Document ID: SEC-2007-0771-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: National Association of Securities Dealers, Inc.
Posted Date: 2007-06-04T04:00Z

[Federal Register: June 4, 2007 (Volume 72, Number 106)]
[Notices]               
[Page 30895-30898]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr04jn07-108]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-55819; File No. SR-NASD-2007-033]

 
Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Notice of Filing and Immediate Effectiveness of Proposed 
Rule Change and Amendment No. 1 Thereto Relating to Extension of NASD's 
Authority Under the Cease and Desist Pilot Program

May 25, 2007.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on May 11, 2007, the National Association of Securities Dealers, Inc. 
(``NASD'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been substantially prepared by NASD. 
NASD has filed the proposal as a ``non-controversial'' rule change 
pursuant to Section 19(b)(3)(A) of the

[[Page 30896]]

Act \3\ and Rule 19b-4(f)(6) thereunder,\4\ which renders the proposal 
effective upon filing with the Commission. On May 24, 2007, NASD filed 
Amendment No. 1 to the proposed rule change. The Commission is 
publishing this notice to solicit comments on the proposed rule change, 
as amended, from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    NASD is proposing to amend NASD Rules 9556, 9800, 9810, and 9860, 
to extend for an additional two-year period, to June 23, 2009, NASD's 
authority under the cease and desist pilot program. At this time, NASD 
is not proposing any substantive changes to the rules covered by the 
pilot program. The only changes regard extending the pilot's expiration 
date to June 23, 2009, and technical changes to the titles of the NASD 
executives who can authorize the initiation of cease and desist 
proceedings and certain cross-references in rules covered by the pilot 
program.
    Below is the text of the proposed rule change. Proposed new 
language is in italics; proposed deletions are in [brackets].
* * * * *
9556. Failure to Comply with Temporary and Permanent Cease and Desist 
Orders
    (Rule 9556, and amendments adopted by SR-NASD-98-80 to Rule 8310, 
IM-8310-3(c)(1) (formerly IM-8310-2(d)(1), renumbered by SR-NASD-2003-
168), 9120(x), 9241(c), 9290, 9311(b), 9312(b), 9360 and the Rule 9800 
Series, shall expire on June 23, [2007]2009, unless extended or 
permanently adopted by the Association pursuant to SEC approval at or 
before such date.)
    (a) Notice of Suspension, Cancellation or Bar
    If a member, person associated with a member or person subject to 
NASD's jurisdiction fails to comply with a temporary or permanent cease 
and desist order issued under the Rule 9200, 9300 or 9800 Series, NASD 
staff--after receiving written authorization from NASD's Chairman and 
CEO or NASD's Senior Executive Vice President for Regulatory Policy and 
Programs [the President of NASD Regulatory Policy and Oversight or the 
Executive Vice President for NASD Regulatory Policy and Programs]--may 
issue a notice to such member or person stating that the failure to 
comply with the temporary or permanent cease and desist order within 
seven days of service of the notice will result in a suspension or 
cancellation of membership or a suspension or bar from associating with 
any member.
    (b) through (h) No Change.
* * * * *
9800. Temporary Cease and Desist Orders
    (The entire Rule 9800 Series, and related amendments adopted by SR-
NASD-98-80 to Rule 8310, IM-8310-3(c)(1) (formerly IM-8310-2(d)(1), 
renumbered by SR-NASD-2003-168), 9120(x), 9241(c), 9290, 9311(b), 
9312(b), and 9360, and by SR-NASD-2003-110 to Rule 9556, shall expire 
on June 23, [2007]2009, unless extended or permanently adopted by the 
Association pursuant to SEC approval at or before such date.)
9810. Initiation of Proceeding
    (a) Department of Enforcement or Department of Market Regulation
    With the prior written authorization of NASD's Chairman and CEO or 
NASD's Senior Executive Vice President for Regulatory Policy and 
Programs [the President of NASD Regulatory Policy and Oversight or the 
Executive Vice President for NASD Regulatory Policy and Programs], the 
Department of Enforcement or the Department of Market Regulation may 
initiate a temporary cease and desist proceeding with respect to 
alleged violations of Section 10(b) of the Securities Exchange Act of 
1934 and SEC Rule 10b-5 thereunder; SEC Rules 15g-1 through 15g-9; NASD 
Rule 2110 (if the alleged violation is unauthorized trading, or misuse 
or conversion of customer assets, or based on violations of Section 
17(a) of the Securities Act of 1933); NASD Rule 2120; or NASD Rule 2330 
(if the alleged violation is misuse or conversion of customer assets). 
The Department of Enforcement or the Department of Market Regulation 
shall initiate the proceeding by serving a notice on a member or 
associated person (hereinafter ``Respondent'') and filing a copy 
thereof with the Office of Hearing Officers. The Department of 
Enforcement or the Department of Market Regulation shall serve the 
notice by personal service, overnight commercial courier, or facsimile. 
If service is made by facsimile, the Department of Enforcement or the 
Department of Market Regulation shall send an additional copy of the 
notice by overnight commercial courier. The notice shall be effective 
upon service.
    (b) through (c) No Change.
* * * * *
9860. Violation of Temporary Cease and Desist Orders
    A Respondent who violates a temporary cease and desist order 
imposed under this Rule Series may have its association or membership 
suspended or canceled under Rule 9556. NASD's Chairman and CEO or 
NASD's Senior Executive Vice President for Regulatory Policy and 
Programs [The President of NASD Regulatory Policy and Oversight or the 
Executive Vice President for NASD Regulatory Policy and Programs] must 
authorize the initiation of any such proceeding in writing.
* * * * *

