered
by the association. Section 15A(h)(2) requires a registered
securities association when determining whether a person shall be
denied membership, barred from becoming associated with a member, or
prohibited or limited with respect to access to services offered by
the association or member thereof, to notify such person of and give
him an opportunity to be heard upon, the specific grounds for
denial, bar, or prohibition or limitation under consideration and
keep a record. Section 15A(h)(3) governs when a registered
securities association may summarily suspend a member or a person
associated with a member.
\136\ In approving this proposal, the Commission notes that it
has considered the proposed rule change's impact on efficiency,
competition, and capital formation. 15 U.S.C. Sec. 78c(f).
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A. Changes to the Membership and Registration Rules
For the reasons discussed below, the Commission believes the
proposed rule change regarding membership decisions is consistent with
the Act and the rules and regulations thereunder applicable to a
national securities association. In particular, the proposal is
consistent with Sections 15A(b)(3), 15A(b)(8), 15A(g)(3), and 15A(h)(2)
of the Act.137 This change improves the current system by
implementing safeguards to ensure that decisions regarding membership
are addressed in a fair and efficient manner. Moreover, the rule change
is reasonably taken in furtherance of the Undertakings and is
consistent with the Undertakings.
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\137\ 15 U.S.C. Secs. 78o-3(b)(3), 78o-3(b)(8), 78o-3(g)(3), and
78o-3(h)(2).
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That portion of the settlement between the Commission and the NASD
concerning the admission of member firms to the NASD requires the
regulatory staff of the NASD, subject only to the supervision of the
Board of Governors of the NASD and the Board of Directors of NASD
Regulation, to have sole discretion to handle the approval of
applications for membership and the conditions and limitations on
membership.138 The District Committees (including any
subcommittees) may not be involved in the review or approval of
applications for membership in the NASD.139 Moreover, the
NASD agreed to promulgate and apply on a consistent basis uniform
standards regarding admission to the NASD and to institute safeguards
to ensure fair and
[[Page 43399]]
evenhanded access to the NASD's services.140
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\138\ SEC Order, supra note 10; see also Undertaking 4, supra
note 15.
\139\ SEC Order, supra note 10; see also Undertaking 4, supra
note 15.
\140\ SEC Order, supra note 10; see also Undertaking 5, supra
note 15.
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1. Processing Membership Applications
The Commission noted in the 21(a) Report that the District
Committee (or a subcommittee it created called the Pre-Membership
Interview (``PMI'') Subcommittee) at the New York City District 10
office of the NASD encouraged the close scrutiny of applicants who
appeared likely to engage in active SOES trading.141 This
scrutiny substantially hindered or delayed a number of these
applications, even though the NASD's rules provided for reasonable
review periods.
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\141\ 21(a) Report, supra note 10, at 41, A-74.
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The current membership application procedures require an applicant
to file its application with the District Office where the applicant
intends to have its principal place of business. The District Office
will then schedule a premembership interview within a reasonable time
after it receives the application and supporting documents. Within
thirty days after the conclusion of the premembership interview, a
subcommittee will consider the application and notify the applicant in
writing whether its application has been granted, denied, or granted
subject to restrictions, and provide the rationale for such
determination. If an application is denied, the applicant has the right
to file an appeal with the District Committee within fifteen days. The
District Committee will consider the record developed before it and
notify the applicant in writing within a reasonable time after the
close of the record whether its application has been granted, denied,
or granted subject to restrictions on its business activities. The
applicant also has the right to appeal the District Committee's
decision to the NBCC. The NBCC will consider the record developed
before it and notify the applicant in writing within a reasonable time
after the close of the record whether its application has been granted,
denied, or granted subject to restrictions on its business activities.
Determinations of the NBCC may be called for review by either the Board
of NASD Regulation or the Board of the NASD.
Rather than requiring the NASD to simply act within a ``reasonable
time frame,'' the proposed rule change sets forth a schedule for the
membership application process and allows applicants to ensure that
their applications are being processed expeditiously. The process
begins with the submission of an application to the NASD. The first
part of the application must be filed with the Membership
Department,142 and the second part of the application must
be filed with the Department of Member Regulation at the District
Office in the District in which an applicant intends to have its
principal place of business.143 The Department will notify
an applicant within thirty days after it receives an application
whether the application is complete.144 Within ninety days
after the receipt of the application or within sixty days after the
receipt of all additional information, whichever is later, the
Department will schedule a membership interview.145 The
Department will issue its written decision within thirty days after the
conclusion of the membership interview or within thirty days after the
submission of additional information, whichever is later.146
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\142\ Specifically, the first part of the application must
contain an original, signed, and notarized Form BD, with applicable
schedules; an original, signed Form U-4 for each associated person
who is required to be registered under the rules of the NASD; an
original NASD-approved fingerprint card for each associated person
who will be subject to SEC Rule 17f-2; a new member assessment
report; a new member firm contact questionnaire; and a check for the
appropriate fee. Proposed Rule 1013(a)(1).
\143\ The second part of the application must include, among
others: a monthly projection of income and expenses, with supporting
rationale, for the first 12 months of operations; a list of all
associated persons, the most recent Form U-4 and Form U-5 for each
associated person, any other document that discloses the
disciplinary history of each associated person, and a list of any
other persons or entities that will exercise control with respect to
the applicant's business; and a description of the nature and source
of applicant's capital, including a list of all persons or entities
that have contributed or plan to contribute financing to the
applicant's business, the terms and conditions of such financing
arrangements, the risk to net capital presented by the applicant's
proposed business activities, and any arrangement for additional
capital should a business need arise. Proposed Rule 1013(a)(2).
\144\ Proposed Rule 1013(a)(4).
\145\ Proposed Rule 1013(c)(3).
\146\ Proposed Rule 1014(d)(1).
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If the Department fails to issue its decision within 180 days after
the receipt of an application, or such later date as the Department and
an applicant have agreed to in writing, an applicant may petition the
NASD Board in writing to direct the Department to issue a
decision.147 Within seven days of receiving such a request,
the NASD Board will instruct the Department to serve its written
decision immediately or show good cause for an extension of time. If
the Department establishes good cause for an extension of time, the
NASD Board may grant the Department an extension of no more than ninety
days.148
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\147\ Proposed Rule 1014(d)(3).
\148\ Proposed Rule 1014(d)(3).
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If the Department denies an application, the applicant may request
that the NBCC review the decision.149 If a hearing is
requested, it shall be conducted by a subcommittee of the NBCC within
forty-five days after the receipt of the request.150 The
subcommittee will present its recommended decision to the NBCC within
sixty days after the date of the hearing.151 The NBCC will
then provide the NASD Regulation Board with its proposed written
decision.152 If the decision is not called for review by the
NASD Regulation Board, the NBCC will transmit its proposed written
decision to the NASD Board.153 If the NASD Board does not
call the decision for review, the NBCC will serve the applicant with
written notice specifying the date on which the call for review period
expired and stating that the final written decision will be served
within fifteen days after such date.154
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\149\ Proposed Rule 1015(a).
\150\ Proposed Rule 1015(f).
\151\ Proposed Rule 1015(h).
\152\ Proposed Rule 1015(i)(3). The NASD anticipates that the
NBCC will provide the Boards with its proposed decision at the next
applicable Board meeting after receiving the subcommittee's
recommendation.
\153\ Proposed Rule 1015(i)(3).
\154\ Proposed Rule 1015(i)(3).
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If the NBCC fails to issue its decision within fifteen days after
the expiration of the call for review period, the applicant may
petition the NASD Board in writing to direct the NBCC to issue its
decision.155 Within seven days of receiving such a request,
the NASD Board will instruct the NBCC to serve its written decision
immediately or show good cause for an extension of time. If the NBCC
establishes good cause for an extension of time, the NASD Board may
grant the NBCC an extension of no more than fifteen days.
