[Federal Register Volume 62, Number 136 (Wednesday, July 16, 1997)]
[Notices]
[Pages 38156-38178]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-18728]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-38831; File No. SR-NASD-97-28]


Self-Regulatory Organizations; Notice of Filing of Amendment No. 
2 to a Proposed Rule Change by the National Association of Securities 
Dealers, Inc., Relating to Procedures for Limitations on Operations, 
Suspensions, Cancellations, Bars, Denials of Access, Eligibility 
Proceedings and Exemptions

July 11, 1997.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'')\1\ and Rule 19b-4 \2\ thereunder, notice is hereby given that 
on July 10, 1997, the National Association of Securities Dealers, Inc. 
(``NASD'') filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission'') Amendment No. 2 to the proposed rule change, as 
described in Items I, II, and III below, which Items have been prepared 
by the self-regulatory organization.\3\ The Commission is publishing 
this notice to solicit comments on Amendment No. 2 from interested 
persons.
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    \1\ 15 U.S.C. Sec. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ The proposed rule change, including Amendment No. 1, was 
previously noticed in the Federal Register. See Exchange Act Release 
No. 38545 (April 24, 1997), 62 FR 25226 (May 8, 1997) (the 
``Original Proposal''). Two comment letters were received on the 
Original Proposal. See letter from Faith Colish, Attorney, Faith 
Colish P.C., to Jonathan G. Katz, Secretary, Commission, dated June 
9, 1997; 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, date June 
17, 1997.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The NASD is proposing to amend the proposed rule change filed in 
SR-NASD-97-28. The Amendment contains revisions to the proposed Rule 
9400 and 9500 Series of the Code of Procedure of the NASD and a 
proposed Rule 9600 Series setting forth procedures for applying for 
exemptions. As amended, the proposed Rule 9400-9500 Rule Series sets 
forth procedures for limitations on operations, suspensions, 
cancellations, bars, denials of access to NASD services, and 
eligibility proceedings. As noted in the Original Proposal, the NASD 
proposes to rescind the Rule 9500 and 9600 Series. The Association is 
requesting permanent approval of the proposed rule change as set forth 
in this

[[Page 38157]]

Amendment. Attached as Exhibit A is the amended text of the proposed 
rule change. Proposed new language is in italics; proposed deletions 
are in brackets.

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

    In its filing with the Commission, the self-regulatory organization 
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. The self-regulatory organization 
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
    a. Introduction: The NASD is amending the Original Proposal 
relating to the Rule 9400 and 9500 Series to request permanent approval 
of the Rule 9400 and 9500 Series as proposed in this amendment, 
consolidate and reorganize certain procedures, provide additional 
procedural rights and specificity for each proceeding, and conform the 
proposed Rule 9400 and 9500 Series to the proposed Rule 9200 and 9300 
Series. Further, the NASD is proposing a new Rule 9600 Series that 
would require members to apply to the staff in the first instance for 
an exemption under various rules and provide a right of appeal to the 
National Business Conduct Committee.
    The Original Proposal requested temporary approval for five 
separate procedures for: (1) Regulating the activities of members 
experiencing financial or operating difficulty (proposed Rule 9410); 
(2) approval of a change in business operations that will result in a 
change in exemptive status under SEC Rule 15c3-3 (proposed rule 9420); 
(3) summary suspension (proposed Rule 9510); (4) non-summary 
suspension, cancellation, and bar (proposed Rule 9520); and (5) 
eligibility proceedings (proposed Rule 9530). The Original Proposal 
also indicated that the NASD would comprehensively review the Rule 9400 
and 9500 Series and consider submitting a revision to its proposal 
based on that review.
    As a result of its review, the NASD now proposes to amend its 
Original Proposal to reduce the number of separate proceedings from 
five to three, and seeks permanent approval of these three procedures. 
First, the NASD is proposing that the Rule 9410 Series for limitations 
on operations remain as a separate rule. Second, the NASD is proposing 
to eliminate the Rule 9420 Series as a separate rule series and instead 
require a member that wishes to change its exemptive status under SEC 
Rule 15c3-3 to apply for a change to its membership agreement if such 
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. Procedures for applying for a change to 
a membership agreement or for approval of a material change in business 
operations are set forth in the proposed rule 1010 Series. The NASD 
will inform the membership of this change in procedure in a notice to 
members. Third, the NASD proposes to consolidate the Exchange Act 
summary suspension proceedings (proposed Rule 9510), non-summary 
suspension, cancellation, and bar proceedings (proposed Rule 9520), and 
new denial of access procedures in the revised Rule 9510 Series. 
Finally, eligibility proceedings remain in a separate rule series and 
are renumbered as the Rule 9520 Series.
    The NASD also proposes to amend the Rule 9400 and Rule 9500 Series 
to provide members, associated persons, and others 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. The amendments to the proposed rules include 
a variety of new provisions regarding the time in which a hearing 
requested by a member must be held (proposed Rule 9413(c) and 9514(d)); 
the disclosure of documents by NASD staff to the member prior to 
hearing (proposed Rules 9413(d), 9514(e) and 9523(a)); and the rights 
of parties at a hearing (proposed Rules 9413(e), 9514(f) and 9523(a)). 
Some of the more significant proposed changes are discussed below.
    b. Proposed Rule 9410 Series: The original proposal did not provide 
for timely notice to the member of the date, time, and location of the 
hearing. As amended, proposed Rule 9413(c) now provides that the 
Department of Member Regulation must provide written notice of such 
information to the member at least five business days prior to the 
hearing.
    Similarly, no provision was made in the Original Proposal for 
disclosure to the member, prior to the hearing, of the Department of 
Member Regulation's documents. The NASD now proposes that not less than 
five business days prior to the hearing, the member shall receive all 
documents considered by the Department of Member Regulation in imposing 
the limitations on the member's business activities, except any 
document that meets the criteria of Rule 9251(b)(1) (A), (B), or (C). 
That Rule describes certain documents that are privileged, constitute 
attorney work product, or otherwise relate to confidential 
investigatory or examination techniques. As a matter of practice, the 
NASD does not turn over such documents in any of its proceedings. As 
noted in the original proposal, proposed Rule 9251 is based on SEC Rule 
of Practice 230, 17 C.F.R. 201.230. The proposed rule also provides for 
the exchange of proposed exhibit and witness lists (proposed Rule 
9413(d)).
    The NASD also proposes to amend the Rule 9410 Series to set forth 
the contents of the record (proposed Rule 9413(f)); designate the 
obligations of the custodian of the record (proposed Rules 9413(g) and 
9414(a)(4)); and a requirement that the Department issue a written 
decision (proposed Rule 9413(i)). If a decision imposes limitations, 
the decision must state the grounds for the limitations and the 
conditions for terminating such limitations (proposed Rule 9413(i)).
    The appeal and review procedures for the Rule 9410 Series are 
largely unchanged from the original proposal. Amendment No. 2 adds a 
new provision that additional relevant and material evidence may be 
considered by the Subcommittee of the National Business Conduct 
Committee (proposed Rule 9414(b)(4)).
    In the original proposal, proposed Rule 9417(b), Enforcement of 
Sanctions, did not provide the time in which a hearing must be held if 
requested by a member. The NASD proposes to provide that the hearing 
must be held within ten days after service of the Department of Member 
Regulation's order imposing sanctions. The NASD also proposes to amend 
proposed Rule 9417 to provide that a request for hearing shall not stay 
the effectiveness of the order imposing sanctions.
    Proposed Rule 9418 clarifies that if additional limitations are 
imposed, the member may apply for relief by filing a written 
application for hearing under rule 9413, and that Rules 9413 through 
9417 apply to such a request.

