[Federal Register Volume 61, Number 162 (Tuesday, August 20, 1996)]
[Notices]
[Pages 43107-43109]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-21110]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37561; File No. SR-NASD-96-14]


Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Order Approving Proposed Rule Change Relating to the 
Requirement That Members Provide Information to Other Regulators for 
Regulatory Purposes

August 13, 1996.

I. Introduction

    On April 4, 1996, the National Association of Securities Dealers, 
Inc. (``NASD'' or ``Association'') submitted to 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 Rules 8210 
and 8220.\3\ The proposed rule change was published for comment in the 
Federal Register on May 6, 1996.\4\ The Commission received two comment 
letters opposing the proposal.\5\ The NASD submitted two letters 
supporting its proposal and responding to the Banc One Letter and the 
SCG Letter.\6\
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    \1\ 15 U.S.C. Sec. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ On April 19, 1996, the NASD filed Amendment No. 1 to the 
proposed rule change. Letter from Suzanne E. Rothwell, Associate 
General Counsel, NASD, to Mark P. Barracca, Special Counsel, 
Division of Market Regulation, SEC, dated April 19, 1996.
    \4\ See Securities Exchange Act Release No. 37150 (Apr. 29, 
1996), 61 FR 20299 (May 6, 1996) (notice of File No. SR-NASD-96-14).
    \5\ See Letter from Steven Alan Bennett, Senior Vice President 
and General Counsel, Banc One Corporation, to Jonathan G. Katz, 
Secretary, SEC, dated May 28, 1996 (``Banc One Letter''), and Letter 
from Joseph W. Mays, Jr., President, Securities Consulting Group, 
Inc. (``SCG'') to Jonathan G. Katz, Secretary, SEC, dated June 27, 
1996 (``SCG Letter'').
    \6\ See Letter from John Ramsay, Deputy General Counsel, NASD 
Regulation, Inc. (``NASDR''), to Katherine England, Assistant 
Director, Division of Market Regulation, SEC, dated July 2, 1996, 
and Letter from John Ramsay, Deputy General Counsel, NASDR, to 
Katherine England, Assistant Director, Division of Market 
Regulation, SEC, dated July 19, 1996.
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II. Background

    Currently, Rule 8210 of the NASD's Procedural Rules provides that 
the NASD's District Business Conduct Committees (``DBCC''), Board of 
Governors (``Board''), or any duly authorized members or agents of the 
Committees or Board may require members and associated persons to 
provide information, and may investigate a member's books and records, 
in connection with investigations or proceedings conducted by the NASD. 
The NASD periodically receives requests from other regulatory 
organizations with whom the NASD has entered into agreements to share 
regulatory information, including self-regulatory organizations 
(``SROs'') who participate in the Intermarket Surveillance Group 
(``ISG''),\7\ for information from NASD members in connection with 
investigations being conducted by these regulators. Rule 8210, however, 
does not expressly permit the NASD to require members to provide 
information in connection with investigations being conducted by other 
regulatory organizations, or to bring disciplinary action against a 
member that refuses to cooperate.
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    \7\ The ISG is an organization of securities industry self-
regulatory organizations (``ISG/SROs'') formed in 1983 to coordinate 
and develop intermarket surveillance programs designed to identify 
and combat fraudulent and manipulative acts and practices. In order 
to promote its purposes, members agree to exchange such information 
as is necessary for ISG members to perform their self-regulatory and 
market surveillance functions. The NASD has been a member of the ISG 
since its formation.
    The ISG's self-regulatory organization members (ISG/SROs) 
include all of the registered securities exchanges and associations: 
American Stock Exchange (AMEX), Boston Stock Exchange (BSE), Chicago 
Board Options Exchange (CBOE), Chicago Stock Exchange (CHX), 
Cincinnati Stock Exchange (CSE), National Association of Securities 
Dealers, Inc. (NASD), New York Stock Exchange (NYSE), Pacific Stock 
Exchange (PSE), and Philadelphia Stock Exchange (PHLX). In addition, 
other domestic contract markets and foreign SROs have been granted 
``affiliate'' membership in the ISG: Alberta Stock Exchange (ASE), 
Amsterdam Stock Exchange (AMSE), Australian Stock Exchange (ASX), 
Chicago Board of Trade (CBOT), Chicago Mercantile Exchange (CME), 
London International Financial Futures and Options Exchange (LIFFE), 
London Stock Exchange (LSE), Montreal Exchange (ME), New York 
Futures Exchange (NYFE), Securities and Futures Authority (SFA), 
Toronto Stock Exchange (TSE), and the Vancouver Stock Exchange 
(VSE). ISG/SROs and ISG affiliates are referred to herein as ``ISG 
participants.''
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III. Description of Proposal