---------------------------------------------------------------------------
\155\ Proposed Rule 1015(i)(4).
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The Commission believes these detailed procedures will help ensure
that applications will be processed in a timely manner. Centralizing
the new member review process at the NASD's headquarters, however, is
not necessary to facilitate the process. Each step in the application
process contains a discrete time frame within which the NASD must act.
In addition, the NASD has represented that significant initiatives are
already underway to ensure national uniformity and consistency in the
treatment of membership applications.156
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\156\ For example, the NASD noted that training sessions
focusing on the proposed rules have been conducted for supervisors
and assistant directors, a comprehensive training program is being
finalized for District Office examiners, and a staff steering
committee chaired by an NASD Regulation vice president and staffed
by senior District Office staff members is finalizing detailed
procedures for District Offices to follow to help ensure uniformity
and consistency.
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[[Page 43400]]
It is also reasonable for the application for membership to require
applicants to provide the information set forth in proposed Rule
1013(a). The required information is reasonably necessary to facilitate
the NASD's ability to review an application and determine if an
applicant will be able to comply with all of the applicable standards.
In particular, it is appropriate to require applicants to project
income and expenses for the first twelve months of operations, to
describe the nature and source of the applicant's capital, and to
submit copies of Forms U-4 and U-5 as part of their application.
Specifically, it is reasonable to require applicants to furnish a
monthly projection of income and expenses for the first twelve months
of operations because this information enhances the NASD's ability to
determine whether an applicant has a reasonable expectation of being
able to comply with the net capital rule once an applicant commences
business. It should not be overly burdensome for applicants to provide
this information because most new firms already project the revenues
necessary to help meet fixed and other expenses for business reasons.
Similarly, it is appropriate for applicants to provide a
description of the nature and source of an applicant's
capital.157 This information will assist the NASD in
determining whether the applicant will have difficulty in maintaining
required net capital. Moreover, it enhances the NASD's ability to
correctly identify the true owners of a firm and thus ensure that
improper parties (e.g., parties that are barred from the industry) are
not involved.
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\157\ The NASD has represented, as described previously, that it
has taken steps to ensure an appropriate degree of consistency and
uniformity will exist. For example, the NASD indicated that it will
require memoranda or public offering documents as information
describing the risk to the applicant's capital.
---------------------------------------------------------------------------
It is also reasonable to require applicants to submit copies of
Forms BD, U-4, and U-5 as part of their application. Presenting the
NASD with all of the relevant information in one package, including
these forms, should help expedite the processing of applications.
Finally, the proposal adequately addresses a commenter's concern
that the tolling provisions may prolong the application
process.158 Although these provisions allow the maximum time
limits to begin from the date of the Department's last request for
information, the proposal also allows an applicant to demand that the
Department issue its written decision within 180 days after it was
received by the NASD, notwithstanding any of the tolling provisions.
This should prevent the Department's requests for information from
unduly delaying the application procedure.159
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\158\ Colish Letter, supra note 9, at 4.
\159\ Proposed Rule 1014(d)(3).
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2. Membership Standards
In the 21(a) Report, the Commission found that the NASD applied
criteria not enumerated in the NASD's rules to some
applicants.160 Currently, the NASD's rules do not contain
explicit standards that an applicant must meet; they only contain
general topics that the membership interview will cover.161
In addition, the current rules only require that the NASD provide the
general rationale for its decision.
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\160\ SEC Order, supra note 10. For example, the NASD considered
adopting a guideline to deny membership to:
Owners, control persons, or principal officers who have been
recently employed by a known SOES activist and who have indicated an
interest in being a SOES activist themselves. This interest would be
evidenced by conducting business predominately on a retail agency
basis and the request to have pieces of equipment with SOES
capabilities that is close in number to the registered
representatives that the firm intends to employ.
Although not adopted as an official policy of the NASD, the
supervisor of the PMI section of District 10 applied this particular
SOES-related guideline to new applicants along with other guidelines
in identifying issues for the PMI Subcommittee to consider. 21(a)
Report, supra note 10, at A-72.
\161\ Current Rule 1011(c)(1)-(6).
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In contrast, the proposed rule change sets forth thirteen standards
that the NASD must consider.162 Moreover, if the NASD denies
an application, the proposed rules explicitly require that the
Department, as part of the decision explaining the reason for the
denial, reference the applicable standard(s).
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\162\ Proposed Rule 1014(a)(1)-(13). One commenter opined that
the standards contained in proposed Rule 1014(a)(8) and proposed
Rule 1014(a)(9) are redundant. Although the subject area for both
standards is similar, the source for comparison differs. Proposed
Rule 1014(a)(8) requires the NASD to compare an applicant's
compliance, supervisory, operational, and internal control practices
and standards to those practices and standards employed by other
firms in the securities industry. Proposed Rule 1014(a)(9), on the
other hand, requires the NASD to evaluate these practices and
standards in light of the requirements of the federal securities
laws, the rules and regulations thereunder, and the rules of the
NASD.
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The proposed standards are objective in nature but, at the same
time, are flexible enough to allow the NASD the discretion it needs to
properly assess membership matters. By identifying the proper criteria
for admission, the new rules should help ensure that applicants are not
required to satisfy criteria not enumerated in the NASD's rules. In
addition, these objective standards will facilitate the Commission's
ability to evaluate NASD decisions appealed to it.
3. Business Restrictions
In the 21(a) Report, the Commission found that the NASD had, in
certain instances, placed improper restrictions on certain members'
activities as a condition of membership 163 and prevented
certain members from seeking modifications to their restriction
agreements.164 The NASD's current rules regarding the
modification or removal of business restrictions are very open-ended.
They simply state that members may file a written request that will be
reviewed by a subcommittee designated by the District Committee for the
District in which the member currently has its principal place of
business. There are no set time frames within which the NASD must act.
In addition, the subcommittee is only required to consider the
circumstances that gave rise to the imposition of the restrictions, the
operations of the member since the imposition of the restrictions, and
any new evidence submitted in connection with the member's request.
---------------------------------------------------------------------------
\163\ For example, the PMI Subcommittee curtailed the ability of
certain firms to use the SOES system. The NASD expressly conditioned
membership on certain firms' acceptance of substantial limitations
on their SOES trading activity. These restrictions included, in
certain circumstances, outright prohibitions on the use of SOES,
limitations on the number of SOES terminals available to a firm, and
restatement of the order splitting and professional trading account
rules in the membership agreement. 21(a) Report, supra note 10, at
A-74.
\164\ The Commission noted in the 21(a) Report that the NASD had
applied an informal policy of preventing firms from seeking
modifications of any restrictions by conditioning membership on the
requirement that the firm forbear from seeking modifications for six
months to one year, notwithstanding that the NASD's rules permitted
a firm to seek a modification at any time. 21(a) Report, supra note
10, at A-75.
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In contrast, the proposal sets forth a detailed procedure for
applying for the removal or modification of a business restriction: it
grants applicants seeking to modify or remove previously imposed
business restrictions the same procedural rights accorded applicants
seeking membership.165 In addition, the NASD will apply the
same standards used for evaluating new membership
[[Page 43401]]
applications to such requests.166 Finally, the proposed rule
change contains a provision that requires the Department to modify or
remove a restriction on its own initiative if the Department determines
such action is appropriate.167
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\165\ For example, the Department must respond to requests for
modification or removal of business restrictions within certain time
frames. See supra Section IV.A.1 for a general discussion of the
time frames and appellate procedure. See also proposed Rule 1017
(setting forth the procedure for seeking a modification or removal
of a business restriction).