[[Page 38158]]

    c. Proposed Rule 9510 Series: The original proposal proposed 
separate rules for summary suspension as authorized by Section 
15A(h)(3) of the Exchange Act (proposed Rule 9510) and non-summary 
suspension, cancellation, and bar proceedings (proposed Rule 9520). The 
NASD now proposes to consolidate these procedures under the proposed 
Rule 9510 Series and add new denial of access procedures. The proposed 
amendments make clear, however, the different bases for summary and 
non-summary procedures (proposed Rule 9511).
    The proposed amendments are intended to expedite these proceedings 
by providing that computation of time under the Rule 9510 Series at all 
times includes intermediate Saturdays, Sundays, and holidays. In 
contrast, proposed Rule 9138 includes such days unless the period is 
ten days or less. In addition, to conform with proposed Rule 9143 and 
the proposed amendment to the Rule 9410 Series, ex parte rules apply 
when NASD staff has knowledge that a member, associated person, or 
other person intends to request a hearing under proposed Rule 9514.
    Although the procedures for hearing and review have been 
consolidated, the different procedures for the initiation of summary 
and non-summary proceedings (proposed Rules 9512 and 9513) remain 
largely unchanged from the original proposal.
    To expedite these proceedings, the request for hearing must be 
filed within seven days after service of the notice initiating the 
proceeding (proposed Rule 9514(a)). As amended, proposed Rule 9514(b) 
also provides for the designation of a department or office of the NASD 
to act as a party in the proceeding and for the appointment of a 
Hearing Panel.
    To conform with the proposed Rule 9410 Series, the proposed Rule 
9510 Series provides for the time in which the hearing must be held; 
written notice of the location, date, and time of the hearing; 
transmission of the NASD's documents; and exchange of proposed exhibit 
and witness lists prior to the hearing (proposed Rule 9514 (d) and 
(e)). With respect to the transmission of the NASD's documents, the 
NASD does not anticipate that a notice of summary suspension will be 
based solely on documents that meet the exclusion criteria of Rule 
9251(b)(1)(A)-(C). In all cases, the notice of summary suspension must 
include the factual basis for the NASD's action and those facts may be 
derived from documents that meet the criteria of Rule 9251(b)(1)(A)-
(C). Provisions to proposed Rule 9413 also define the contents of the 
record and designate a custodian of the record (proposed Rule 
9514(f)(4) and (5)). The provision defining the contents of the 
decision issued by the hearing panel (proposed Rule 9514(g)(3)) has 
been amended to conform with proposed Rule 9268, which describes the 
initial decision in a disciplinary proceeding.
    The NASD also has added a procedure for reinstatement after a non-
summary suspension or limitation. This procedure is similar to the 
procedure set forth in proposed Rule 8225. A member or person who is 
subject to a summary suspension, limitation, or prohibition or a non-
summary prohibition under the proposed Rule 9510 Series could not use 
this reinstatement procedure; such member or person would have to 
reapply for membership, registration, or access under other Rules of 
the NASD.
    The NASD also has specifically provided for the imposition of costs 
in denial of access proceedings, which are not otherwise covered by 
Rule 8330.
    Finally, certain existing cross-references to the Rule 9700 Series 
in other NASD rules must be changed to reflect that the Rule 9510 
Series will now provide procedures for denials of access. That is, the 
reference to the Rule 9700 Series in NASD Rules 4730 and 5360 will be 
replaced with a reference to the Rule 9510 Series. The NASD proposes to 
eliminate the references to the Rule 9700 Series in Rule 5265 because 
procedures for resolving matters arising under this rule are provided 
for under the Uniform Practice Code, as set forth in the Rule 11000 
Series.
    d. Proposed Rule 9520 Series: The rules for eligibility proceedings 
are now renumbered as the proposed Rule 9520 Series. The length of time 
for a member to file a written application for relief is extended from 
seven to ten days (proposed Rule 9522(a)). The Amendment also provides 
for notice of the location, date, and time of the hearing and the 
transmission of the NASD's documents and exchange of exhibit and 
witness lists prior to hearing (proposed Rule 9523(a)). The Amendment 
also provides for the content of the record and the designation of the 
custodian of the record (proposed Rule 9523(a)(6) and (7)).
    In keeping with other procedures in the proposed Rule 9000 Series, 
the NASD is amending proposed Rule 9522 to provide that applications 
for relief and notices of withdrawal of such applications be filed with 
the adjudicator, the National Business Conduct Committee, rather than 
the Department of Member Regulation, which acts as a Party in the 
proceeding. In addition, because departments and offices other than the 
Department of Member Regulation may be involved in issuing a notice of 
disqualification (e.g., the Membership Department, which maintains the 
Central Registration Depository), the NASD is amending proposed Rule 
9522 to provide that ``Association staff'' rather than ``the Department 
of Member Regulation'' may issue a notice of disqualification.
    e. Proposed Rule 9600 Series: As part of the NASD's settlement with 
the Commission, the NASD agreed to provide autonomy and independence to 
the regulatory staff of the NASD and its subsidiaries such that the 
staff: (i) Has sole discretion as to what matters to investigate and 
prosecute; (ii) has sole discretion to handle all other regulatory 
matters; (iii) prepares rule proposals, rule interpretations, and other 
policy matters with any consultations with interested NASD 
constituencies made in a fair and evenhanded manner; and (iv) is 
generally insulated from the commercial interests of its members and 
the Nasdaq market.
    As part of the implementation of the requirement in the settlement 
to provide autonomy and independence to the regulatory staff in certain 
matters, the NASD is proposing a new Rule 9600 Series that would 
require members to apply to the staff in the first instance for an 
exemption under various rules and provide a right of appeal to the 
National Business Conduct Committee.
    The proposed rule change is also consistent with amendments 
recently filed with the Commission which, among other things, propose 
to revise the Rules of the NASD to create greater authority for NASD 
Regulation staff regarding applications for membership and the 
investigation of complaints, and to provide enhanced procedural rights 
and safeguards for new applicants and those subject to a complaint.
    The proposed Rule 9600 Series would require a member seeking an 
exemption from certain NASD rules to file a written application with 
the Office of General Counsel of NASD Regulation. Presently, under 
various rules, certain quasi-adjudicative or exemptive authority has 
been granted to various standing committees.
    The proposed rules provide that any written application for an 
exemption must contain the member's name and address, the name of a 
person associated with the member who will serve as the primary contact 
for the application, the rule from which the member is seeking an 
exemption, and a detailed statement of the grounds for granting the 
exemption. If the member does not want the application or the decision 
on the

