[Federal Register Volume 64, Number 215 (Monday, November 8, 1999)]
[Notices]
[Pages 60869-60870]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-29157]
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SECURITIES AND EXCHANGE COMMISSION
(Release No. 34-42091; File No. SR-NASD-99-15)
Self-Regulatory Organizations; National Association of Securities
Dealers, Inc.; Order Approving Proposed Rule Change and Notice of
Filing and Order Granting Accelerated Approval of Amendment No. 2
Relating to the National Adjudicatory Council's Call For Review of
Membership Decisions
November 2, 1999.
I. Introduction
On March 19, 1999, the National Association of Securities Dealers,
Inc. (``NASD'' or ``Association'') through its wholly-owned subsidiary,
NASD Regulation, Inc. (``NASD Regulation''). filed with the Securities
and Exchange Commission (``SEC'' or ``Commission''), pursuant to
Section 19(b)(1) of the Securities Exchange Act of 1934 (the
``Act''),\1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to
temporarily suspend the National Adjudicatory Council's (``NAC's'')
oversight of membership applications approved by district staff. On
April 16, 1999, the Association filed Amendment No. 1 to the
proposal.\3\ The proposed rule change and amendment were published in
the Federal Register on April 26, 1999.\4\ On October 20, 1999, the
NASD filed Amendment No. 2 to the proposal.\5\ The Commission received
no comments on the proposal. This notice and order approves the
proposed rule change, as amended, and solicits comments from interested
persons on Amendment No. 2.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See letter from Alden S. Adkins, Senior Vice President and
General Counsel, NASD Regulation, to Katherine A. England, Assistant
Director, Division of Market Regulation (``Division''), Commission
(April 16, 1999) (``amendment No. 1'').
\4\ Securities Exchange Act Release No. 41311 (April 20, 1998),
64 FR 20347.
\5\ See letter from Alden S. Adkins, Senior Vice President and
General Counsel, NASD Regulation, to Katherine A. England, Assistant
director, Division, Commission (October 18, 1999) (``Amendment No.
2''). In Amendment No. 2, the NASD requests that the proposed end
date of the temporary suspension of NASD Rule 1015 be change from
October 31, 1999 to December 31, 1999.
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II. Description of the Proposal
The purpose of the proposed rule change is to temporarily suspend
the NAC's oversight responsibilities under NASD rule 1015 requiring
review of membership decisions made by NASD district staff, while the
Association considers other options for review of the membership
admission process. Currently, NASD Rule 1015(a)(2) provides that a
membership decision rendered by the Department of Member Regulation
shall be subject to a call for review by the NAC. According to the
NASD, the NAC has never been able to adequately perform this function.
Therefore, the Association proposes formal suspension of this function
until December 31, 1999,\6\ while it attempts to devise and implement
new review procedures.
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\6\ Id.
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In August 1997, the SEC approved substantial revisions to the
membership review processes to conform the rules to the requirements of
the August 8, 1996 SEC Order correcting abuses in certain NASD
procedures (``Order').\7\ Following the Order, the authority to approve
membership application was transferred from NASD District Business
Conduct Committees to NASD Regulation staff.\8\ Applicants granted
restricted membership or refused admission could appeal to the National
Business Conduct Committee (``NBCC''), the NAC's predecessor, which was
also charged with oversight of admissions.\9\ During consideration of
the revisions to the NASD admissions process in 1997, the call for
review provision was included in the Rule 1010 Series so that members
would have a mechanism to provide input on membership decisions.
Nonetheless, the NBCC, which requested the change, was primarily
concerned about decisions approving unrestricted memberships. Since a
successful applicant would have no incentive to appeal an unrestricted
admission, the NBCC wished to have a
[[Page 60870]]
mechanism to review the unrestricted admissions, if warranted.
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\7\ Securities Exchange Act Release No. 37538 (Aug. 8, 1996)
(SEC 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.).
\8\ Securities Act Release Nos. 39350 (Nov. 21, 1997), 62 FR
64000 (Dec. 3, 1997) and 39470 (Dec. 19, 1997), 62 FR 67927 (Dec.
30, 1997) (Notice and Notice and Accelerated Approval of File No.
SR-NASD-97-81, respectively.)
\9\ The Association asserts that during consideration of the
revisions to the NASD admissions process in 1997, the call for
review provision was included in the Rule 1010 Series so that
members would have a mechanism to provide input on membership
decisions.