    The NASD proposes to amend NASD Rules 8210 and 8220. The NASD is 
proposing to amend Rule 8210 to require that members or persons 
associated with a member \8\ provide information and access to their 
books, records, and accounts to any DBCC, the Market Surveillance 
Committee (``MSC''), or the Board, or any duly authorized members or 
agents of the Committees or Board for certain purposes. Specifically, 
the proposal would require the member or persons associated with a 
member to provide information to the above-mentioned Committees, Board, 
and members and agents thereof for the purpose of any investigation, or 
determination as to filing of a complaint or any hearing of any 
complaint against any member of the Association or any person 
associated with a member made or held by another domestic or foreign 
SRO, association, securities or contract market or regulator of these 
markets, with whom the Association has entered into an agreement 
providing for the exchange of information and other forms of material 
assistance for market surveillance, investigative, enforcement or other 
regulatory purposes. By amending Rule 8210, the NASD also will have a 
clear basis to discipline members and associated persons who fail to 
provide information to other domestic or foreign SROs, associations, 
securities or contract markets or regulators of such markets with whom 
the NASD has information sharing agreements. The NASD also proposes to 
amend Rule 8220 to authorize any Market Surveillance Committee to 
require any

[[Page 43108]]

member to submit a report in writing with regard to any matter 
connected with such member's business or business practices, and to 
inspect the books, records and accounts of any member.\9\
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    \8\ The term ``persons associated with a member'' includes 
persons no longer associated with a member when the persons are 
subject to the Association's jurisdiction to report information.
    \9\ See Amendment No. 1, supra note 3.
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IV. Summary of Comments

    The Commission received two negative comment letters regarding the 
proposal to amend Rules 8210 and 8220.\10\ The issues raised therein, 
together with responses by the NASD are discussed below.
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    \10\ See supra note 5.
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    In the Banc One Letter, Banc One objects to the proposed rule 
change as being overly broad and as subjecting members to jurisdictions 
that might not otherwise have authority over such members. Banc One 
states that while the NASD has the authority to require its members to 
produce books, records and other information, it has the responsibility 
to protect its members from unwarranted investigations that are costly 
and time consuming and should be undertaken through the proper 
authorities at the NASD. Banc One states that the NASD already has 
examination, surveillance, and enforcement authority over its members 
and that to extend this authority to other self-regulatory 
organizations or governmental agencies is unnecessary. Banc One also 
objects to the proposed rule as being potentially costly and stated 
that the proposed rule seems to tip the balance between the efficient 
operation of broker-dealers without regulatory interference and the 
fight against manipulative and fraudulent activities in favor of the 
latter and to the detriment of the former. Lastly, Banc One states that 
the proposed rule has no provision to protect confidential or 
proprietary information provided to other regulators and that members 
should not be required to provide the information without receiving the 
protections provided by the NASD.
    In response to the Banc One Letter, the NASD states that the NASD 
is not subjecting, and does not have the authority to subject, members 
and their associated persons to the jurisdictions of regulatory 
authorities beyond the limits that currently apply under existing legal 
standards. The NASD states that it is making explicit that under its 
own jurisdiction the NASD has the authority, through the Board, the MSC 
or any DBCC, to require members to respond orally or in writing and to 
investigate the books and records of the member with regard to 
investigations and other regulatory actions by other regulators with 
whom the NASD has entered into information sharing agreements. 
According to the NASD, these entities would direct their requests to 
the NASD, which will serve as the intermediary between the member and 
the requesting entity. Moreover, the NASD states that all requests by 
these entities would be subject to the NASD's rules and regulations. 
Therefore, members or associated persons required to provide 
information under the proposed rule would continue to have the same 
rights and procedural protections that they would have if the NASD had 
initiated the request for information.
    The NASD states that it recognizes that the imposition of any rule 
or regulation may result in certain administrative, compliance or 
enforcement costs, however, the NASD does not believe that the proposed 
rule will impose excessive regulatory interference at the expense of 
broker-dealer efficiency. Moreover, the NASD states that the authority 
provided under the proposed rule is discretionary, and, therefore, it 
may refuse another entity's request for information if, for example, 
the purpose of the request falls outside the purposes of the proposed 
rule.
    Finally, the NASD states that, as a member of the ISG, it is bound 
by certain restrictions on information obtained under the ISG 
agreement. Among these restrictions, is the requirement that a 
recipient of the information obtain written consent of the party 
furnishing the information prior to making the information available to 
its non-regulatory departments or any subsidiary or affiliated entity.
    In the SCG Letter, the SCG objects to the NASD's proposal as being 
unconstitutional. The SCG argues that the proposed rule violates NASD 
members' right of due process and the right of privacy as it does not 
require clients of members to give their permission for their 
confidential files to be released. The SCG also inquires whether a 
client of a NASD member could have a meritorious claim against the NASD 
or the NASD member if a NASD member released private and confidential 
information.
    In response to the SCG Letter, the NASD states that constitutional 
safeguards against the deprivation of certain rights do not apply to 
the NASD because the NASD is not a governmental entity. Nevertheless, 
the NASD states that any information provided under the proposed rule 
may be used only for legitimate regulatory and enforcement purposes. 
The NASD states that ISG participants are bound by certain restrictions 
on information obtained from other ISG participants for regulatory and 
enforcement purposes. Under the ISG agreement, information obtained by 
ISG participants may not be made available by the recipient to its non-
regulatory departments or any subsidiary or affiliated entity without 
the written consent of the party furnishing the information, and may 
only be provided to the SEC or Commodity Futures Trading Commission 
(``CFTC''), or pursuant to an order of the court or other lawful 
process, or as is necessary for conducting any investigation or 
disciplinary proceeding.