[[Page 38159]]

application to be publicly available in whole or in part, the member 
also must include in its application a detailed statement, including 
supporting facts, showing good cause for treating the application or 
decision as confidential in whole or in part.
    The proposed rules would require NASD Regulation staff, after 
considering an application, to issue a written decision setting forth 
its findings and conclusions to be served on the applicant pursuant to 
Rules 9132 and 9134. After the decision is served on the applicant, the 
application and decision will be made publicly available unless NASD 
Regulation staff determines that the applicant has shown good cause for 
treating the application or decision as confidential in whole or in 
part.
    The proposed rules permit an applicant to appeal the decision by 
filing a written notice of appeal within 15 calendar days after service 
of a decision issued under proposed Rule 9620. The notice of appeal 
must contain a brief statement of the findings and conclusions as to 
which exception is taken. The National Business Conduct Committee may 
order oral argument. If the applicant does not want the National 
Business Conduct Committee's decision on appeal to be publicly 
available in whole or in part, the applicant must include in its notice 
of appeal a detailed statement, including supporting facts, showing 
good cause for treating the decision as confidential in whole or in 
part. The notice of appeal must be signed by the applicant. Where the 
failure to promptly review a decision to deny a request for exemption 
would unduly or unfairly harm the applicant, the National Business 
Conduct Committee shall provide expedited review. An applicant may 
withdraw its notice of appeal at any time by filing a written notice of 
withdrawal of appeal with the National Business Conduct Committee.
    The proposed rules require the National Business Conduct Committee, 
following the filing of a notice of appeal, to designate a Subcommittee 
to hear an oral argument, if ordered, consider any new evidence that 
the applicant can show good cause for not including in its application, 
and recommend to the National Business Conduct Committee a disposition 
of all matters on appeal.
    The proposed rules require the National Business Conduct Committee, 
after considering all matters on appeal and the Subcommittee's 
recommendation, to affirm, modify, or reverse the decision issued under 
the proposed Rule 9620. The National Business Conduct Committee must 
issue a written decision setting forth its findings and conclusions and 
serve the decision on the applicant. The decision must be served 
pursuant to Rules 9132 and 9134. The decision will be effective upon 
service and constitutes final action of the NASD.
    The proposed rules also make conforming changes to those particular 
rules under which exemptions are currently granted, clarifying that the 
authority for granting such exemptions rests with NASD Regulation staff 
in the first instance. Currently, this includes rules relating to 
registration requirements, categories of principal registration, 
qualification examinations and waiver requirements, customer account 
statements, margin accounts, underwriting terms and arrangements for 
corporate financing matters, conflicts of interest involving 
distributions of securities of members and affiliates, direct 
participation programs, position limits for index warrants, exercise 
limits for index warrants, position limits for options, position limits 
for index options, exercise limits for options, securities categorized 
as ``failed to receive'' and ``failed to deliver,'' short sales, 
customer account transfer contracts, clearance of corporate debt 
securities, free-riding and withholding, and Municipal Securities 
Rulemaking Board Rule G-37.
    In addition, the proposed rules create new authority under Rule 
2210 to permit the Advertising Regulation Department to grant 
exemptions from the pre-filing requirements of paragraph (c) of that 
Rule in order to reflect existing practice. The need for such authority 
under Rule 2210 arises when, for example, members are the subject of a 
buyout or reorganization, or form a subsidiary firm, and the successor 
entity is substantially similar to the predecessor entity, retains the 
same control persons, and continues to produce the same securities 
products that were previously filed with the Department. In such 
situations, the dangers toward which the pre-filing requirements are 
directed have already been eliminated.
    The proposed amendments do not affect certain existing functions of 
committees when the interests represented are fundamentally different, 
or when the issues presented are highly technical and do not require a 
highly formal process (See Rules 11110 and 2340(d), which will continue 
to authorize certain functions for the Financial Responsibility and 
Operations Committees, and Rules 10102, 10104, and 10301(b), which will 
continue to authorize certain functions for the National Arbitration 
and Mediation Committee).
    f. Rule 9800 Series: The Rule 9800 Series contains procedures for 
committee review of staff decisions regarding corporate financing and 
direct participation program matters. The deletion of the Rule 9800 
Series is consistent with the changes proposed herein to Rules 2710 
(Corporate Financing Rule), 2720 (Distributions of Securities of 
Members and Affiliates) and 2810 (Direct Participation Programs) to 
subject corporate financing and direct participation program matters to 
the new procedures for granting exemptions.
2. Statutory Basis
    The NASD believes the proposed rule change is consistent with 
Section 15A(b) (6)-(8) of the Act, 15 U.S.C. Sec. 78o-3(b) (6)-(8). The 
NASD believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act, which require that the NASD 
adopt and amend its rules to promote just and equitable principles of 
fair trade, and generally provide for the protection of investors and 
the public interest, in that the proposed rule change preserves the 
independence of NASD Regulation staff regarding procedures for 
exemptions, promotes fairness by creating procedural regularity and 
predictability intended to optimize evenhanded results and minimize 
disparate results, and clarifies and streamlines the process for 
granting exemptions by articulating the application and decision 
process and by clearly defining appeal rights. Section 15A(b)(7) 
mandates that a national securities association establish rules 
providing that ``its members and persons associated with its members 
shall be appropriately disciplined for violation of any provision of 
this title, the rules or regulations thereunder, the rules of the 
Municipal Securities Rulemaking Board, or the rules of the association, 
by expulsion, suspension, limitation of activities, functions, and 
operations, fine, censure, being suspended or barred from being 
associated with a member, or any other fitting sanction.'' Section 
15A(b)(8) mandates that a national securities association establish 
rules providing for ``a fair procedure for the disciplining of members 
and persons associated with members, the denial of membership to any 
person seeking membership therein, the barring of any person from 
becoming associated with a member thereof, and the prohibition or 
limitation by the association of any person with respect to access to 
services offered by the association or a member thereof.'' The NASD 
believes the proposed rule

[[Page 38160]]

changes will further the goals of Sections 15A(b) (6), (7), and (8).

B. Self-Regulatory Organization's Statement on Burden on Competition

    The NASD does not believe 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, as amended.

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

    The NASD has neither solicited nor received written comments.

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

    Within 35 days of the publication of this notice in the Federal 
Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer periods to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve the proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing. Persons making written statements 
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 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. Sec. 552, will be available for inspection and copying at 
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. Comments also may be submitted electronically at the following E-
mail address: [email protected]. File Number SR-NASD-97-28 should 
be included on the subject line if E-mail is used to submit a comment 
letter. Electronically submitted comment letters will be posted on the 
Commission's Internet web site (http://www.sec.gov).
    All submissions should refer to File Number SR-NASD-97-28, 
Amendment No. 2, and should be submitted by August 6, 1997.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\4\
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    \4\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.

Exhibit A

    Proposed new language is in italics; proposed deletions are in 
brackets.