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The Association has never been able to implement the NAC's call for
review authority. The NASD states that several attempts have been made
to do so, none of the procedures tried have been particularly
effective.\10\ Therefore, the NAC and the NASD Board agreed to request
temporary suspension of the NAC's review responsibilities. At the same
time, the Association asserts that it will review the NASD Rule 1010
Series admissions procedures in their entirety, including the role of
the NAC in that process. The Association expects to conclude its review
by December 31, 1999.\11\
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\10\ For example, the Association contemplated limiting the
number of staff decisions to be considered for a call for review by
focusing the process on certain categories of decisions, such as
only new member application decisions or certain types of business
expansions. The NASD determined, however, that such a procedure
might be perceived as biased against those firms that fell within a
selected category.
\11\ See note 5, above.
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III. Discussion
The Commission finds that the proposed rule change is consistent
with the provisions of Section 15A of the Act,\12\ and particularly
Section 15A(b)(8) thereof.\13\ Section 15A(b)(8) requires that the
rules of a national securities association provide a fair procedure for
the denial of membership to any person seeking membership therein.\14\
This must be balanced against the more general requirement that the
rules of a national securities association promote the public interest
and the protection of investors. Thus, while the Commission finds that
it is reasonable to temporarily suspend the NAC's call for review
responsibilities until December 31, 1999,\15\ during that time the
Association must actively seek to develop an effective mechanism for
reviewing unrestricted memberships approved by its district office
staff, which the NASD has represented may be heightened oversight NASD
headquarters staff of the NASD district membership decisions.\16\
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\12\ 15 U.S.C. 78o-3.
\13\ 15 U.S.C. 78o-3(b)(8).
\14\ Id.
\15\ See note 5, above.
\16\ The Commission notes that even prior to the noticing of
this proposed rule change the NASD represented that it was working
to achieve a workable solution to the implementation problems, and
that significant progress was being made. This representation is
critical to the Commission's approval of this proposal.
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The Commission notes, notwithstanding its approval of the
Association's proposal to temporarily suspend NASD Rule 1015, the NASD
is still responsible for all oversight of membership admissions
decisions, both restricted and unrestricted. In addition, during the
temporary suspension of NASD Rule 1015, the approved procedures for the
denial of membership to any person seeking NASD membership will not be
affected. In approving the Association's proposal, the Commission
relies upon the NASD's representation that the proposed rule change
will neither alter a membership applicant's ability to independently
seek NAC review of a membership decision, nor prejudice a membership
applicant's rights under the NASD Rules.
The Commission finds good cause to approve Amendment No. 2 to the
proposed rule change prior to the thirtieth day after the date of
publication of notice of filing of the amendment in the Federal
Register. Specifically, Amendment No. 2 changes the proposed end date
of the temporary suspension of NASD Rule 1015 from October 31, 1999, to
December 31, 1999. The Commission believes that the extension of the
temporary suspension of NASD Rule 1015 is reasonable in light of the
efforts taken by the NASD to find an appropriate resolution for the
review of membership decisions. The Commission notes that in NASD
Notice to Members 99-67 the NASD published its recommendations for new
procedures for the review of membership decisions for membership
comment. The Commission believes an extension of the temporary
suspension of NASD Rule 1015 should provide the Association with
adequate time to consider and integrate any comments into the review
procedures that will ultimately be implemented. Accordingly, the
Commission believes that there is good cause, consistent with sections
15A(b)(8) and 19(b) of the Act,\17\ to approve Amendment No. 2 to the
proposal on an accelerated basis.
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\17\ 15 U.S.C. 78o-3(b)(8) and 78s(b).
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning Amendment No. 2, including whether Amendment No. 2
is consistent with the Act. Persons making written submissions should
file six copies thereof with the Secretary, Securities and Exchange
Commission, 450 Fifth Street, NW., Washington, DC 20549-0609. Copies of
the submission, all subsequent amendments, all written statements with
respect to the proposed rule change that are filed with the Commission,
and all written communications relating to the proposed rule change
between the Commission and any person, other than those that may be
withheld from the public in accordance with the provisions of 5 U.S.C.
552, will be available for inspection and copying at the Commission's
Public Reference Room. Copies of such filing will also be available for
inspection and copying at the principal office of the NASD. All
submissions should refer to File No. SR-NASD-99-15 and should be
submitted by [insert date 21 days from the date of publication].
V. Conclusion
It is therefore Ordered, pursuant to Section 19(b)(2) of the
Act,\18\ that the proposed rule change, as amended, (SR-NASD-99-15) is
temporarily approved, until December 31, 1999.
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\18\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\19\
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\19\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-29157 Filed 11-5-99; 8:45 am]
BILLING CODE 8010-01-M