\166\ Proposed Rule 1017(e)(1)(A)(requiring the NASD to utilize
the standards set forth in proposed Rule 1014 when evaluating a
request to modify or remove a business restriction).
\167\ Proposed Rule 1017(h). The Commission noted in the 21(a)
Report certain instances where the NASD retained Professional
Trading Account restrictions in membership agreements as much as 18
months after those rules were repealed. 21(a) Report, supra note 10,
at n.203.
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The Commission believes the detailed procedures contained in the
proposed rule change will provide both applicants and the NASD greater
guidance with regard to processing requests to modify or remove
business restrictions. The establishment of uniform standards by which
such requests will be evaluated, combined with the NASD's new training
procedures and establishment of a staff steering committee, will help
ensure national uniformity and consistency in the treatment of such
applications.
B. Changes to the Investigations and Sanctions Rules
For the reasons discussed below, the Commission believes the
proposed change to the Rule 8000 Series regarding investigations and
sanctions should provide fair and efficient procedures. The Commission
also believes that the proposed change is consistent with Section 15A
of the Act, and in particular, with Sections 15A(b)(6) 168
and 15A(b)(9) 169 of the Act. Further, the Commission
believes the proposed change to the procedures governing investigations
and sanctions is reasonably taken in furtherance of and is consistent
with the Undertakings.
---------------------------------------------------------------------------
\168\ 15 U.S.C. Sec. 78o-3(b)(6).
\169\ 15 U.S.C. Sec. 78o-3(b)(9).
---------------------------------------------------------------------------
Undertaking 4 requires the NASD ``[t]o provide[] for the autonomy
and independence of the regulatory staff of the NASD and its
subsidiaries such that the staff, subject only to the supervision of
the Board of Governors of the NASD and the Boards of Directors of NASDR
and Nasdaq * * * has sole discretion as to what matters to investigate.
* * *'' 170 In addition, Undertaking 5 requires that the
NASD ``promulgate and apply on a consistent basis uniform standards for
regulatory and other access issues * * * and institute safeguards to
ensure fair and evenhanded access to all services and facilities of the
NASD.'' 171
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\170\ Undertakings, supra note 15.
\171\ Undertakings, supra note 15.
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The Rule 8100 Series currently governs complaints against NASD
members. Authority permitting the NASD to investigate a member's books
and to require a member or associated person to provide information in
connection with an investigation or proceeding conducted by the NASD is
presently provided by the Rule 8200 Series. The Rule 8200 Series also
currently gives the NASD the authority to suspend members or associated
persons who do not comply with the Rule 8200 Series. Finally, the Rule
8300 Series provides for sanctions against members and persons
associated with members for violations of NASD Rules.
The NASD proposes to amend the Rule 8000 Series to reflect the
proposed changes to the Rule 9000 Series, discussed in detail below,
172 and to clarify and enhance the certain provisions. The
Commission finds that these clarifying changes and procedural
enhancements to the Rule 8000 Series are appropriate and reasonable. In
the Commission's view, these changes should improve the current Rule
8000 Series, and provide fair and efficient procedures for
investigation and sanction proceedings. For example, the Commission
believes that the inclusion of a provision in the proposed Rule 8000
Series that requires that any decision to impose a suspension under the
series must state the grounds for the suspension and the conditions for
terminating the suspension will promote uniformity.
---------------------------------------------------------------------------
\172\ See infra discussion of the disciplinary proceedings in
Section IV.C.1.
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In addition, the NASD has also proposed changes to the Rule 8100
Series, eliminating the ability of any person who believes he or she
has been aggrieved by any act of any member or associated person to
initiate formal disciplinary proceedings pursuant to current Rule 8120.
The Commission notes that, as discussed below, the NASD has proposed
substantial enhancements to the disciplinary process. 173
For example, the NASD has proposed to implement staff-initiated
disciplinary proceedings, to enhance the arbitration process, and to
institute an expanded and independent NASD internal review function,
including an Ombudsman Office.
---------------------------------------------------------------------------
\173\ See infra discussion of the disciplinary proceedings in
Section IV.C.1.
---------------------------------------------------------------------------
As a result of these changes to the NASD's disciplinary process,
the Commission believes it is no longer necessary to permit ``aggrieved
persons'' the right to invoke NASD processes to institute formal
disciplinary actions. The Commission notes that the NASD has
acknowledged its responsibility as an SRO to give due consideration to
complaints by members, associated persons, or members of the public who
bring forth information suggesting wrongdoing. Further, the NASD has
stated it recognizes its duty to investigate and to determine whether
its disciplinary process should be invoked. In addition, the Commission
notes that the NASD has proposed to add a provision to the Delegation
Plan requiring NASD Regulation to establish internal procedures for
considering complaints by members, associated persons, and members of
the public who request an investigation or disciplinary action by the
NASD. 174 The procedures established under this provision
would involve regular oversight by NASD Internal Review. Finally, the
Commission notes that no other SRO has a similar rule permitting
``aggrieved persons'' to institute disciplinary proceedings.
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\174\ NASD Regulation currently logs, tracks, and investigates
all customer complaints through the NASD's long-standing customer
complaint program. The NASD has proposed to amend Section II.A.1.f.
of the Delegation Plan to specify that NASD Regulation will
establish procedures to consider requests by members, associated
person, and members of the public that NASD Regulation initiate
formal disciplinary action. See Securities Exchange Act Release No.
38909 (Aug. 7, 1997).
---------------------------------------------------------------------------
The Commission also believes that the proposal to delete Rule 8130,
which currently authorizes the DBCCs to file complaints, is in
furtherance of Undertaking 4. As noted in the discussion of the
disciplinary process below,175 pursuant to Undertaking 4,
the DBCCs will no longer have authority to issue complaints. The
Commission believes that the proposed deletion of current Rule 8130 is
a reasonable means to address the findings of the Commission's 21(a)
Report and is consistent with the Undertakings, particularly with
Undertaking 4.
---------------------------------------------------------------------------
\175\ See infra discussion of the disciplinary proceedings in
Section IV.C.1.
---------------------------------------------------------------------------
As discussed above, one commenter noted that proposed Rule 8210 did
not differentiate between requests for information to parties, as
opposed to non-parties. The NASD declined to modify Rule 8210 in
response to this comment. The Commission notes that parties and non-
parties subject to Rule 8210 requests are NASD members or associated
persons, and therefore have submitted themselves to the jurisdiction of
the NASD. Therefore, the Commission believes it is reasonable for the
NASD not to differentiate in Rule 8210 between requests to parties and
requests to non-parties. The Commission also believes that the NASD's
interpretation of proposed Rule
[[Page 43402]]
9146, which permits a hearing officer to issue a protective order upon
the motion of a party or other person, is a reasonable means to enable
parties and non-parties to limit the use of materials submitted in a
disciplinary proceeding.
Further, the commenter requested that reference to the existence of
payment plans available to members for the payment of fines, sanctions
or costs be included in the Code of Procedure. The Commission notes
that although neither Rule 8320 nor the Code of Procedure specifically
address the availability of payment plans, the NASD has confirmed that
it will inform its members of the existence of payment plans through
the inclusion of information regarding installment plans in the NASD's
Sanctions Guidelines, which are publicly available.
In conclusion, the Commission finds that proposed Rule 8000 Series
is consistent with the Act, and should enhance both the fair and
efficient operation of the NASD's disciplinary proceedings and the
dispassionate application of the rules and fairness in the NASD's
disciplinary process, as well as other regulatory activities.
C. Changes to the Code of Procedure
1. Disciplinary Proceedings
For the reasons discussed below, the Commission believes that the
proposed changes regarding the disciplinary proceedings are consistent
with the Act, improve the current system, and should provide fair and
efficient procedures to address disciplinary matters. The Commission
also believes that the proposed rule change is consistent with Section
15A of the Act, and in particular, with Sections 15A(b)(6)
176 and 15A(b)(8) 177 of the Act.
