Federal Register / Vol. 62, No. 156 / Wednesday, August 13, 1997 / Notices 43385

1 15 U.S.C. § 78s(b)(1).

2 17 CFR 240.19b–4.

3Letter 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’’).

4Securities Exchange Act Release No. 38545 (Apr.

24, 1997), 62 FR 25226 (May 8, 1997) (publishing

notice of SR–NASD–97–28) (‘‘Original Proposal’’).

5Securities Exchange Act Release No. 38831 (July

11, 1997), 62 FR 38156 (July 16, 1997)

(‘‘Amendment No. 2’’).

6Letter 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.

7Letter 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’’).

8Letter 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).

9Letter 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’’).

10Securities 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’’).

11The 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.

Continued

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.

Jonathan G. Katz,

Secretary.

[FR Doc. 97–21366 Filed 8–12–97; 8:45 am]

BILLING CODE 8010–01–M

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 ByLaws 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.

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

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.

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
43386 Federal Register / Vol. 62, No. 156 / Wednesday, August 13, 1997 / Notices

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.

12Section 19(g)(1)(B) of the Act, 15 U.S.C.

§ 78s(g)(1)(B).

13 21(a) Report, supra note 10, at 39.

14SEC Order, supra note 10.

15Undertakings 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 selfregulatory 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 selfregulatory 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.

16For 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.

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

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.

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.

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

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
Federal Register / Vol. 62, No. 156 / Wednesday, August 13, 1997 / Notices 43387

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.

19The 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)).

disciplinary actions in view of the

enhancements to the disciplinary

process, including the change to staffinitiated 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).

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
43388 Federal Register / Vol. 62, No. 156 / Wednesday, August 13, 1997 / Notices

20The 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)).

21Amendment 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.

22The 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.

23Proposed 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).

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.

25To 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.

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).

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

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.
Federal Register / Vol. 62, No. 156 / Wednesday, August 13, 1997 / Notices 43389

26Amendment No. 3, supra note 6.

27The NASD also stated its intent to submit a

separate rule filing to amend its expedited remedial

proceedings. Original Proposal, supra note 4.

28Amendment No. 2, supra note 5.

29See current Rule 9510 Series.

30See current Rule 9530 Series.

31The NASD has stated it will inform its

membership of this change in procedure in a notice

to members. Amendment No. 2, supra note 5.

32See current Rule 9610 Series.

33See current Rule 9620 Series.

34See current Rule 9640 Series.

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

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.

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

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

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.

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.

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
43390 Federal Register / Vol. 62, No. 156 / Wednesday, August 13, 1997 / Notices

35See Amendment No. 5, supra note 8.

36First 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.

38Supra note 37.

39Telephone 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.

40Amendment No. 5, supra note 8.

41Original Proposal, supra note 4.

42Amendment No. 5, supra note 8.

recommendation, and the NBCC’s

findings and conclusions.

D. Effectiveness of the New

Procedures 35

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.

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.

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

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
Federal Register / Vol. 62, No. 156 / Wednesday, August 13, 1997 / Notices 43391

43Colish Letter, supra note 9.

44Colish 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.

45NASD Response, supra note 6, at 4.

46Colish Letter, supra note 9, at 5.

47NASD Response, supra note 6, at 4.

48Colish Letter, supra note , at 5.

49Amendment No. 3, supra note 6; NASD

Response, supra note 6, at 4.

50Colish Letter, supra note 9, at 6.

51For 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).

52NASD Response, supra note 6, at 5.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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
43392 Federal Register / Vol. 62, No. 156 / Wednesday, August 13, 1997 / Notices

53Colish Letter, supra note 9, at 7.

54NASD Response, supra note 6, at 5.

55ABA Letter, supra note 9.

56ABA Letter, supra note 9, at 8.

57NASD Response, supra note 6, at 6.

58NASD Response, supra note 6, at 6–7.

59Amendment No. 3, supra note 6.

60ABA Letter, supra note 6, at 13–14.

61NASD Response, supra note 6, at 7.

62ABA Letter, supra note 9, at 18.

63NASD Response, supra note 6, at 7.

64ABA Letter, supra note 9, at 19.

65ABA Letter, supra note 9, at 20.

66NASD Response, supra note 6, at 8.

67ABA Letter, supra note 9.

system, are somewhat redundant.53 In

addition, the commenter asserts that

those standards may be subject to wide

differences of opinion and subjective

judgment.

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.

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 postcomplaint 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.