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, NASD included statements 
concerning the purpose of, and basis for, the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. NASD has prepared summaries, set forth in Sections A, B, 
and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    In May 2003, the Commission approved, on a two-year pilot basis, a 
rule change that gave NASD authority to issue temporary cease and 
desist orders (``TCDOs'') and made explicit NASD's ability to impose 
permanent cease and desist orders as a remedy in disciplinary cases.\5\ 
The pilot program also gave NASD authority to enforce cease and desist 
orders. In June 2005, NASD extended the pilot program for an additional 
two-year period.\6\ The current two-year pilot expires on June 23, 
2007. NASD is proposing a rule change to extend the pilot program for 
an additional two-year period, to June 23, 2009. Such an extension will 
enable NASD to continue to issue and enforce temporary and permanent 
cease and desist orders. NASD's authority to issue TCDOs will expire 
after the additional two-year period unless the pilot program is 
further extended or adopted

[[Page 30897]]

on a permanent basis with Commission approval.
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    \5\ See Securities Exchange Act Release No. 47925 (May 23, 
2003), 68 FR 33548 (June 4, 2003) (SR-NASD-98-80).
    \6\ See Securities Exchange Act Release No. 51860 (June 16, 
2005), 70 FR 36427 (June 23, 2005) (SR-NASD-2005-061).
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    NASD currently is seeking only to extend the pilot program period 
and make technical changes to the titles of the NASD executives who can 
authorize the initiation of cease and desist proceedings and certain 
cross-references in rules covered by the pilot program. NASD is not 
proposing any substantive changes to the rules covered by the pilot 
program at this time. Since the pilot program was first approved in 
2003, NASD has issued only one TCDO and one permanent cease and desist 
order (in the same case, which is described below). Consequently, NASD 
believes that additional time is needed to make a meaningful 
determination about whether the program should continue and whether 
certain specific provisions should be modified and, if so, to what 
extent.
    In the one case initiated under the pilot program, NASD's 
Department of Enforcement (``Enforcement'') alleged that the member in 
question was engaged in widespread fraud that included, among other 
things, making material misrepresentations and omissions in connection 
with the private offering of its own stock, effecting unauthorized 
transactions, and using customer funds improperly.\7\ Enforcement 
showed that not only was the member attempting to continue the 
fraudulent offering, it also was funneling money and assets to a non-
NASD member affiliate. Enforcement alleged, and a hearing panel found, 
that a TCDO was necessary, because the member's continuation of the 
misconduct was likely to result in further dissipation or conversion of 
assets and other significant harm to investors before the completion of 
the underlying disciplinary proceeding. After the hearing panel issued 
a permanent cease and desist order following a full disciplinary 
hearing, the parties settled the case, resulting in the expulsion of 
the member, the bar of its owner, and the imposition of almost $12 
million in fines and restitution.
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    \7\ See Securities Exchange Act Release No. 51270 (February 28, 
2005) (summarizing NASD's cease and desist proceedings against 
former NASD member L.H. Ross & Company).
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    The proposed extension of the pilot program for an additional two 
years will provide NASD with a mechanism to continue to take 
appropriate remedial action against a member or an associated person 
who has engaged (or is engaging) in violative conduct that could cause 
continuing harm to the investing public if not addressed expeditiously. 
At the same time, the pilot program continues to contain numerous 
procedural checks and safeguards to ensure that cease and desist 
proceedings are used prudently, sparingly, and fairly. In addition, the 
extension of the pilot program will allow NASD to analyze more 
thoroughly the pilot program's overall effectiveness. Accordingly, NASD 
believes it is appropriate to extend the pilot period regarding cease 
and desist orders for two years.
    The proposed rule change will become effective upon filing, will be 
operative on June 23, 2007, and will expire on June 23, 2009, unless 
extended or permanently adopted by NASD pursuant to Commission approval 
at or before such date.
2. Statutory Basis
    NASD believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\8\ which requires, among 
other things, that NASD's rules must 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 proposed rule change also is consistent with the 
provisions of Section 15A(b)(7) of the Act,\9\ which provides that NASD 
members, or persons associated with its members, are appropriately 
disciplined for violations of any provisions of the Act or NASD's 
rules. The extension of the pilot program is consistent with NASD's 
obligations under the Act, because cease and desist orders are designed 
to stop violative conduct that is likely to cause dissipation or 
conversion of assets or other significant harm to investors.
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    \8\ 15 U.S.C. 78o-3(b)(6).
    \9\ 15 U.S.C. 78o-3(b)(7).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    NASD does not believe that the proposed rule change will result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Written comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A) of the Act \10\ and Rule 19b-
4(f)(6) thereunder.\11 \
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    \10\ 15 U.S.C. 78s(b)(3)(A).
    \11\ 17 CFR 240.19b-4(f)(6).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission may summarily abrogate such rule change if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protection of investors, or otherwise 
in furtherance of the purposes of the Act.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml.
); or     Send an e-mail to rule-comments@sec.gov. Please include 

File Number SR-NASD-2007-033 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.
    All submissions should refer to File Number SR-NASD-2007-033. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro/shtml
). Copies of the submission, all subsequent amendments, 

all written statements with respect to the proposed rule change that 
are filed with the Commission, and all written communications relating 
to the proposed rule change between the Commission and any person, 
other than those that may be withheld from the public in accordance 
with the provisions of 5 U.S.C. 552, will be available for inspection 
and copying in the Commission's Public Reference

[[Page 30898]]

Room. Copies of the filing also will be available for inspection and 
copying at the principal office of NASD. All comments received will be 
posted without change; the Commission does not edit personal 
identifying information from submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-NASD-2007-033 and should be submitted on 
or before June 25, 2007.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E7-10681 Filed 6-1-07; 8:45 am]

BILLING CODE 8010-01-P