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\176\ 15 U.S.C. Sec. 78o-3(b)(6).
\177\ 15 U.S.C. Sec. 78o-3(b)(8).
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(a) How disciplinary proceedings are initiated. The Commission
believes that the proposed rule change, which removes the authority to
authorize and issue a complaint from the District Committees, the
Market Regulation Committee, and the NBCC, and places it solely on the
Department of Enforcement of NASD Regulation, is reasonably taken in
furtherance of and is consistent with Undertaking 4 in the SEC
Order.178
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\178\ Undertakings, supra note 15.
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Pursuant to the NASD's Undertakings in the SEC Order, the NASD has
agreed to ``provide for the autonomy and independence of the regulatory
staff of the NASD and its subsidiaries such that the staff * * * has
sole discretion as to what matters to investigate and prosecute, * * *,
[ ] and is generally insulated from the commercial interests of its
members and the Nasdaq market.'' 179 In particular, under
the proposed rules, only the Department of Enforcement of NASD
Regulation will be permitted to authorize and issue complaints. In
addition, the Department of Enforcement may be directed to authorize
and issue a complaint by the NASD Regulation Board or the NASD Board.
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\179\ Undertakings, supra note 15.
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To further provide the desired level of autonomy to its regulatory
staff, and to address the Commission's conclusion in the 21(a) Report
that District Committees were granted overly-broad discretionary
authority, the NASD proposes to eliminate the District Committees'
involvement in the disciplinary process. Under the revised procedures,
the District Committees will no longer have the authority to initiate
disciplinary proceedings or to authorize the NASD's staff
recommendation to initiate a disciplinary proceeding, nor will they
have the ability to veto NASD staff enforcement recommendations. Even
more significant, the District Committees will no longer serve as
adjudicative bodies, which historically have provided certain segments
of the NASD membership with a disproportionate role in the self-
regulatory process.180 They will no longer serve as
evidentiary hearing panels for disciplinary proceedings, issue final
decisions, or review or approve final decisions. The District
Committees' only disciplinary role will be to serve as a pool of
persons from which two of the three hearing panelists are selected.
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\180\ 21(a) Report, supra note 10, at 35 n.91 and accompanying
text.
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Moreover, the NASD's proposed changes to the Market Regulation
Committee's responsibilities and duties in the disciplinary process
address the Commission's conclusion in the 21(a) Report that the Market
Surveillance Committee (now the Market Regulation Committee)
inappropriately performs a grand jury function with respect to
disciplinary actions proposed by the NASD's Market Surveillance
Department.181 Under the proposed changes, like the District
Committees, the only disciplinary role for the Market Regulation
Committee will be to serve as a pool of panelists to serve on a hearing
panel or, if applicable, an extended hearing panel. A person who
currently serves or who has previously served (not earlier than four
years before the date the complaint was served upon the respondent) on
the Market Regulation Committee who is associated with an NASD member,
or retired therefrom may be chosen to serve as one of the panelists on
a hearing panel or an extended hearing panel when the complaint alleges
at least one cause of action involving a violation of a statute or a
rule within the scope of proposed Rule 9120(r).182
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\181\ 21(a) Report, supra note 10, at 35 n.91.
\182\ See supra note 23.
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One commenter expresses concern that the Department of Enforcement
may be able to ``pre-select'' panelists from the Market Regulation
Committee (current or former members) by alleging at least one
violation set forth in proposed Rule 9120(r), thereby affecting the
selection process.183 The Commission agrees with the NASD's
view that proposed Rule 9120(r) does not intend to place all federal
and state securities laws, rules, and regulations under the advisory
jurisdiction of the Market Regulation Committee. A current or former
member of the Market Regulation Committee will serve on a panel only
when the matter relates to certain subjects, including: quotations of
securities; execution of transactions; reporting of transactions; and
trading practices.
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\183\ ABA Letter, supra note 9, at 75.
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In the Commission's view, by limiting the role of the District
Committees and Market Regulation Committee, while providing the
Department of Enforcement with the autonomy and independence to
authorize and issue complaints, the professional staff of NASD
Regulation should be able to implement a vigorous and evenhanded
enforcement program. Moreover, the Commission believes that this shift
of authority in the complaint process should ensure that member
participation and peer review is preserved, while eliminating
problematic aspects of the disciplinary process identified in the 21(a)
Report.
(b) The role of the Hearing Officer and Hearing Panel. The
Commission also believes the proposed change allowing the recently
established Office of Hearing Officers to preside over all formal NASD
disciplinary proceedings is reasonably taken in furtherance of and is
consistent with the Undertaking 3 in the SEC Order. Specifically, in
Undertaking 3 in the SEC Order, the NASD agreed to ``institute the
participation of professional hearing officers (who shall be attorneys
with appropriate experience and training) to preside over disciplinary
proceedings.'' 184
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\184\ SEC Order, supra note 10. See also Undertakings, supra
note 15.
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[[Page 43403]]
This undertaking was made in response to the Commission's
conclusions in the 21(a) Report that the NASD did not adequately guard
against the influence of particular segments of its membership over its
regulatory functions and processes. For example, the Commission
concluded in the 21(a) Report that market makers had exerted
substantial influence over the administration of the NASD's
disciplinary process. The Commission concluded that market makers'
influence over the NASD, which constituted a majority of the District
Committees and the former Market Surveillance Committee, resulted in
heightened enforcement of SOES activity, and lax enforcement of the
firm quote obligations, trade reporting rules, and excused withdrawal
rules.185
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\185\ 21(a) Report, supra note 10, at 35-39.
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NASD Regulation has responded to the Commission's concerns by
establishing the Office of Hearing Officers as an independent office
within NASD Regulation. All litigated disciplinary proceedings will be
decided by a panel composed of one hearing officer and two panelists,
i.e., the two securities industry representatives. Hearing panel
decisions are not subject to review by the District Committees or the
Market Regulation Committee. Once a hearing panel has ruled, the
decision is subject to review by the NBCC, and the Boards of the NASD
Regulation and NASD.
The hearing officer, who is assigned to a disciplinary proceeding
by the chief hearing officer, presides over all matters relating to the
proceeding. The hearing officer, among other things, considers all
procedural and evidentiary matters, discovery requests, and other non-
dispositive matters. The hearing officer presiding over a particular
disciplinary proceeding also has the authority to impose discretionary
sanctions for violations of an order issued by the hearing officer,
hearing panel or, if applicable, extended hearing panel, or for other
contemptuous conduct during any stage of the disciplinary proceeding.
One commenter believes that to avoid the perception of unfairness
and bias, the Office of Hearing Officers should report to the President
of the NASD, rather than to the President of NASD
Regulation.186 The Commission believes, however, that the
NASD has reasonably addressed the commenter's concern by implementing
various measures, as highlighted above, to assure the independence of
the chief hearing officer and the hearing officers.187
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\186\ ABA Letter, supra note 9, at 39-40.
\187\ NASD Response, supra note 6.
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The Commission believes the establishment of an office of
professional hearing officers, with the appropriate legal training,
should enhance the dispassionate application of the rules and fairness
in the disciplinary process. Moreover, the Commission believes that
because industry representatives will continue to be represented on
each hearing panel, their market expertise will continue to provide a
central role in the disciplinary process.188
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\188\ One commenter recommends that at least one person serving
as a panelist on a hearing panel or extended hearing panel ``be
engaged in similar activities within the securities industry as the
respondent.'' ABA Letter, supra note 9, at 67. The Commission agrees
with the NASD's view that in order to avoid selecting a panelist
with a conflict of interest or bias, ``expertise'' should not be
considered as the only factor in the selection process.
