[Federal Register Volume 62, Number 81 (Monday, April 28, 1997)]
[Notices]
[Pages 22986-22988]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-10882]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-38537; File No. SR-NASD-97-11]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change and Amendment No. 1 by National Association of Securities 
Dealers, Inc., Relating to the Release of Disciplinary Information

April 22, 1997.

I. Introduction

    On February 11, 1997, the NASD Regulation, Inc. (NASD Regulation'') 
filed with the Securities and Exchange Commission (``SEC'' or 
``Commission'') pursuant to Section 19(b)(1) of the Securities Exchange 
Act of 1934 (``Exchange Act''),\1\ a proposed rule change consisting of 
an Interpretation on the Release of Disciplinary Information in IM-
8310-2 of the Rules of the National Association of Securities Dealer's, 
Inc. (``NASD''). On March 10, 1997, NASD Regulation filed with the 
Commission Amendment No. 1. The proposed rule change and Amendment No. 
1 were published for comment in the Federal Register.\2\ One comment 
letter was received.\3\ For the reasons discussed below, the Commission 
is approving the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1) (1988).
    \2\ See Securities Exchange Act Release No. 38380 (March 10, 
1997), 62 FR 12866 (March 18, 1997).
    \3\ See letter from Steven Alan Bennett, Senior Vice President 
and General Counsel, Bank One Corporation, to Mr. Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, dated April 7, 1997, 
supporting the proposed rule change and Amendment No. 1.
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II. Description of the Proposal

    The NASD's Public Disclosure Program (``Program'') currently 
provides through the Central Registration Depository (``CRD'') a 
synopsis of all pending NASD disciplinary information regarding members 
and associated persons, including information on disciplinary 
complaints \4\ when they are issued by the Association and disciplinary 
decisions when they are issued by any Committee or Board of the 
Association. Recently, the Commission approved an amendment that 
requires the Association to provide copies of disciplinary complaints 
and decisions upon request.\5\
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    \4\ This rule filing relates to ``disciplinary complaints,'' and 
does not address ``customer complaints.''
    \5\ See, Securities Exchange Act Release No. 37797 (October 9, 
1996); 61 FR 53984 (October 16, 1996).
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    The Interpretation on the Release of Disciplinary Information 
(``Interpretation''), contained in IM-8310-2,\6\ currently permits the 
Association to issue information regarding certain specified 
significant disciplinary decisions when they become final.\7\ The 
specified decisions are limited to those that impose sanctions of a 
suspension, bar or fine of $10,000 or more.
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    \6\ The Interpretation was previously cited as ``Resolution of 
the Board of Governors--Notice to Membership and Press of 
Suspensions, Expulsions, Revocations, and Monetary Sanctions and 
Release of Certain Information Regarding Disciplinary History of 
Members and Their Associated Persons'' and appeared after paragraph 
2301 of the NASD Manual, following Article V, Section 1 of the Rules 
of Fair Practice.
    \7\ The publication of information is normally done through a 
monthly press release containing information about significant 
disciplinary actions that have become final during the preceding 
month. In addition, a more detailed press release may be issued on a 
more expedited basis about a case of particular importance.
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    The Program has expanded to now provide a synopsis of all pending 
NASD disciplinary information regarding members and associated persons, 
including information on the filing of disciplinary complaints. While 
the information is available through CRD, concerns have been raised 
because there is a disparity in accessability of the information. The 
NASD does not publish, to the membership or the press, the issuance of 
a significant complaint regarding a member or associated person with 
whom the individual does

[[Page 22987]]