9400. Limitation[s and Approval] Procedures Under Rules 3130[,] and 
3131[, and 3140]

9410. Procedures for Regulating Activities of a Member Experiencing 
Financial or Operational Difficulties
9411. Purpose
    The Rule 9410 Series sets forth procedures for regulating the 
activities of a member that is experiencing the financial or 
operational difficulties specified in Rule 3130 or 3131.
9412. Notice of Limitations
    The Department of Member Regulation [(hereinafter ``Department'' in 
the Rule 9410 Series)] may issue a notice directing a member to limit 
its business activities if the Department of Member Regulation has 
reason to believe that any condition specified in Rule 3130 or 3131 
exists. The notice shall specify the grounds on which such action is 
being taken, the nature of the limitations to be imposed, the effective 
date of the limitations, [and] a fitting sanction that will be imposed 
if the member fails to comply with the limitation set forth in the 
notice, and the conditions for terminating such limitations. The 
effective date of the limitations shall be at least seven days after 
the date of service of the notice. The notice also shall inform the 
member that it may request a hearing before the Department of Member 
Regulation under Rule 9413. The Department of Member Regulation shall 
serve the notice [pursuant to Rules 9131 and 9134] by facsimile or 
overnight commercial courier.
9413. Department of Member Regulation Consideration
(a) Request for Hearing
    A member aggrieved by a notice issued under Rule 9412 may file a 
written request for a hearing before the Department of Member 
Regulation. The request shall state the specific grounds for 
withdrawing or modifying the limitations specified in the notice. The 
request shall be filed pursuant to Rules 9135, 9136, and 9137 within 
five days after service of the notice under Rule 9412.
[(b) Hearing]
    [If a member requests a hearing under paragraph (a), the Department 
shall conduct a hearing within 14 days after service of the notice 
under Rule 9412. The member shall be entitled to be heard in person, to 
be represented by an attorney, and to submit any relevant evidence. The 
hearing shall be recorded and a transcript prepared by a court 
reporter. The member may purchase a copy of the transcript from the 
court reporter. Any corrections to the transcript shall be submitted 
within three days after the hearing or within three days after receipt 
of the transcript, whichever is later.]

(b) Stay

    A request for hearing shall stay the notice of limitations served 
under Rule 9412 unless the National Business Conduct Committee orders 
otherwise.

(c) Time of Hearing

    If a member requests a hearing under paragraph (a), the Department 
of Member Regulation shall conduct a hearing within 14 days after 
service of the notice under Rule 9412. Not less than five business days 
before the hearing, the Department of Member Regulation shall provide 
written notice to the member of the location, date, and time of the 
hearing by facsimile or overnight commercial courier.

(d) Transmission of Documents

    (1) Not less than five business days before the hearing, the 
Department of Member Regulation shall provide to the member by 
facsimile or overnight commercial courier all documents that were 
considered in imposing the limitations on business activities set forth 
in the notice served under Rule 9412, unless a document meets the 
criteria of Rule 9251(b)(1) (A), (B), or (C). A document that meets 
such criteria shall not constitute part of the record, but shall be 
retained by the Association until the date upon which the Association 
serves a final decision or, if applicable, upon conclusion of any 
review by the Commission or the federal courts.
    (2) Not less than five business days before the hearing, the 
Department of Member Regulation and the member shall exchange proposed 
exhibit and witness lists. The exhibit and witness

[[Page 38161]]

lists shall be served by facsimile or by overnight commercial courier.

(e) Hearing and Rights of Member

    The member shall be entitled to be heard in person, to be 
represented by an attorney, and to submit any relevant evidence. The 
hearing shall be recorded and a transcript prepared by a court 
reporter. The member may purchase a copy of the transcript from the 
court reporter at prescribed rates. A witness may purchase a copy of 
the transcript of his or her own testimony from the court reporter at 
prescribed rates. Proposed corrections to the transcript may be 
submitted by affidavit to the Department of Member Regulation within a 
reasonable time determined by the Department of Member Regulation. Upon 
notice to the participants in the hearing, the Department of Member 
Regulation may order corrections to the transcript as requested or sua 
sponte.

(f) Record

    The record shall consist of:
    (1) the notice issued pursuant to Rule 9412;
    (2) all documents transmitted to the member under Rule 9413(d);
    (3) the request for hearing filed pursuant to Rule 9413(a);
    (4) any other submissions by the member and the Department of 
Member Regulation at the hearing;
    (5) any evidence considered at the hearing; and
    (6) the transcript of the hearing and any corrections thereto.

(g) Custodian of the Record

    The custodian of the record shall be the Department of Member 
Regulation.