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(c) Ex parte communications prohibited. Proposed Rule 9143 defines
and prohibits ex parte communications between the disciplinary panels
and the Parties or their representatives. In the Commission's view, it
is reasonable for the NASD to prohibit ex parte communications between
the disciplinary panels and the parties or their representatives during
the disciplinary proceedings. The Commission also believes that the
boundaries set by the NASD in the ex parte communication rule should
help to ensure that no party can unfairly advance his or her position
in a disciplinary proceeding through discussions outside of the
proceeding's forum.
In addition, the Commission believes the parties subject to the
prohibition on ex parte communications include those who reasonably
would be expected to participate in a disciplinary proceeding.
Specifically, the parties defined in Rule 9120(v), persons identified
with such parties,189 an adjudicator, as defined in Rule
9120(a), and persons identified with such adjudicator, are subject to
the ex parte communication rule.190
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\189\ Each group consists of at least a party, and his or her
counsel or representative. In disciplinary proceedings, the relevant
group includes the respondent or the several respondents (each a
member firm or an associated person), and counsel or
representatives. The Department of Enforcement, and Interested
Association Staff, as defined in Rule 9120(q) is subject to the ex
parte prohibition.
\190\ The adjudicatory group that is prohibited from making or
receiving prohibited communications includes the adjudicator and any
person, such as a law clerk or other person, who is engaged in
advising the adjudicator, including a Governor, a Director or an
adjudicator who is participating in a decision with respect to that
proceeding, or [to] an NASD employee who is participating or
advising in the decision of a Governor, a Director, or an
adjudicator with respect to that proceeding.
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The Commission also believes it is reasonable to establish an
objectively determinable point in time when the prohibition of ex parte
communications commences. Specifically, the prohibition applies upon
``the authorization of a complaint * * * unless the person responsible
for the communication has knowledge that the complaint will be
authorized, in which case the prohibitions shall apply beginning at the
time of his or her acquisition of such knowledge.'' 191 The
proposed rule also indicates that in no case shall the prohibition
begin to apply later than the time at which a proceeding is noticed for
hearing. The Commission recognizes the importance of providing parties
and adjudicators and those associated with each group with an
identifiable point in time that the prohibition begins. Accordingly,
the Commission believes that the NASD's proposed standard reasonably
provides those relevant groups with adequate notice of their
obligations under this rule.
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\191\ Proposed Rule 9143.
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In the Commission's view, it is also reasonable for a respondent
(or potential respondent) to be deemed to have waived his or her
protections under the ex parte communications prohibition if: (1) a
respondent submits an offer of settlement; or (2) a member or a person
associated with a member executes an AWC or a MRV. This waiver should
help to ensure that the disciplinary process operates efficiently by
providing all persons involved in the settlement process or the pre-
complaint resolution process with the flexibility to attempt to dispose
of a disciplinary matter.
(d) Motions practice, discovery, and pre-hearing procedures. The
Commission believes it is reasonable for the NASD to establish a formal
motions practice in the Code of Procedure. The general provisions
governing motions practice are set forth in proposed Rule 9146. The
Commission notes that the establishment of a formal motions practice in
NASD disciplinary proceedings provides a framework for parties to move
for various forms of relief including, but not limited to, a more
definite statement; summary disposition; recusal or disqualification of
an adjudicator; and leave to introduce additional evidence. The
Commission believes the establishment of a formal motion practice
should enhance the fair and efficient operation of the disciplinary
proceedings.
The Commission also believes that the NASD's proposed discovery
provisions
[[Page 43404]]
reasonably address the need for respondents subject to a disciplinary
proceeding to have broader documentary discovery rights.192
Specifically, proposed Rules 9251 through 9253 provide for the
discovery of non-privileged and otherwise unprotected documents by
respondents in a disciplinary proceeding. Under the proposed rules, a
respondent has a right to obtain certain documents and the right to
insist upon their production based upon a schedule set forth in the
rules.193 The Commission notes that the proposed discovery
rules should help to ensure that a respondent will receive
nonprivileged and otherwise unprotected documents in advance of the
initial hearing (or soon thereafter if the Department of Enforcement
received the requested document after the commencement of the hearing).
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\192\ One commenter suggests that Federal Rule of Evidence 501
(for privilege issues) and Federal Rule of Civil Procedure 26(b)(3)
(for work-product immunity issues) should be used as a model. ABA
Letter, supra note 9, at 89-90. The Commission believes that it is
reasonable for the NASD to decide not to incorporate these rules
into the Code of Procedure. The Commission agrees with the NASD's
view that it must provide a fair process but is not limited by the
specific evidentiary rules relating to privilege in the Federal
Rules of Evidence and the Federal Rules of Civil Procedure.
The commenter also suggests that the right to an interlocutory
appeal should be available to contest any ruling denying a claim of
attorney-client privilege or work-product privilege. ABA Letter,
supra note 9, at 46-48. The Commission agrees with the NASD's view
that privilege issues are very important, but to grant interlocutory
review as a right regarding every contested privilege issue would
impede the effective operation of the SRO adjudicatory process.
\193\ One commenter believes that the proposed discovery rule
should not include a standard regarding materiality and relevance in
the post-complaint time frame. ABA Letter, supra note 9, at 85. The
Commission believes that it is reasonable for the NASD to subject a
secondary production of documents to a material relevance standard
so that the Department of Enforcement is not forced to turn over
documents that are not relevant to the proceeding initiated and may
relate to a potential, but yet-to-be named respondent as part of the
same investigation file.
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In addition, the Commission believes it is reasonable for the
Department of Enforcement to withhold a document that is privileged,
constitutes attorney work product, is an examination or inspection
report, is an internal memorandum or writing prepared by NASD staff
that will not be offered in evidence, or is correspondence between the
NASD and state, federal, or foreign regulatory authority or an
SRO.194 Under such circumstances, the hearing officer may
require the Department of Enforcement to submit a list of the documents
withheld,195 and may conduct an in camera inspection of any
such documents to determine whether they should be produced.
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\194\ One commenter believes that the only documents that the
staff should be able to withhold are privileged documents or
documents constituting attorney work product. ABA Letter, supra note
9, at 89-90. The Commission believes that the NASD's proposed
discovery provisions should both protect a respondent's discovery
rights, while ensuring that the NASD's enforcement efforts are not
impaired.
\195\ One commenter believes that the enforcement staff should
be required to provide a list of all documents it obtains to the
respondent, and the hearing officer, not the enforcement staff,
should make determinations of relevance. ABA Letter, supra note 9,
at 85. The Commission agrees with the NASD' view that it would be
inappropriate to mandate a withheld document list in every case
because it might enable a reader to trace the course of an
investigation, forcing improper disclosure about the investigation
and the investigatory process in circumstances that could impede a
continuing investigation of another member or associated person.
Moreover, the Commission believes that the NASD has proposed a
reasonable standard in proposed Rule 9251(c) under which a
respondent may move to require the Department of Enforcement to
produce a list of documents withheld if the motion is based upon
``some reason to believe that a document is being withheld in
violation of the Code.'' Amendment No. 3, supra note 6.
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The Commission also believes that the proposed rules regarding pre-
hearing procedures should help to ensure that disciplinary proceedings
run fairly and efficiently, and should improve the overall quality of
the hearing. Specifically, the proposed rules grant the hearing officer
discretionary authority to require the parties to participate in pre-
hearing conferences or to file a variety of informational materials in
advance of the hearing. According to the NASD, these conferences are
intended, among other things, to: expedite the disposition of the
proceeding; establish procedures to manage the proceeding efficiently;
and improve the quality of the hearing through more thorough
preparation. In the Commission's view, effective planning and increased
control over the proceeding by the hearing officer during the pre-
hearing phase should provide for a more fair and efficient disciplinary
process.
