Document ID: SEC-2005-0189-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: National Association of Securities Dealers, Inc.
Posted Date: 2005-11-03T05:00Z

[Federal Register: November 3, 2005 (Volume 70, Number 212)]
[Notices]               
[Page 66876-66879]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr03no05-93]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52692; File No. SR-NASD-2005-064]

 
Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Order Granting Approval of Proposed Rule Change as 
Amended by Amendment No. 1 Relating to the Publication of Decisions 
Issued by the National Adjudicatory Council Pursuant to NASD Rule 1015

October 28, 2005.

I. Introduction

    On May 12, 2005, the National Association of Securities Dealers, 
Inc. (``NASD'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to amend NASD Interpretive 
Material 8310-2, ``Release of Disciplinary and Other Information 
Through the Public Disclosure Program'' (``IM-8310-2'') to authorize 
the NASD to release to the public information with respect to any 
decision issued by the National Adjudicatory Council (``NAC'') pursuant 
to NASD Rule 1015, ``Review of

[[Page 66877]]

National Adjudicatory Council.''\3\ The proposed rule change was 
published for notice and comment in the Federal Register on June 13, 
2005 (``Notice'').\4\ The Commission received two comment letters on 
the proposal.\5\ On July 26, 2005, the NASD filed a response to 
comments.\6\ On October 6, 2005, the NASD filed Amendment No. 1 to the 
proposed rule change.\7\ This order approves the proposed rule change, 
as amended.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ NASD Rule 1015 is part of the NASD Rule 1010 Series 
governing membership proceedings. These proceedings involve both the 
review of new member applications (NASD Rule 1014) and continuing 
membership applications seeking approval of a change in ownership, 
control, or business operations (NASD Rule 1017). See infra notes 
15-17 and accompanying text.
    \4\ See Securities Exchange Act Release No. 51786 (June 6, 
2005), 70 FR 34170.
    \5\ See letters from James Antosh, Chief Operating Officer and 
Chief Financial Officer of a privately owned broker-dealer 
(``Antosh'') dated June 30, 2005 and Joseph W. Mays, Jr., President, 
Securities Consulting Group, Inc. (``Mays'') dated July 5, 2005, 
both of which were addressed to Jonathan G. Katz, Secretary, 
Commission.
    \6\ See July 26, 2005 letter from Shirley H. Weiss, Associate 
General Counsel, NASD, to Katherine A. England, Assistant Director, 
Division of Market Regulation, SEC (``NASD Response Letter'').
    \7\ In Amendment No. 1, NASD made non-substantive changes to 
clarify the form of the NAC decisions authorized to be released to 
the public. It is a technical amendment and is not subject to notice 
and comment.
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II. Summary of Comments

    The Commission received two comment letters on the proposed rule 
change.\8\ Both commenters opposed the proposed rule change on the 
general basis that publication of NAC decisions issued under NASD Rule 
1015 would infringe on personal rights of privacy and confidentiality 
by permitting NASD to reveal to the public details concerning private 
transactions between private individuals. The following is a summary of 
the major concerns that the commenters raised.
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    \8\ See supra note 5.
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A. Details Concerning Private Transactions Between Private Individuals 
Will Be Released for Anyone to View

    One commenter believes that the proposal to disclose NAC decisions 
has ``crossed the line'' where personal rights to privacy would be 
diminished.\9\ The commenter believes the NASD should not be allowed to 
publicly reveal private transactions between private individuals and 
expresses concern that persons appearing before the NAC would have less 
privacy and confidentiality than would be afforded in a civil 
court.\10\ The commenter agrees that the public has a right to 
information when it entrusts its assets to others, but believes that 
the release of NAC decisions would publicly disclose sensitive details 
of business transactions, trade secrets, or financial information.\11\ 
As a result, the commenter views the consideration for the public's 
right to information as embodied in this proposal to have ``crossed the 
line.''\12\
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    \9\ See Antosh at 1.
    \10\ Id.
    \11\ Id.
    \12\ Id.
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B. The Release of NAC Decisions Regarding ``Associated Persons,'' as 
Defined in the NASD Rules, Violates Constitutional Rights to 
Confidentiality and Privacy