(h) Evidence Not Admitted

    Evidence that is proffered but not admitted during the hearing 
shall not be part of the record, but shall be retained by the custodian 
of the record until the date when the Association's decision becomes 
final or, if applicable, upon the conclusion of any review by the 
Commission or the federal courts.
[(c)](i) Decision
    Within seven days after the hearing, the Department of Member 
Regulation shall issue a written decision approving, modifying, or 
withdrawing the limitations specified in the notice. If the decision 
imposes limitations, the decision shall state the grounds for the 
limitations, the conditions for terminating such limitations, and 
provide for a fitting sanction to be imposed under Rule [9417] 9416 if 
the member fails to comply with the limitations. The Department of 
Member Regulation shall promptly serve the decision [pursuant to Rules 
9132 and 9134. The decision] by facsimile or overnight commercial 
courier. The limitations imposed shall become effective upon service of 
the decision.
[(d)] (j) Failure To Request Hearing
    If a member does not request a hearing under paragraph (a), the 
limitations specified in the notice shall become effective on the date 
specified in the notice. Unless the National Business Conduct Committee 
calls the notice for review under Rule 9414(a)(2), the limitations 
specified in the notice shall remain in effect until the Department of 
Member Regulation reduces or removes [or modifies] the limitations 
pursuant to Rule 9418(b).
9414. National Business Conduct Committee Review
(a) Initiation of a Review
(1) Application by Member
    A member aggrieved by a decision issued under Rule 9413 may file a 
written application for review by the National Business Conduct 
Committee. The application shall state the specific grounds for the 
review and whether oral argument is requested. The application shall be 
filed pursuant to Rules 9135, 9136, and 9137 within seven days after 
service of the decision. The member may withdraw its application for 
review at any time by filing a written notice with the National 
Business Conduct Committee pursuant to Rules 9135, 9136, and 9137.
(2) Motion of National Business Conduct Committee
    A decision issued under Rule 9413 shall be subject to a call for 
review by any member of the National Business Conduct Committee or the 
Review Subcommittee described in Rule 9312(a)(1) within 30 days after 
service of the decision. If a member that receives a notice under Rule 
9412 does not request a hearing under Rule 9413, the notice shall be 
subject to a call for review by any member of the National Business 
Conduct Committee or the Review Subcommittee[,] within 30 days after 
the effective date of the notice. If the National Business Conduct 
Committee or the Review Subcommittee calls a decision or notice for 
review, a written notice of review shall be served promptly on the 
member pursuant to Rules 9132 and 9134. The notice of review shall 
state the specific grounds for the review and whether an oral argument 
is ordered. If a decision is called for review by a member of the 
National Business Conduct Committee or the Review Subcommittee, [the 
decision shall be reviewed by] the National Business Conduct Committee 
shall review the decision.
(3) Stay
    Unless otherwise ordered by the National Business Conduct 
Committee, the initiation of a review under this paragraph shall stay 
the decision of the Department of Member Regulation or an uncontested 
notice until a decision constituting final action of the Association is 
issued.
(4) Transmission of the Record
    If a review is initiated under this paragraph, the Department of 
Member Regulation shall assemble and prepare an index of the record, 
transmit the record and index to the National Business Conduct 
Committee, certify to the National Business Conduct Committee that the 
record is complete, and serve a copy of the record and index on the 
member.
[(4)] (5) Ex Parte Communications
    The prohibitions against ex parte communications in Rule 9143 shall 
become effective under the Rule 9410 Series when Association staff has 
knowledge that a member intends to file a written application for 
review or that the National Business Conduct Committee intends to 
review a decision on its own motion under this Rule.
(b) Subcommittee Consideration
(1) Appointment of Subcommittee
    The National Business Conduct Committee shall appoint a 
Subcommittee to participate in the review. The Subcommittee shall be 
composed of two or more members. One member shall be a member of the 
National Business Conduct Committee, and the remaining member or 
members shall be current or former Directors of the NASD Regulation 
Board or former Governors of the NASD Board.
(2) Oral Argument
    If oral argument is timely requested by the member, oral argument 
shall be held before the Subcommittee within 14 days after service of 
the decision under Rule 9413. If oral argument is ordered by the 
Subcommittee, oral argument shall be held before the Subcommittee 
within [seven] 14 days after service of the order under paragraph 
(a)(2). The member shall be entitled to be represented by an attorney. 
The oral argument shall be recorded and a transcript prepared by a 
court reporter.
    The member may purchase a copy of the transcript from the court 
reporter at prescribed rates. [Any corrections to the

[[Page 38162]]

transcript shall be submitted within three days after the oral argument 
or within three days after receipt of the transcript, whichever is 
later.] A witness may purchase a copy of the transcript of his or her 
own testimony from the court reporter at prescribed rates. Proposed 
corrections to the transcript may be submitted by affidavit to the 
Subcommittee within a reasonable time determined by the Subcommittee. 
Upon notice to the participants in the hearing, the Subcommittee may 
order corrections to the transcript as requested or sua sponte.
(3) Review on Record
    [If oral argument is not requested or ordered, the] The 