business. Moreover, the current provisions of IM-8310-2 do not permit 
the Association to be pro-active in providing notification to the 
membership and the press of non-final disciplinary decisions and does 
not permit the Association to publicize other (final or non-final) 
disciplinary decisions that do not meet the current publication 
criteria, but that nonetheless involve a significant policy or 
enforcement issue that should be brought to the attention of the 
public.
    In considering this issue, NASD Regulation believes that the 
interests of the public in obtaining improved access to information 
concerning significant disciplinary matters must be balanced against 
the legitimate interests of respondents not to be subject to unfair 
publicity concerning unadjudicated allegations of violations (i.e., 
complaints) and non-final determinations of violations (i.e., non-final 
decisions). Proposed Interpretation IM-8310-2 seeks to balance these 
interests by authorizing the Association to release information on 
disciplinary matters that could most significantly affect investors' 
interest and by enhancing the disclosure accompanying the release of 
disciplinary information.
    The Association would be authorized to release information on those 
disciplinary complaints that present the most significant investor 
protection issues, i.e. violations of anti-fraud, anti-manipulation, 
and sales practices rules that affect investors. In addition, the 
Association would be authorized to release to the public information 
the President of NASD Regulation determines should be publicized in the 
public interest as well as information on any NASD-initiated \8\ 
disciplinary complaint that contains an allegation of a violation of a 
specifically identified statute, rule or regulation of the SEC, NASD, 
or Municipal Securities Rulemaking Board (``MSRB'') \9\ that is 
determined by the NASD Regulation Board of Directors to involve serious 
misconduct that affects investors (``Designated Rules'').\10\ The 
Association would also be authorized to release information on final 
and non-final disciplinary matters that: (1) Meet the current criteria 
for significant disciplinary decisions; (2) meet the specific criteria 
proposed for disciplinary complaints, or (3) the President of NASD 
Regulation determines should be publicized in the public interest.
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    \8\ With respect to the methodology for the release of 
information on complaints and decisions, it is anticipated that 
information will be released through an omnibus press release (that 
is subsequently included in an NASD Notice to Members), a press 
release on an individual matter, or through the NASD Regulation 
WebSite.
    \9\ NASD Regulation maintains the authority and responsibility 
to enforce compliance with MSRB rules with respect to member firms.
    \10\ NASD Regulation proposed a list of Designated Rules that 
included those SEC, NASD, and MSRB rules that prohibit significant 
fraudulent activity or egregious conduct. The list of Designated 
Rules was published in Securities Exchange Act Release No. 38380 
(March 10, 1997), 62 FR 12866 (March 18, 1997). In addition, the 
list of Designated Rules will be published in the Notice to Members 
announcing the approval of this rule proposal. In the future, any 
changes to the list will be filed with the Commission as a proposed 
rule change in accordance with Rule 19b-4(e)(1). In addition, the 
changes to the list will be published by the Association in a Notice 
to Members.
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    The proposal also provides for, in limited circumstances, the 
release of information on disciplinary complaints that contain 
allegations of violations of other rules and regulations not included 
on the list of Designated Rules, but nonetheless involve serious 
misconduct that could affect investors. Proposed Interpretation IM-
8310-2 would authorize the President of NASD Regulation to issue 
information on any complaint or group of complaints that involve a 
significant policy or enforcement determination where the release of 
the information is deemed to be in the public interest.
    In order to ensure that the appropriate disclosures accompany 
information on any disciplinary complaint, NASD Regulation proposed to 
require that any disciplinary complaint be accompanied by a disclosure 
regarding the status of the complaint. The Interpretation currently 
requires disclosure that ``the issuance of a disciplinary complaint 
represents the initiation of a formal proceeding by the Association in 
which findings as to the allegations in the complaint have not been 
made and does not represent a decision as to any of the allegations 
contained in the complaint.'' The proposed amendment would expand this 
disclosure to include the following statement: ``Because this complaint 
is unadjudicated, you may wish to contact the respondent before drawing 
any conclusions regarding the allegations in the complaint.'' NASD 
Regulation believes that this disclosure will help to enable recipients 
of the information to view it in an appropriate context and, thereby, 
provide appropriate protections to the respondent.\11\
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    \11\ While the Association receives request for disciplinary 
information from either telephonic inquiries or written inquiries, 
the requested information is released in written form and will be 
accompanied by the disclosure.
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    With respect to non-final disciplinary decisions, NASD Regulation 
proposed to amend the Interpretation to require that the current 
significance test for release of information on final decisions also be 
applied to the release of information on non-final decisions--with the 
additional requirement that non-final decisions be accompanied by 
appropriate disclosures as to the status of the case.\12\ As a result 
of these changes, the Association would be authorized to release 
information on non-final disciplinary decisions that impose monetary 
sanctions of $10,000 or more, penalties of expulsion, revocation, 
suspension, or a bar from being associated with member firms.
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    \12\ As proposed, paragraph (c) of Interpretation IM-8310-2 
would be redesignated as subparagraph (d)(1) and the provisions that 
currently prevent the Association from releasing information on non-
final disciplinary decisions would be deleted.
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    Association would be authorized to release information on non-final 
disciplinary decisions that impose monetary sanctions of $10,000 or 
more, penalties of expulsion, revocation, suspension, or a bar from 
being associated with member firms.
    In addition, the proposal would require the release of information 
on all non-final and final decisions that contain allegations of a 
Designated Rule violation, regardless of the extent to the sanction or 
whether any sanction had, in fact, been imposed. NASD Regulation 
believes that where information on a disciplinary complaint is released 
because it includes an allegation of a violation of one or more 
Designated Rules, information on the decision involving the same matter 
should also be released based on the same public policy interests that 
justify the release of compliant information--regardless of whether the 
decision results in the finding of a violation and the imposition of 
sanction, a dismissal of the allegation, or a reversal of earlier 
findings.
    NASD Regulation also proposed amending the provision regarding 
waiving the release of information in a particular case where the 
release of the information would be deemed to violate fundamental 
notions of fairness or work an injustice. The proposed amendment 
transfers the authority to grant exceptions from the Board of Governors 
of the NASD to the National Business Conduct Committee (``NBCC''), in 
order to facilitate consideration of any application for an exception 
pursuant to the standard NBCC review procedures for motions by 
respondents.

III. Discussion

    The Commission believes the proposed rule change is consistent with 
the Exchange Act and the rules and regulations thereunder applicable to 
the NASD. In particular, Section 15A(b)(6)

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of the Exchange Act \13\ requires 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, to foster cooperation and coordination with 
persons engaged in regulating, clearing, settling and processing 
information with respect to, and facilitating transactions in 
securities, to remove impediments to and perfect the mechanism of a 
free and open market and a national market system and in general to 
protect investors and the public interest. The Commission believes that 
the NASD Regulation's proposal to expand the Association's authority to 
release information on significant disciplinary complaints and 
significant final and non-final disciplinary decisions is consistent 
with the Association's obligations to protect investors and the public 
interest.
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    \13\ 15 U.S.C. Sec. 78o-3.
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    The Commission believes investor confidence in NASD members will be 
enhanced because more information will be available to the public under 
the proposed Interpretation. Moreover, the Commission believes that 
providing the public with more complete information on the disciplinary 
history of NASD members will aid investors in making informed decisions 
with respect to choosing a broker.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Exchange Act that the proposed rule change and Amendment No. 1 (SR-
NASD-97-11) be and hereby is approved. The Interpretation IM-8310-2 
should become effective 30 days after the date a Notice to Members is 
issued announcing adoption of the proposed rule change and containing 
the list of Designated Rules. The Notice to Members shall be issued 
within 45 days of publication of this approval order in the Federal 
Register.

    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) (1989).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-10882 Filed 4-25-97; 8:45 am]
BILLING CODE 8010-01-M