    Another commenter expresses disapproval of the proposal because he 
believes it will result in the disclosure of shareholders of broker-
dealers, who are included in the definition of ``Associated Person'' 
under the NASD Rules.\13\ The commenter states that the definition of 
Associated Person has been adjusted by the NASD and the SEC to apply, 
among others, to individuals or entities that are non-employee 
shareholders of an Applicant broker-dealer who do not ``supervise, 
manage or direct the activities of the broker-dealer or are members of 
the board of directors.''\14\ The commenter further explains that 
because such shareholders are included in the NASD's formal 
consideration of a broker-dealer's application for membership\15\ or a 
broker-dealer's application for approval of a change in ownership, 
control, or business operations,\16\ the information concerning such 
shareholders would be incorporated into any NAC decision if such 
Applicant broker-dealer elects to appeal the NASD decision in 
accordance with NASD Rule 1015.\17\
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    \13\ See Mays at 1. The term ``Associated Person'' means: (1) A 
natural person registered under NASD Rules; or (2) a sole 
proprietor, or any partner, officer, director, branch manager of the 
Applicant, or any person occupying a similar status or performing 
similar functions; (3) any company, government or political 
subdivision or agency or instrumentality of a government controlled 
by or controlling the Applicant; (4) any employee of the Applicant, 
except any person whose functions are solely clerical or 
ministerial; (5) any person directly or indirectly controlling the 
Applicant whether or not such person is registered or exempt from 
registration under NASD By-laws or NASD Rules; (6) any person 
engaged in investment banking or securities business controlled 
directly or indirectly by the Applicant whether such person is 
registered or exempt from registration under NASD By-laws or NASD 
Rules; or (7) any person who will be or is anticipated to be a 
person described in (1) through (6) above. See NASD Rule 1011(b).
    The term ``Applicant'' means a person that applies for 
membership in the Association under NASD Rule 1013 or a member that 
files an application for approval of a change in ownership, control, 
or business operations under NASD Rule 1017. See NASD Rule 1011(a).
    The term ``Association'' means, collectively, the NASD, NASD 
Regulation, Nasdaq, and NASD Dispute Resolution. See NASD Rule 
0120(b).
    \14\ See Mays at 1.
    \15\ See NASD Rule 1014.
    \16\ See NASD Rule 1017.
    \17\ Under NASD Rule 1015, an aggrieved Applicant may file a 
written request for NAC review of the NASD's decision issued under 
NASD Rules 1014 or 1017. See generally NASD Rule 1015.
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    As a result, the commenter believes that the release of information 
in NAC decisions, as contemplated by the proposed rule change, would 
reveal confidential information regarding non-employee shareholders and 
concludes that release of the information should not be permitted.\18\ 
The commenter argues that, as a consequence of the proposal, such 
shareholders would be denied their ``constitutional rights'' to 
confidentiality and privacy, and the release of information regarding 
such shareholders would directly violate federal and state law 
pertaining to the protection of confidentiality and privacy generally 
afforded to individuals and legal entities.\19\
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    \18\ See Mays at 1. The NAC's decision will include a 
description of the NASD's decision, including its rationale, a 
description of the principal issues raised, a summary of the 
evidence, a statement as to whether the NASD's decision is affirmed, 
modified, or reversed, and a rationale for the decision that 
references the applicable standards. See NASD Rule 1015(j).
    \19\ See Mays at 1.
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III. NASD's Response to Comments

    On July 26, 2005, the NASD responded to the comments.\20\ As a 
general preface, the NASD first notes in its response that disclosure 
of NAC decisions under the proposed rule change would not involve every 
application for NASD membership, but would be limited to those 
applications that culminate in appeal proceedings before the NAC.\21\
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    \20\ See supra note 6.
    \21\ See NASD Response Letter at 1.
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    Regarding a commenter's concern that the proposed rule change would 
result in the disclosure of details concerning private transactions 
between private individuals, the NASD argues that the attendant 
disclosure of an Applicant's proposed or executed business arrangements 
or transactions with other persons must be balanced against the 
public's interest in being able to review the NAC decisions.\22\ The 
NASD states that furnishing potential new members and members that are 
considering a change in ownership, control, or business operations the 
opportunity to review the NAC decisions issued under NASD Rule 1015 
will assist Applicants