Subcommittee shall conduct its review on the basis of the record [and], 
any written submissions by the [Parties.] member and the Department of 
Member Regulation, and the decision issued pursuant to Rule 9413(i). If 
oral argument is requested or ordered, the Subcommittee also may 
consider any submissions or additional arguments by the member and the 
Department of Member Regulation.
(4) Additional Evidence
    The Subcommittee may consider any additional relevant and material 
evidence if the member shows good cause for not previously submitting 
such evidence. If additional evidence is accepted by the Subcommittee, 
the evidence shall be included in the record. Proffered evidence that 
is not accepted into the record by the Subcommittee shall be retained 
until the date when the Association's decision becomes final, or, if 
applicable, upon the conclusion of any review by the Commission or the 
federal courts.
(5) Recommendation
    The Subcommittee shall present a recommended decision in writing to 
the National Business Conduct Committee and all other Directors not 
later than seven days before the meeting of the National Business 
Conduct Committee at which the proceeding shall be considered.
(c) Decision
(1) Decision of National Business Conduct Committee, Including Remand
    After considering all matters presented in the review and the 
written recommended decision of the Subcommittee, the National Business 
Conduct Committee may affirm, modify, or reverse the [Department's] 
Department of Member Regulation's decision or remand the proceeding 
with instructions. The National Business Conduct Committee shall 
prepare a proposed written decision pursuant to subparagraph (2).
(2) Contents of Decision
    The decision shall include:
    (A) a description of the [Department's] Department of Member 
Regulation's decision, including its rationale;
    (B) a description of the principal issues regarding the imposition 
of limitations raised in the review and a statement supporting the 
disposition of such issues;
    (C) a summary of the evidence on each issue;
    (D) a statement of whether the [Department's] Department of Member 
Regulation's decision is affirmed, modified, or reversed, and a 
rationale therefor; and
    (E) if any limitations are imposed[,]: (i) a description of the 
limitations and a statement describing a fitting sanction that will be 
imposed under Rule 9417 if the member fails to comply with any of the 
limitations; and
    (ii) the conditions for terminating the limitations.
(3) Issuance of Decision After Expiration of Call for Review Period
    The National Business Conduct Committee shall provide its proposed 
written decision to the NASD Regulation Board, and, if the proceeding 
is not called for review by the NASD Regulation Board, to the NASD 
Board. The NASD Regulation Board may call the proceeding for review 
pursuant to Rule 9415. The NASD Board may call the proceeding for 
review pursuant to Rule 9416. If neither the NASD Regulation Board nor 
the NASD Board calls the proceeding for review, the proposed written 
decision of the National Business Conduct Committee shall become final, 
and the National Business Conduct Committee shall serve its written 
decision on the member and the Department of Member Regulation pursuant 
to Rules 9132 and 9134. The decision shall be effective upon service. 
The decision shall constitute the final action of the Association, 
unless the National Business Conduct Committee remands the proceeding.
9415. Discretionary Review by the NASD Regulation Board
(a) Call for Review by Director
    A Director may call a proceeding for review by the NASD Regulation 
Board if the call for review is made within the period prescribed in 
paragraph (b).
(b) Seven Day Period; Waiver
    After receiving the proposed written decision of the National 
Business Conduct Committee pursuant to Rule 9414, a Director shall have 
not less than seven days to determine if the proceeding should be 
called for review. A Director shall call a proceeding for review by 
notifying the General Counsel of NASD Regulation. By a unanimous vote 
of the NASD Regulation Board, the NASD Regulation Board may shorten the 
period to less than seven days. By an affirmative vote of the majority 
of the NASD Regulation Board then in office, the NASD Regulation Board 
may, during the seven day period, vote to extend the period to more 
than seven days.
(c) Review at Next Meeting
    If a Director calls a proceeding for review within the period 
prescribed by paragraph (b), the NASD Regulation Board shall review the 
proceeding not later than the next meeting of the NASD Regulation 
Board. The NASD Regulation Board may order the filing of briefs in 
connection with its review proceedings pursuant to this Rule.
(d) Decision of NASD Regulation Board, Including Remand
    After review, the NASD Regulation Board may affirm, modify, or 
reverse the proposed written decision of the National Business Conduct 
Committee or remand the proceeding with instructions. The NASD 
Regulation Board shall prepare a proposed written decision that 
includes all of the elements described in Rule 9414(c)(2).
(e) Issuance of Decision After Expiration of Call for Review Period
    The NASD Regulation Board shall provide its proposed written 
decision to the NASD Board. The NASD Board may call the proceeding for 
review pursuant to Rule 9416. If the NASD Board does not call the 
proceeding for review, the proposed written decision of the NASD 
Regulation Board shall become final, and the NASD Regulation Board 
shall serve its written decision on the member and the Department of 
Member Regulation pursuant to Rules 9132 and 9134. The decision shall 
be effective upon service. The decision shall constitute the final 
action of the Association, unless the NASD Regulation Board remands the 
proceeding.
9416. Discretionary Review by the NASD Board
(a) Call for Review by Governor
    A Governor may call a proceeding for review by the NASD Board if 
the call for review is made within the period prescribed in paragraph 
(b).