(e) Pro se respondents. The Commission recognizes that the enhanced
procedural requirements and protections set forth in the disciplinary
procedures should improve the fairness and efficiency of a disciplinary
proceeding, but could disadvantage some pro se respondents. In response
to the Commission's concerns, the NASD has represented that, through
the NASD Regulation's Office of Dispute Resolution and the chief
hearing officer, it is committed to providing a fair forum for all
parties. Accordingly, the chief hearing officer and all hearing
officers will adopt as a practice the flexible approach of state and
federal judicial proceedings. Pro se respondents will be granted
waivers from certain procedural requirements 196 or
otherwise be excused from fully or partially complying with certain
procedural or technical rules to the extent that the adjudicator may
allow, while continuing to: (i) Provide fair notice to other parties of
the issues before the adjudicator; (ii) provide the parties an
opportunity to respond to the issues; and (iii) establish and maintain
a record for any appeal of the matter. The Commission believes that
this approach should provide a fair method in which to promote the
efficient administration of disciplinary proceedings with respect to
pro se respondents.
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\196\ For example, the NASD states that in certain circumstances
it would be appropriate to excuse a pro se respondent from complying
with certain requirements in Rule 9146 regarding motions practice.
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(f) Offers of settlement, AWCs, MRVs. The Commission believes that
the NASD has proposed a reasonable framework in governing the
settlement of cases prior to the filing of a complaint, and the
settlement procedures after a complaint has been filed. Specifically,
an AWC is a letter that a person or a member agrees to execute to
resolve a potential disciplinary matter in a pre-complaint environment.
An MRV is a letter that a person or a member agrees to execute to
resolve a potential disciplinary matter prior to the issuance of a
complaint.\197\ Finally, an offer of settlement is an offer made by a
respondent in order to resolve the matter prior to the issuance of a
decision on the merits. The Commission notes that current provisions
governing each of these proceedings have been substantially
incorporated into the proposed Code of Procedure.
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\197\ Proposed Rule IM-9216 (listing those specific types of
violations appropriate for disposition under the minor rule
violations plan).
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Because AWCs, MRVs, and offers of settlement are executed
voluntarily by a respondent, or a person about to be named as a
respondent, the NASD also proposes to require, before going forward
with such procedures, a party (or a potential party) to agree to waive
the protections offered against ex parte communications and the
separation of functions provisions in proposed Rule 9144. As noted
above, the Commission recognizes that this waiver should help to ensure
that the disciplinary process operates efficiently by providing all
persons involved in the settlement process or the pre-complaint
resolution process with the flexibility to attempt to dispose of a
disciplinary matter. The Commission notes, however, that if the AWC,
MRV, or offer of settlement is not accepted by the final adjudicator,
the
[[Page 43405]]
rejected document does not constitute a part of the record in any
proceeding. In addition, the NASD proposes to allow the NBCC to
delegate authority to the General Counsel of NASD Regulation to accept
or refer to the NBCC for its consideration AWCs, MRVs, and uncontested
offers of settlement. Further, the NASD proposes to allow the NBCC to
delegate to the Chair and the Vice Chair of the NBCC the authority to
accept or reject such AWCs, MRVs, and offers of settlement. A contested
offer of settlement and order of acceptance may be accepted or rejected
only by either the full NBCC or the Chair and Vice Chair, as provided
in proposed Rule 9270(f)(2). The Commission believes that these
delegation provisions should help to allow the NBCC to concentrate on
contested disciplinary matters and those matters raising policy
questions.
(g) NBCC and NASD Regulation/NASD Board Review. In the Commission's
view, the call for review and appellate process set forth in the
proposed Rule 9300 Series provide a reasonable interim system for
reviewing lower-level decisions. As noted above, the NASD Board has
recently approved a subsequent corporate restructuring, which will, in
part, eliminate the additional NASD Regulation Board layer of review.
The NASD proposed rules provide the NBCC the authority to review any
disciplinary proceeding for which a first or ``trial-level'' decision
has been rendered. Also, a respondent or the Department of Enforcement
may appeal to the NBCC any ``trial-level'' decision, including a
default decision.\198\ The Commission believes that it is appropriate
for the Department of Enforcement staff to determine whether an appeal
should be filed.
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\198\ A respondent may not ``appeal'' any final action contained
in an AWC, an MRV or an offer of settlement that has been accepted
by any of the General Counsel of NASD Regulation, the Chair and the
Vice Chair of the National Business Conduct Committee, or the
National Business Conduct Committee (proposed Rules 9216 (a) and
(b), and 9270).
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In addition, the NBCC's decision whether to call a case for review
rests with an NBCC Review Subcommittee. The two to four person Review
Subcommittee must be composed of current members of the NBCC, and must
include a balance of non-industry Directors and industry Directors, or,
if not balanced, shall include a majority of non-industry Directors.
Also, the General Counsel of NASD Regulation, by delegation of the
authority of the NBCC, may determine if a default decision issued
pursuant to Rule 9269 should be reviewed by the NBCC.
The NBCC subcommittees and extended proceeding committees act as
the appeal forum and recommend decisions to the full NBCC in writing
not later than seven days before the meeting of the NBCC at which the
disciplinary proceeding is considered. At the same time, all other
Directors who sit on the NASD Regulation Board also receive the written
recommended decision. After considering all matters presented in the
appeal or review, the written recommended decision of the subcommittee
(or, if applicable, the extended proceeding committee), and after
reaching its conclusions on the issues, the NBCC prepares a proposed
written decision.\199\ The proposed written decision of the NBCC may be
called for review by, respectively, any Director of the NASD Regulation
Board, and any Governor of the NASD Board. The opportunity for a
Director or Governor to call a case for review occurs sequentially. In
the Commission's view, these procedures should provide an efficient,
fair, and balanced framework for reviewing lower-level decisions.
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\199\ Specifically, the decision must include:
(1) a statement describing the investigative or other origin of
the disciplinary proceeding;
(2) the specific statutory or rule provisions that were alleged
to have been violated;
(3) a statement setting forth the findings of fact with respect
to any act or practice the respondent was alleged to have committed
or omitted;
(4) the conclusions as to whether the respondent violated any
provision alleged in the complaint;
(5) a statement in support of the disposition of the principal
issues raised in the proceeding; and
(6) a statement describing any sanction imposed, the reasons
therefore, and, pursuant to Rule 9360, the date upon which such
sanction shall become effective.
Proposed Rule 9349(b) (1)-(6).
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(h) Recusal or disqualification. The Commission believes that the
NASD has proposed a reasonable standard under which an adjudicator must
recuse him or herself or may be disqualified by motion. Specifically,
the standard (as set forth in proposed Rules 9160, 9233, 9234, and
9332) is ``a conflict of interest or bias, or circumstances otherwise
exist where the * * * [Adjudicator's] fairness might reasonably be
questioned.'' The NASD sets forth in the rules the various persons or
groups that may act as an adjudicator and therefore would be subject to
disqualification or recusal procedures. Specifically, Governors,
Directors, members of the NBCC and certain subcommittees, panelists of
hearing panels or extended hearing panels, hearing officers, and
members of the staff of the Department of Member Regulation are subject
to possible disqualification under the standard set forth above.
One commenter recommends that proposed Rule 9160 regarding recusal
or disqualification set forth procedural steps that must be followed in
seeking disqualification of Governors, Directors, NBCC Committee
members, and certain NASD Regulation staff when serving an adjudicatory
role.\200\ The Commission agrees with the NASD's view that additional
procedures are unnecessary because an adjudicator will recuse him or
herself when he or she has a conflict of interest or a bias, and other
members of a board or committee have the ability to suggest recusal or
seek disqualification if the member does not act promptly to recuse him
or herself.