[[Page 66878]]

in understanding the standards that must be met under NASD Rule 1014 or 
1017, as the case may be, and the manner in which the NAC applies the 
standards.\23\ Additionally, the NASD believes that public investors 
will benefit from the availability of information about any limitations 
placed on members, where the limitations result from proceedings before 
the NAC.\24\ As stated in the Notice, the NASD represents that under 
the proposed rule change, the names of any persons who are not 
themselves under consideration or review as part of the membership 
application process will not be disclosed when the NAC decision is 
published.\25\ Finally, the NASD notes that the information contained 
in NAC decisions is already subject to publication if an Applicant 
appeals an adverse NAC decision to the SEC, ``because the SEC makes its 
decision in such matters available to the public, including on the 
SEC's web site.'' \26\
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    \22\ See id.
    \23\ Id. at 1-2.
    \24\ Id. at 2.
    \25\ Id.
    \26\ Id.
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    In response to a commenter's concern that the NASD should not be 
permitted to release information about persons who may be non-employee 
shareholders of a broker-dealer, the NASD notes that it is not aware of 
any cognizable constitutional or statutory claim that pertains to the 
violation of protected rights to confidentiality and privacy.\27\ The 
NASD acknowledges that as a self-regulatory organization, it must 
comport with its duty of fairness. The NASD argues that the proposed 
rule change is consistent with this duty and furthers a ``reasonable 
regulatory purpose.'' \28\
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    \27\ Id.
    \28\ Id.
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    Under this proposed rule change, the NASD explains that the 
shareholders of broker-dealers who are not otherwise employed by the 
broker-dealer or engaged in the broker-dealer's business will be on 
notice that their names will be subject to release to the public if 
they meet the definition of Associated Person in NASD Rule 1011(b) and 
the Applicant appeals an adverse decision to the NAC.\29\ The NASD 
states that shareholder status, alone, would not trigger disclosure 
under the proposed rule change. Rather, an individual or entity who is 
not registered with the NASD or otherwise engaged in the broker-
dealer's business would meet the definition of Associated Person only 
if the individual or entity ``directly or indirectly controls the 
applicant.'' \30\ The NASD states that the definition of Associated 
Person excludes passive investors who are not control persons of the 
broker-dealer, such as non-employee shareholders and shareholders who 
are otherwise not directly engaged in the broker-dealer's business.\31\
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    \29\ Id.
    \30\ Id. See also NASD Rule 1011(b). The Commission notes that a 
broker-dealer's information reported on Form BD (Uniform Application 
for Broker-Dealer Registration), which may include information about 
a person(s) who directly or indirectly controls the broker-dealer, 
is publicly available.
    \31\ Id. The NASD represents that it would consider certain 
information concerning lenders of 5% or more of the Applicant's net 
capital in determining whether the Applicant meets all standards for 
admission, a change in ownership or control, or a material change in 
its business operations. See id.
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    Finally, the NASD argues that information about control persons can 
be a critical part of its consideration of membership applications and 
applications in connection with a member's change of ownership, control 
or business operations.\32\ The NASD believes that, in the interest of 
protecting investors and serving the public interest, when the NAC's 
decisions are based on information regarding an Applicant's control 
persons, public investors and current members should be allowed to 
review such information.\33\
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    \32\ Id.
    \33\ Id.
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IV. Discussion and Commission Findings