[[Page 38163]]

(b) Seven Day Period; Waiver
(1) Proceeding Called for Review by NASD Regulation Board
    If the NASD Regulation Board reviewed the proceeding under Rule 
9415, a Governor shall make his or her call for review not later than 
the next meeting of the NASD Board that is at least seven days after 
the date on which the NASD Board receives the proposed written decision 
of the NASD Regulation Board.
(2) Proceeding Not Called for Review by NASD Regulation Board
    If no Director of the NASD Regulation Board called the proceeding 
for review under Rule 9415, a Governor shall make his or her call for 
review not later than the next meeting of the NASD Board that is at 
least seven days after the date on which the NASD Board receives the 
proposed written decision of the National Business Conduct Committee.
(3) Waiver
    By a unanimous vote of the NASD Board, the NASD Board may shorten 
the period in subparagraph (1) or (2) to less than seven days. By an 
affirmative vote of the majority of the NASD Board then in office, the 
NASD Board may, during the seven day period in subparagraph (1) or (2), 
vote to extend the period in subparagraph (1) or (2) to more than seven 
days.
(c) Review at Next Meeting
    If a Governor calls a proceeding for review within the period 
prescribed in paragraph (b), the NASD Board shall review the proceeding 
not later than the next meeting of the NASD Board. The NASD Board may 
order the filing of briefs in connection with its review proceedings 
pursuant to this Rule.
(d) Decision of NASD Board, Including Remand
    After review, the NASD Board may affirm, modify, or reverse: (1) 
the proposed written decision of the NASD Regulation Board, or (2) if 
the NASD Regulation Board did not call [a] the proceeding for review 
under Rule 9415, the proposed written decision of the National Business 
Conduct Committee, Alternatively, the NASD Board may remand the 
proceeding with instructions. The NASD Board shall prepare a written 
decision that includes all of the elements described in Rule 
9414(c)(2).
(e) Issuance of Decision
    The NASD Board shall issue and serve its written decision on the 
member and the Department of Member Regulation pursuant to Rules 9132 
and 9134. The decision shall be effective upon service. The decision 
shall constitute the final action of the Association, unless the NASD 
Board remands the proceeding.
9417. Enforcement of Sanctions
(a) Order
    If the Department of Member Regulation determines that a member has 
failed to comply with any limitations imposed by a decision [under Rule 
9413, 9414, 9415, or 9416,] or an effective notice under [Rule 
9413(d),] the Rule 9410 Series that has not been stayed, the Department 
of Member Regulation shall issue an order [to be served pursuant to 
Rules 9132 and 9134] imposing the sanctions set forth in the decision 
or notice and specifying the effective date and time of such sanctions. 
The Department of Member Regulation shall serve the order on the member 
by facsimile or overnight commercial courier.
(b) Hearing
    (1) A member aggrieved by an order issued under paragraph (a) may 
file a written request for a hearing before the Department of Member 
Regulation. The request shall be filed pursuant to Rules 9135, 9136, 
and 9137 within [four days] seven days (including intermediate 
Saturdays, Sundays, and Federal holidays) after service of the order. 
The hearing shall be held within ten days after service of the order 
under paragraph (a).
    (2) The member shall be entitled to be heard in person, to be 
represented by an attorney, and to submit any relevant evidence.
    (3) The hearing shall be recorded and a transcript prepared by a 
court reporter. The member may purchase a copy of the transcript from 
the court reporter at prescribed rates. [Any corrections to the 
transcript shall be submitted within two days after the hearing or 
within two days after receipt of the transcript, whichever is later.] A 
witness may purchase a copy of the transcript of his or her own 
testimony from the court reporter at prescribed rates. Proposed 
corrections to the transcript may be submitted by affidavit to the 
Department of Member Regulation within a reasonable time determined by 
the Department of Member Regulation. Upon notice to the participants in 
the hearing, the Department of Member Regulation may order corrections 
to the transcript as requested or sua sponte.
(c) No Stay of Sanctions
    Unless otherwise ordered by the National Business Conduct 
Committee, a request for a hearing pursuant to this Rule shall not stay 
the effectiveness of the order issued under paragraph(a).
    [(c)] (d) Decision
    Within four days after the hearing, the Department of Member 
Regulation shall affirm, modify, or reverse the order issued under 
paragraph (a). The Department of Member Regulation shall serve the 
decision on the member pursuant to Rules 9132 and 9134. The decision 
shall become effective upon service and shall constitute final action 
of the Association.
9418. Additional Limitations; [Modification] Reduction or Removal of 
Limitations
(a) Additional Limitations
    If a member continues to experience financial or operational 
difficulty specified in Rule 3130 or 3131, notwithstanding an effective 
notice or decision under the Rule 9410 Series, the Department of Member 
Regulation may impose additional limitations by issuing a notice under 
Rule 9412. The notice shall state that the member may apply for relief 
from the additional limitations by filing a written application for a 
hearing under Rule 9413 and that the procedures in Rules 9413 through 
9417 shall be applicable. An application for a hearing also shall 
include a detailed statement of the member's objections to the 
additional limitations.
(b) [Modification] Reduction or Removal of Limitations
    If the Department of Member Regulation determines that any 
limitations previously imposed under the Rule 9410 Series should be 
[modified] reduced or removed, the Department of Member Regulation 
shall serve a written notice on the member pursuant to Rules 9132 and 
9134.
9419. Application to Commission for Review; Other Action Not Foreclosed
    (a) [Any person aggrieved by final action pursuant to the Rule 9410 
Series may apply for review by the Commission under] The right to have 
any action taken by the Association pursuant to this Rule Series 
reviewed by the Commission is governed by Section 19 of the Act. The 
filing of an application for review shall not stay the effectiveness of 
[final] the action taken by the Association, unless the Commission 
otherwise orders.
    (b) Action by the Association under the Rule 9410 Series shall not 
foreclose action by the Association under any other Rule.