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\200\ ABA Letter, supra note 9, at 52.
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The same commenter also proposes that the right to an interlocutory
appeal should be available to contest any situation in which a panelist
refuses to recuse him or herself. The Commission agrees with the NASD's
view that the right of an interlocutory appeal is unnecessary because
(1) a party may challenge the panelist through a disqualification
motion; and (2) persons other than parties may inform the chief hearing
officer or hearing officer of disqualifying factors, providing another
avenue to remove a panelist from a hearing panel.\201\
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\201\ NASD Response, supra note 6, at 10.
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The Commission also notes that clarity in this area is highly
desirable because the proposed rule allows the Chairs and Vice Chairs
of the NBCC, and the respective Chairs of the NASD and NASD Regulation
Boards to order the disqualification of their competitors sitting on
the applicable boards, committees, and subcommittees. The Commission
believes the standard set forth in the rules should provide a
reasonable framework in which to make such determinations.
(i) Contemptuous conduct. The Commission believes that it is
appropriate for the NASD to allow for sanctions for conduct that
violates orders of a hearing officer, a hearing panel or, if
applicable, an extended hearing panel, and for other contemptuous
conduct during a hearing. Specifically, the hearing officer, hearing
panel or, if applicable, an extended hearing panel, can sanction
contemptuous conduct by ruling, among other things, that: the subject
matter of the violated order or any other designated facts be taken as
established for purposes of the proceeding; the violator or
contemptuous party be precluded from supporting or opposing certain
claims or defenses, or precluded from introducing evidence on certain
[[Page 43406]]
matters; and particular pleadings or parts thereof be stricken.
Proposed Rule 9280(b)(2) provides for the imposition of sanctions
for a party's unjustified refusal to make disclosures required by the
proposed Rule 9240 and 9250 Series, or otherwise required by order of a
hearing officer, hearing panel, or, if applicable, an extended hearing
panel. Unless the failure to make disclosures is harmless, the
recalcitrant party is precluded from using any of the information
withheld or the testimony of the witness that was not disclosed as
evidence at the hearing, or otherwise relying on such information or
testimony. This sanction may be imposed in addition to, or in lieu of,
the various restrictions on the conduct of the case authorized by
proposed Rule 9280(b)(1). Further, under proposed Rule 9280(c), absent
reasonable basis, a party's failure to admit the genuineness of a
document that is later found to be genuine may also be subject to the
sanctions listed in proposed Rule 9280(b)(1).
Proposed Rule 9280, read in conjunction with proposed Rule 9150,
also authorizes a hearing officer, hearing panel, or, if applicable, an
extended hearing panel to exclude an offending attorney or person
acting in a representative capacity from functioning as such in the
particular proceedings. In this regard, proposed Rule 9141(b) also
makes clear that the right to representation in a disciplinary
proceeding is subject to the power to exclude a party's representative
or attorney under proposed Rules 9150 and 9280. Under proposed Rule
9280(c), an attorney or representative who is excluded from
participating in a disciplinary proceeding may seek immediate review of
the exclusion order by the NBCC by filing a motion to vacate within
five days after service of the order. The filing of such a motion
operates to stay all aspects of the disciplinary proceeding, pending
expedited consideration and a prompt decision by the NBCC. The
Commission believes these sanctioning powers provide a reasonable means
for these adjudicators to maintain acceptable levels of conduct by the
parties and their representatives when participating in a disciplinary
proceeding.
2. Members Experiencing Financial or Operating Difficulties; Summary
Suspensions; and Procedures for Exemptions From Certain NASD Rules
The Commission believes the proposed changes regarding the Rule
9400, 9500 and 9600 Series improve the current procedures and should
provide a fair and efficient means to address: (1) Limitations of the
activities of members experiencing financial or operational
difficulties; (2) summary and non-summary suspension, cancellation,
bar, limitation or prohibition on access to NASD services; (3)
eligibility; and (4) exemptions from specific NASD rules. The
Commission believes the proposed rule change is consistent with
Sections 15A(b)(6),202 15A(b)(9),203 and
15A(h)(3) 204 of the Act. The Commission also believes the
proposed changes to these procedures are reasonably taken in
furtherance of and are consistent with the Undertakings.205
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\202\ 15 U.S.C. Sec. 78o-3(b)(6).
\203\ 15 U.S.C. Sec. 78o-3(b)(9).
\204\ 15 U.S.C. Sec. 78o-3(h)(3).
\205\ SEC Order, supra note 10.
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Undertaking 4 requires the NASD ``[t]o provide[] for the autonomy
and independence of the regulatory staff of the NASD and its
subsidiaries such that the staff, subject only to the supervision of
the Board of Governors of the NASD and the Boards of Directors of NASDR
and Nasdaq * * * has sole discretion as to what matters to investigate
* * * .''206 In addition, Undertaking 5 requires that the
NASD ``promulgate and apply on a consistent basis uniform standards for
regulatory and other access issues * * * and institute safeguards to
ensure fair and evenhanded access to all services and facilities of the
NASD.'' 207
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\206\ Undertakings, supra note 15.
\207\ Undertakings, supra note 15.
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In the Commission's view, the proposal should provide an adequate
procedural framework for the Rule 9400, 9500, and 9600 Series,
enhancing the fair and efficient operation of these rule series.
Specifically, the amended proceedings incorporate a great number of
procedural improvements that should provide members and persons
associated with members clearer, more detailed, and more streamlined
procedures for the above-described proceedings.
The Commission notes that, pursuant to proposed Rule 9110, the new
Rule 9400 through 9600 Series procedures are governed by the provisions
of the Rule 9100 Series, unless a rule specifically provides otherwise.
As discussed in detail above in Section IV.C.1, the Rule 9100 Series
defines certain terms and addresses notice, service and filing
procedures; motions practice; ex parte communications; separation of
adjudicatory and prosecutorial functions; and disqualification of
adjudicators under appropriate circumstances. The Commission believes
that it is reasonable for the NASD to establish these provisions for
the Rule 9400, 9500, and 9600 Series, because the provisions should
enhance the fair and efficient operation of the procedures governing
limitations of the activities of members experiencing financial or
operational difficulties; summary and non-summary suspension,
cancellation, bar, limitation or prohibition on access to NASD
services; eligibility; and exemptions from specific NASD rules.
In addition, the Commission believes the revisions and enhancements
to the Rule 9400 through 9600 Series procedures should help ensure that
participants in the proceedings are aware of their rights and
obligations under the Series, and will improve the overall quality of
the procedures and their outcomes. Specifically, the procedures under
these Series provide for notice to a member or associated person of the
grounds or basis for a notice or limitation; the nature of the sanction
or limitation; the effective date of such a notice; the consequences of
a failure to comply with a notice or the criteria that must be met to
have a notice removed (where appropriate); the member or associated
person's rights at a hearing; the definition of the record for each
proceeding; and the required components of a written decision under
these Series. For example, the Rule 9510 Series, governing summary and
non-summary suspension procedures, provides for service of notice of a
suspension by facsimile or overnight commercial courier to help ensure
that the subject of the suspension has adequate time to respond to such
a notice within the time-frames established by the series. In addition,
the Rule 9400 and 9500 Series provide for the retention of evidence
that is proffered but not accepted into the record until the date when
the NASD's decision becomes final or, if applicable, upon the
conclusion of any review by the Commission or the federal courts.