    The Commission has carefully reviewed the proposed rule change, as 
amended, the comment letters, and the NASD Response Letter, and 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 \34\ and, in particular, section 
15A(b)(6) of the Act.\35\ Section 15A(b)(6) requires, among other 
things, that the rules of a national securities association be designed 
to prevent fraudulent and manipulative acts and practices, to promote 
just and equitable principles of trade, and, in general, to protect 
investors and the public interest. The Commission finds that the 
proposal to amend IM-8310-2 to give NASD authority to release to the 
public information with respect to any decision issued by the NAC 
pursuant to NASD Rule 1015 is consistent with section 15A(b)(6) of the 
Act. The Commission believes that the proposal is reasonably designed 
to (i) allow potential new NASD members and current members considering 
a change in ownership, control, or business operations to better 
understand the standards that must be met under NASD Rule 1014 or 1017, 
as the case may be, and the manner in which such standards are applied; 
and (ii) afford the general public, including public investors, the 
opportunity to be better informed of the membership process and the 
rationale behind the NAC's decision-making, particularly with respect 
to those instances in which the NAC issues an adverse decision.
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    \34\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
    \35\ 15 U.S.C.78o-3(b)(6).
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    Based on the NASD's representations, the Commission believes the 
proposed rule change will not unreasonably infringe on rights of 
privacy or confidentiality by permitting the NASD to publish detailed 
information with respect to decisions issued by the NAC. With regard to 
a commenter's assertions that the proposal will reveal to the public 
details concerning private transactions between private persons, the 
Commission believes that, after weighing the negative impact of public 
disclosure of such transactions against the positive impact of enhanced 
knowledge of the NASD standards of NASD Rules 1014 and 1017, the 
publication of NAC decisions would promote just and equitable 
principles of trade by allowing current NASD members, potential NASD 
members, and the general public equal access to, and a better 
understanding of, the specific application and interpretation of such 
standards. The Commission believes that public investors will benefit 
from the availability of information about any adverse decisions 
against Applicants and limitations placed on members, where such 
adverse decisions and limitations are a result of proceedings before 
the NAC, because the factors that are instrumental in the granting of 
membership or the expansion of business activities will be articulated 
in the decisions and made available to the public as a result of the 
proposed rule change. With respect to NAC decisions involving 
applications for NASD membership, reviewed pursuant to NASD Rule 1014, 
or applications for a change in ownership, control, or business 
operations, reviewed pursuant to NASD Rule 1017, the Commission further 
notes that access to such decisions would not only benefit future 
Applicants in the application process, but would also promote 
efficiency by deterring meritless appeals, and foster consistency by 
assisting the NASD in its review of such applications and serve as 
useful precedent for future NAC

[[Page 66879]]

decisions. Finally, the Commission recognizes that the information 
contained in the NAC decisions is already subject to publication if an 
Applicant appeals an adverse NAC decision to the Commission because the 
Commission makes its decisions in such matters available to the public. 
The Commission believes that the public availability of such 
information furthers the goals outlined in section 15A(b)(6) of the Act 
by making more transparent NASD's rules and regulations, and promoting 
the coordination of an unimpeded flow of information that encourages a 
free and open market for investors and the general public.
    Regarding a commenter's assertion that the proposal permits the 
improper disclosure of non-employee shareholders of a broker-dealer not 
engaged in the management of such broker-dealer's business because such 
shareholders would be included within the definition of Associated 
Person in NASD Rule 1011(b), the Commission believes the NASD has 
adequately responded to this concern.\36\ Additionally, as Amendment 
No. 1 to the proposed rule change clarifies, in the interest of 
protecting privacy, the NAC decisions will not routinely publish the 
names of persons who are not themselves under consideration or review 
as part of the application process.\37\ Finally, the Commission 
believes that the proposed rule change furthers a legitimate regulatory 
purpose and does not implicate constitutional scrutiny or violate any 
cognizable federal or state statute related to the protection of 
confidentiality and privacy.
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    \36\ See supra notes 30-31 and accompanying text.
    \37\ See supra note 7.
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    With regard to all other issues raised by the commenters, the 
Commission is satisfied that the NASD has adequately and accurately 
addressed the commenters' concerns.

V. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the Act 
\38\, that the proposed rule change (SR-NASD-2005-064) be, and it 
hereby is, approved, as amended.
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    \38\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\39\
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    \39\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. E5-6096 Filed 11-2-05; 8:45 am]

BILLING CODE 8010-01-P