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 selfregulatory organizations (‘‘SROs’’).59

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.

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

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.

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

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

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
Federal Register / Vol. 62, No. 156 / Wednesday, August 13, 1997 / Notices 43393

68ABA Letter, supra note 9, at 30–31.

69NASD Response, supra note 6, at 8.

70ABA Letter, supra note 9, at 34.

71NASD Response, supra note 6, at 8. See also

Amendment No. 3, supra note 6.

72ABA Letter, supra note 9, at 38.

73ABA Letter, supra note 9, at 39–40.

74NASD Response, supra note 6, at 8–9. See also

Amendment No. 3, supra note 6.

75NASD Response, supra note 6.

76ABA Letter, supra note 9, at 41.

77NASD Response, supra note 6, at 9.

78ABA Letter, supra note 9, at 46–48.

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

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

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

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

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

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

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

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

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
43394 Federal Register / Vol. 62, No. 156 / Wednesday, August 13, 1997 / Notices

79NASD Response, supra note 6, at 10.

80NASD Response, supra note 6, at 10.

81ABA Letter, supra note 9, at 49–50. See infra

discussion regarding ABA comments on proposed

Rule 9280.

82NASD Response, supra note 6. See also

Amendment No. 3, supra note 6.

83ABA Letter, supra note 9, at 52.

84NASD Response, supra note 6, at 11.

85ABA Letter, supra note 9, at 53–57.

86NASD Response, supra note 6, at 11.

87ABA Letter, supra note 9, at 64–65.

88NASD Response, supra note 6, at 11–12.

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

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

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

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

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

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

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

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

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
Federal Register / Vol. 62, No. 156 / Wednesday, August 13, 1997 / Notices 43395

89ABA Letter, supra note 9, at 67.

90NASD Response, supra note 6, at 12–13.

91ABA Letter, supra note 9, at 69.

92NASD Response, supra note 6, at 13.

93ABA Letter, supra note 9, at 71.

94ABA Letter, supra note 9, at 73.

95Proposed Rule 9232 sets forth criteria for the

chief hearing officer to consider when designating

a particular district committee as the primary

district committee.

96ABA Letter, supra note 9, at 74–75.

97Supra note 23.

98ABA Letter, supra note 9, at 75.

99NASD Response, supra note 6, at 13–14.

100Amendment No. 3, supra note 6.

101NASD Response, supra note 6, at 13–14.

102ABA Letter, supra note 9, at 81.

103NASD Response, supra note 6, at 14.

respondents will not have sufficient

time to prepare for the hearing. 89

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

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

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

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

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

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

Pursuant to proposed Rule 9241, prehearing 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 twentyone 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

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

Proposed Rule 9242 regarding prehearing submissions indicates that the
43396 Federal Register / Vol. 62, No. 156 / Wednesday, August 13, 1997 / Notices

104ABA Letter, supra note 9, at 82.

105NASD Response, supra note 6, at 14.

106ABA Letter, supra note 9, at 85.

107ABA Letter, supra note 9, at 89.

108ABA Letter, supra note 9, at 89–90.

109Further, 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.

110NASD Response, supra note 6, at 14–15.

111Amendment No. 3, supra note 6.

112NASD Response, supra note 6, at 14–15.

113ABA Letter, supra note 9, at 93.

114NASD Response, supra note 6, at 15–16.

115The 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.

116ABA Letter, supra note 9, at 95.

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 prehearing exchange of the information is

necessary.105

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

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 workproduct 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 selfregulatory system.108

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

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

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

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

The NASD believes it would be

inappropriate and unnecessary to

amend the minimum period for prehearing 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

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

The NASD states that to fulfill its SRO

enforcement responsibilities, it must

rely upon the voluntary cooperation of

firm customers. The NASD needs to
Federal Register / Vol. 62, No. 156 / Wednesday, August 13, 1997 / Notices 43397

117NASD Response, supra note 6, at 16.

118ABA Letter, supra note 9, at 98–103.

119NASD Response, supra note 6, at 16–17. See

also Amendment No. 3, supra note 6.

120ABA Letter, supra note 9, at 112–114.

121NASD Response, supra note 6, at 17–18.

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.

123ABA Letter, supra note 9, at 116.

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 videotaped testimony would be costly and,

therefore, will not occur routinely.117

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

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

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

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

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

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
43398 Federal Register / Vol. 62, No. 156 / Wednesday, August 13, 1997 / Notices

124NASD Response, supra note 6, at 18.