Further, the rules provide a mechanism for the member or associated
person to request and obtain review of a notice issued pursuant to the
Rule 9400 and 9500 Series. Each of the Rule 9400 and 9500 Series
procedures also provides for a call for review by the NASD Board (and,
in most cases, by the NASD Regulation Board as well), under procedures
similar to those for disciplinary proceedings under the Rule 9200 and
9300 Series. In addition, the Rule 9400 and 9500 Series require that
adjudicatory and prosecutorial functions remain
separated,208 and provide for the disqualification of an
adjudicator when there is ``a conflict of
[[Page 43407]]
interest or bias, or circumstances otherwise exist where the * * *
[adjudicator's] fairness might reasonably be questioned.''
209
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\208\ Proposed Rule 9144.
\209\ Proposed Rule 9160.
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The proposed Rule 9600 Series is intended to centralize exemptive
authority in NASD Regulation staff that is now, pursuant to current
rules, delegated to various standing committees. The proposed Rule 9600
Series governing exemptions for certain NASD rules also contains some
of the procedural enhancements present in the Rule 9400 and 9500
Series, including service requirements, components of the decision,
procedure to appeal a decision and obtain a hearing, and the
opportunity to present oral evidence. The Commission notes that
applicants for exemptions have a right of appeal, which will be heard
by a sub-committee appointed by the NBCC. The decision then issued by
the NBCC constitutes final action of the NASD, and will not be subject
to a call for review by the NASD Board. The Commission notes that the
authority of the NBCC over exemption decisions pursuant to the Rule
9600 Series is a delegation from the NASD Board, leaving the NASD Board
ultimately responsible for the fairness of the exemption proceedings
and procedures.210
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\210\ The Commission understands that the fairness of exemption
proceedings will be within the scope of responsibility of the NASD
Board's Audit Committee.
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The Commission believes that the NASD's proposal to modify the Rule
9400 through 9600 Series is reasonable, and should improve the
procedures for limitations of the activities of members experiencing
financial or operational difficulties; summary and non-summary
suspension, cancellation, bar, limitation or prohibition on access to
NASD services; eligibility; and exemptions from specific NASD rules.
The Commission believes that the proposed Rule 9400 through 9600 Series
will assist the NASD in promulgating and applying on a consistent basis
uniform standards for regulatory and other access issues, as well as
instituting safeguards to ensure fair and evenhanded access to all
services and facilities of the NASD, consistent with the 21(a) Report
and the Undertakings. In conclusion, the Commission finds that proposed
Rule 9400, 9500 and 9600 Series are consistent with the Act, and should
enhance both the fair and efficient operation of the NASD, and the
dispassionate and fair application of the rules in the NASD's
regulatory activities.
D. Effectiveness of the Proposed Rules
The NASD has proposed a transition schedule for the procedures
approved in this order. In the Commission's view, the schedule proposed
by the NASD for implementation as discussed in detail in Section II.D.,
should help to assist in the transition to the new procedures.
V. Amendment No. 2
The Commission finds good cause for approving Amendment No. 2 prior
to the thirtieth day after the date of publication of notice thereof in
the Federal Register. Specifically, Amendment No. 2 sets forth proposed
changes to the proposed Rule 9400 and 9500 Series and proposes to seek
approval of the proposed Rule 9600 Series. The Commission notes that
Amendment No. 2, which amends the proposed Rule 9400, 9500 and 9600
Series, was noticed and published for the full 21-day comment period,
and no comments were received. Further, as discussed above, the
Commission believes that the proposed Rule 9400, 9500 and 9600 Series
are consistent with the Act, and should enhance both the fair and
efficient operation of the NASD's disciplinary proceedings and the
dispassionate application of the rules and fairness in the NASD's
disciplinary process, as well as other regulatory activities. Finally,
the acceleration of the effectiveness of Amendment No. 2 will enable
the Commission to approve the proposed Rule 9400, 9500 and 9600 Series
concurrent with the other major modifications to the NASD's rules as
proposed in SR-NASD-97-28. Therefore, the Commission believes granting
accelerated approval to Amendment No. 2 is appropriate and consistent
with Section 19(b)(2) of the Act.211
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\211\ 15 U.S.C. Sec. 78s(b)(2).
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VI. Amendment No. 3
The Commission finds good cause for approving Amendment No. 3 prior
to the thirtieth day after the date of publication of notice thereof in
the Federal Register. As noted above, the NASD made several
modifications to the disciplinary proceeding rules in Amendment No. 3
to the proposed rule change, including expanding the pool of persons
eligible to serve as panelists in a disciplinary proceeding, defining
the administrative and ministerial role of the Counsel to the NBCC,
providing greater flexibility for an attorney to withdraw from a
proceeding with good cause without 30 days notice, and eliminating the
right of the Department of Enforcement to move for summary disposition
of a disciplinary proceeding. In addition, the proposed changes made to
the Rule 8000 Series in Amendment No. 3 were technical, non-substantive
amendments. Finally, the NASD made several modifications to the
membership application process including adding a requirement that,
once approved, a member must return an executed membership agreement
within twenty-five days of service of the agreement, inserting language
in several sections permitting an applicant and the NASD to modify
certain deadlines by agreement, codifying the procedural protections
afforded new member applications in the business restrictions section,
and certain other clarifying changes.
The Commission believes the NASD's proposed changes in Amendment
No. 3 further strengthen and clarify the proposed rule change and raise
no new regulatory issues. Further, the Commission believes that
Amendment No. 3 does not significantly alter the Original Proposal
which was subject to a full notice and comment period. Therefore, the
Commission believes that granting accelerated approval to Amendment No.
3 is appropriate and consistent with Section 19(b)(2) of the
Act.212
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\212\ 15 U.S.C. Sec. 78s(b)(2).
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VII. Amendment No. 4
The Commission finds good cause for approving Amendment No. 4 prior
to the thirtieth day after the date of publication of notice thereof in
the Federal Register. Specifically, Amendment No. 4 makes several
technical non-substantive changes to the proposal such as identifying
appropriate cross-references and correcting typographical errors in the
Rule 9100-9300 Series of the Code of Procedure. The Commission believes
that proposed Amendment No. 4 raises no new regulatory issues.
Therefore, the Commission believes granting accelerated approval to
Amendment No. 4 is appropriate and consistent with Section 19(b)(2) of
the Act.213
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\213\ 15 U.S.C. Sec. 78s(b)(2).
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VIII. Amendment No. 5
The Commission finds good cause for approving Amendment No. 5 prior
to the thirtieth day after the date of publication of notice thereof in
the Federal Register. Specifically, Amendment No. 5 makes a technical
change to the proposal, deleting the requirement for signatures of each
member of a hearing panel on a disciplinary decision. Further, as
discussed in detail above, Amendment
[[Page 43408]]
No. 5 describes the effective date for each component of the NASD's
proposal. The Commission believes that proposed Amendment No. 5 raises
no new regulatory issues. Therefore, the Commission believes granting
accelerated approval to Amendment No. 5 is appropriate and consistent
with Section 19(b)(2) of the Act.214
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\214\ 15 U.S.C. Sec. 78s(b)(2).
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IX. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning Amendment Nos. 3, 4 and 5 to the proposed rule
change. 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
Amendment Nos. 3, 4 and 5 that are filed with the Commission, and all
written communications relating to Amendment Nos. 3, 4 and 5 between
the Commission and any persons, other than those that may be withheld
from the public in accordance with the provisions of 5 U.S.C. Sec. 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 File No. SR-NASD-97-28 and should be
submitted by September 3, 1997.
X. Conclusion
For all of the aforementioned reasons, the Commission finds that
the proposed rule change is consistent with the requirements of the Act
and the rules and regulations thereunder applicable to a national
securities association.
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,215 that the proposed rule change (SR-NASD-97-28) is
approved, including Amendment Nos. 2, 3, 4, and 5 on an accelerated
basis.
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\215\ 15 U.S.C. Sec. 78s(b)(2).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.216
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\216\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-21330 Filed 8-12-97; 8:45 am]
BILLING CODE 8010-01-P