V. Discussion

    After careful consideration of the comments and the NASD's 
responses thereto, the Commission has determined to approve the 
proposed rule change. The Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to the Association, and, in 
particular, with the requirements of Section 15A(b)(6) of the Act,\11\ 
which require, among other things, that the rules of the Association be 
designed to foster cooperation and coordination with persons engaged in 
regulating securities transactions. The proposed rule change is 
consistent with these objectives in that it clarifies the Association's 
authority to require members and persons associated with a member to 
provide information to any DBCC, the MSC, or the Board, or any duly 
authorized members or agents of the Committees or Board for regulatory 
purposes and to discipline those members or persons associated with 
members who fail or refuse to provide such information. The Commission 
notes that most of the other ISG participants have amended their rules 
to clarify their investigatory and information sharing authority.\12\
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    \11\ 15 U.S.C. Sec. 78o-3.
    \12\ The CBOE recently amended Rule 15.9(b) to require its 
members and associated persons, at the request of the CBOE, to 
furnish testimony, documentary evidence or other information in 
connection with any inquiry by a domestic or foreign self-regulatory 
organization, association, contract market, or regulator of such 
market with whom the CBOE has entered into an agreement providing 
for the exchange of information and other forms of mutual assistance 
for market surveillance, investigative, enforcement and regulatory 
purposes. Securities Exchange Act Release No. 35403 (Feb. 22, 1995), 
60 FR 10884 (Feb. 28, 1995) (order approving File No. SR-CBOE-94-
39). The PSE recently amended Rule 10.2(d) to require PSE members, 
member organizations, persons associated with a member or member 
organization, and other persons or entities over whom the PSE has 
jurisdiction pursuant to Rule 10.1(b) to testify before another SRO 
and to furnish information in connection with a regulatory inquiry, 
investigation, examination, or disciplinary proceeding resulting 
from an agreement entered into by the PSE pursuant to Rule 14.1. 
Securities Exchange Act Release No. 35646 (Apr. 25, 1995), 60 FR 
21227 (May 1, 1995) (order approving File No. SR-PSE-95-02). The 
NYSE recently amended Rules 27, 476(a)(11), and 477 to require 
persons under Exchange jurisdiction to comply with information 
requests from domestic commodities markets and associations and 
foreign self-regulatory organizations and associations as well as 
from domestic securities markets. Securities Exchange Act Release 
No. 37476 (July 24, 1996) (order approving File No. SR-NYSE-95-43). 
Currently, Art. V, Sec. 4(a) of the AMEX Rules facilitates 
examinations being conducted by another exchange.

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[[Page 43109]]

    The Commission believes that the amendment to Rule 8210, requiring 
members and associated persons to provide information to the NASD for 
the purpose of investigations made by another domestic or foreign SRO, 
association, securities or contract market or regulator of the markets, 
for market surveillance, investigative, enforcement or other regulatory 
purposes is appropriate. As previously in effect, Rule 8210 may have 
limited the NASD by not clearly providing the NASD's Committees and 
Board with the authority to require members to provide such 
information. Moreover, Rule 8210 did not provide the MSC with any 
authority to require members and associated persons to provide 
information. By adding the MSC to the list of entities, which may 
require members and associated persons to provide information and 
expanding the circumstances under which these entities may require 
information, the amendment furthers the interest of the public and 
provides for the protection of investors by allowing the Association to 
assist other regulators to conduct prompt inquiries into possible 
trading violations and other possible misconduct.
    The Commission also believes that the amendment to Rule 8210 
provides the Association with a basis on which to initiate a 
disciplinary proceeding when those under its jurisdiction fail to 
cooperate with requests for information, and, therefore, furthers the 
interest of the public and provides for the protection of investors by 
allowing the Association to appropriately discipline those members that 
engaged in misconduct.
    The Commission also believes that the amendment to Rule 8220, 
expanding the NASD's authority to require a member or persons 
associated with a member to comply with any requests to report, orally 
or in writing, submit books, records, or accounts, for the purpose of 
any investigation initiated by the NASD or another entity will further 
the interest of the public and provides for the protection of investors 
by allowing certain organizations and associations to acquire 
information necessary to ensure that NASD members are conducting 
business in conformance with applicable laws and regulations.
    Finally, the Commission believes that the proposed rule change 
achieves a reasonable balance between the need for regulatory 
cooperation and protection of the procedural rights of NASD members and 
others from who information or testimony is requested. The rule 
provides the Association with the authority to seek cooperation by 
certain persons with respect to inquiries and investigations resulting 
from regulatory agreements between the Association and other SROs and 
associations while providing any person or entity required to furnish 
information or testimony pursuant to the rule with the same procedural 
rights that they would have as if the request were pursuant to an NASD 
initiated inquiry or investigation.

VI. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\13\ that the proposed rule change (SR-NASD-96-14) is approved.

    \13\15 U.S.C. Sec. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-21110 Filed 8-19-96; 8:45 am]
BILLING CODE 8010-01-M