125ABA Letter, supra note 9, at 135–36.

126NASD Response, supra note 6, at 18–19.

127ABA Letter, supra note 9, at 137.

128Amendment No. 3, supra note 6.

129NASD Response, supra note 6.

130ABA Letter, supra note 9, at 138–39.

131Under proposed Rule 9370, other sanctions are

stayed when an application for review is filed.

132NASD Response, supra note 6, at 19.

133 15 U.S.C. § 78s(b).

134 15 U.S.C. § 78o–3.

135For 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. § 78c(f).

137 15 U.S.C. §§ 78o–3(b)(3), 78o–3(b)(8), 78o–

3(g)(3), and 78o–3(h)(2).

138SEC Order, supra note 10; see also

Undertaking 4, supra note 15.

139SEC Order, supra note 10; see also

Undertaking 4, supra note 15.

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

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

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

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

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

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

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.

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.

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
Federal Register / Vol. 62, No. 156 / Wednesday, August 13, 1997 / Notices 43399

140SEC Order, supra note 10; see also

Undertaking 5, supra note 15.

141 21(a) Report, supra note 10, at 41, A–74.

142Specifically, 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).

143The 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).

144Proposed Rule 1013(a)(4).

145Proposed Rule 1013(c)(3).

146Proposed Rule 1014(d)(1).

147Proposed Rule 1014(d)(3).

148Proposed Rule 1014(d)(3).

149Proposed Rule 1015(a).

150Proposed Rule 1015(f).

151Proposed Rule 1015(h).

152Proposed 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.

153Proposed Rule 1015(i)(3).

154Proposed Rule 1015(i)(3).

155Proposed Rule 1015(i)(4).

156For example, the NASD noted that training

sessions focusing on the proposed rules have been

Continued

evenhanded access to the NASD’s

services.140

1. Processing Membership Applications

The Commission noted in the 21(a)

Report that the District Committee (or a

subcommittee it created called the PreMembership 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.

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

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

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

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.

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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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.

157The 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.

158Colish Letter, supra note 9, at 4.

159Proposed Rule 1014(d)(3).

160SEC 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.

161Current Rule 1011(c)(1)–(6).

162Proposed 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.

163For 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.

164The 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.

165For 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).

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.

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

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.

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).

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.

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
Federal Register / Vol. 62, No. 156 / Wednesday, August 13, 1997 / Notices 43401

166Proposed 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).

167Proposed 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.

168 15 U.S.C. § 78o–3(b)(6).

169 15 U.S.C. § 78o–3(b)(9).

170Undertakings, supra note 15.

171Undertakings, supra note 15.

172See infra discussion of the disciplinary

proceedings in Section IV.C.1.

173See infra discussion of the disciplinary

proceedings in Section IV.C.1.

174NASD 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).

175See infra discussion of the disciplinary

proceedings in Section IV.C.1.

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

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.

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

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.

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.

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.

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.

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
43402 Federal Register / Vol. 62, No. 156 / Wednesday, August 13, 1997 / Notices

176 15 U.S.C. § 78o–3(b)(6).

177 15 U.S.C. § 78o–3(b)(8).

178Undertakings, supra note 15.

179Undertakings, supra note 15.

180 21(a) Report, supra note 10, at 35 n.91 and

accompanying text.

181 21(a) Report, supra note 10, at 35 n.91.

182See supra note 23.

183ABA Letter, supra note 9, at 75.

184SEC Order, supra note 10. See also

Undertakings, supra note 15.

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.

(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

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.

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 selfregulatory 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.

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

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.

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
Federal Register / Vol. 62, No. 156 / Wednesday, August 13, 1997 / Notices 43403

185 21(a) Report, supra note 10, at 35–39.

186ABA Letter, supra note 9, at 39–40.

187NASD Response, supra note 6.

188One 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.

189Each 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.

190The 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.

191Proposed Rule 9143.

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

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 nondispositive 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

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

(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

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.

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
43404 Federal Register / Vol. 62, No. 156 / Wednesday, August 13, 1997 / Notices

192One 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.

193One commenter believes that the proposed

discovery rule should not include a standard

regarding materiality and relevance in the postcomplaint 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.

194One 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.

195One 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.

196For 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.

197Proposed Rule IM–9216 (listing those specific

types of violations appropriate for disposition

under the minor rule violations plan).

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).

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.

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.

(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.

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
Federal Register / Vol. 62, No. 156 / Wednesday, August 13, 1997 / Notices 43405

198A 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).

199Specifically, 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).

200ABA Letter, supra note 9, at 52.

201NASD Response, supra note 6, at 10.

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.

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.

(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.

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

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
43406 Federal Register / Vol. 62, No. 156 / Wednesday, August 13, 1997 / Notices

202 15 U.S.C. § 78o–3(b)(6).

203 15 U.S.C. § 78o–3(b)(9).

204 15 U.S.C. § 78o–3(h)(3).

205SEC Order, supra note 10.

206Undertakings, supra note 15.

207Undertakings, supra note 15. 208Proposed Rule 9144.

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 nonsummary 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

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

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 nonsummary 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
Federal Register / Vol. 62, No. 156 / Wednesday, August 13, 1997 / Notices 43407

209Proposed Rule 9160.

210The Commission understands that the fairness

of exemption proceedings will be within the scope

of responsibility of the NASD Board’s Audit

Committee. 211 15 U.S.C. § 78s(b)(2).

212 15 U.S.C. § 78s(b)(2).

213 15 U.S.C. § 78s(b)(2).

interest or bias, or circumstances

otherwise exist where the * * *

[adjudicator’s] fairness might reasonably

be questioned.’’ 209

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

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

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

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

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
43408 Federal Register / Vol. 62, No. 156 / Wednesday, August 13, 1997 / Notices

214 15 U.S.C. § 78s(b)(2).

215 15 U.S.C. § 78s(b)(2). 216 17 CFR 200.30–3(a)(12).

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

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. § 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. SRNASD–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.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.216

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 97–21330 Filed 8–12–97; 8:45 am]

BILLING CODE 8010–01–P

OFFICE OF THE UNITED STATES

TRADE REPRESENTATIVE

Generalized System of Preferences

(GSP); Notice Regarding the 1997

Annual GSP Review and Completion of

the Expedited Indonesian Melamine

Dinnerware Review

AGENCY: Office of the United States

Trade Representative.

ACTION: Notice.

SUMMARY: This notice lists the petitions

that were accepted for the Annual

Generalized System of Preferences

(GSP) review for modifications of GSP

product eligibility. The dates for

hearings on these product reviews and

for the submission of comments will be

notified later. The expedited review of

the GSP eligibility of melamine

dinnerware from Indonesia was

completed with the decision that denial

of continued GSP eligibility was not

warranted.

FOR FURTHER INFORMATION CONTACT:

GSP Subcommittee, Office of the United

States Trade Representative, 600 17th

Street, NW, Room 518, Washington,

D.C. 20506. The telephone number is

(202) 395–6971.

SUPPLEMENTARY INFORMATION:

I. 1997 GSP Product Review

Pursuant to Title V the Trade Act of

1974, (‘‘Trade Act’’) (19 U.S.C. 2461 et

seq.), the GSP program grants duty-free

treatment to designated eligible articles

that are imported from designated

beneficiary developing countries. In a

notice dated May 21, 1997, USTR

initiated the 1997 Annual GSP Review

provided for in the GSP regulations (15

CFR 2007 et seq.) and announced a

deadline of July 2, 1997 for the filing of

petitions requesting modifications in the

list of eligible articles (62 Federal

Register 27828). Petitions may request

that products be added or removed from

the list of eligible articles or that a

country be granted a waiver of

‘‘competitive need limits’’ (CNLs) for an

eligible article pursuant to section

503(c) of the Trade Act (19 U.S.C.

2464(c)).

The GSP Subcommittee of the Trade

Policy Staff Committee (TPSC), after

reviewing the product petitions

submitted, has decided that the

petitions listed in the attached annex

should be accepted for consideration in

the 1997 Annual GSP Review. The

annex sets forth the case number,

product identification, the change

requested and the petitioner for each

product included in the 1997 Annual

GSP Review.

The opportunities for public comment

on the products under review, including

the dates for a public hearing and

procedures for participating in the

hearing, will be published in a

subsequent notice.

II. Expedited Review of Melamine

Dinnerware Petition

As part of an expedited review of a

petition to suspend GSP eligibility for

melamine institutional tableware from

Indonesia, USTR requested comments

on the petition by July 2, 1997 (62

Federal Register 2852). As a result of

that review, the GSP TPSC

Subcommittee had decided that removal

of GSP eligibility was not warranted.

Frederick L. Montgomery,

Chairman, Trade Policy Staff Committee.

BILLING CODE 3901–01–M