[[Page 38164]]

[9420. Approval of Change in Business Operations That Will Result in a 
Change in Exemptive Status under SEC Rule 15c3-3]
[9421. Purpose]
    [The Rule 9420 Series sets forth procedures for Rule 3140, which 
requires the Association's approval of a change in a member's business 
activities that will result in a change in the member's exemptive 
status under SEC Rule 15c3-3.]
[9422. Department of Member Regulation Consideration]
[(a) Application]
    [A member shall apply for approval of a change in its business 
operation that will result in a change in its exemptive status under 
SEC Rule 15c3-3 by filing a written application with the Department of 
Member Regulation (hereinafter ``Department'' in the 9420 Rule Series) 
at the district office in the district in which it has its principal 
place of business. The application shall address the criteria set forth 
in Rule 3140 and shall be filed pursuant to Rules 9135, 9136, and 
9137.]
[(b) Decision]
    [Within 21 days after receipt of the application, the Department 
shall issue a decision approving or denying the application in whole or 
in part. If the decision denies the application in whole or in part, 
the decision shall set forth the specific grounds for such action. The 
decision shall provide a fitting sanction to be imposed in accordance 
with Rule 9426 if the member fails to comply with any limitations 
imposed. The Department shall serve the decision pursuant to Rules 9132 
and 9134.]
[9423. National Business Conduct Committee Review]
[(a) Initiation of Review]
    [(1) Application by Member]
    [A member aggrieved by a decision issued under Rule 9422 may file a 
written application for review by the National Business Conduct 
Committee. The application shall state the specific grounds for the 
review and whether oral argument is requested. The application shall be 
filed pursuant to Rules 9135, 9136, and 9137 within seven days after 
service of the decision. The member may withdraw its application at any 
time by filing a written notice with the National Business Conduct 
Committee pursuant to Rules 9135, 9136, and 9137.]
[(2) Motion of National Business Conduct Committee]
    [A decision issued under Rule 9422 shall be subject to a call for 
review by any member of the National Business Conduct Committee or the 
Review Subcommittee described in Rule 9312(a)(1) within 30 days after 
service of the decision. If the National Business Conduct Committee or 
the Review Subcommittee calls a decision for review, a written notice 
of review shall be served promptly on the member pursuant to Rules 9132 
and 9134. The written notice of review shall state the specific grounds 
for the review and whether oral argument is ordered. If a decision is 
called for review by any member of the National Business Conduct 
Committee or the Review Subcommittee, the decision shall be reviewed by 
the National Business Conduct committee.]
[(3) No Stay of Action]
    [Unless otherwise ordered by the National Business Conduct 
Committee, the initiation of a review under this paragraph shall not 
stay the decision of the Department.]
[(4) Ex Parte Communications]
    [The prohibitions against ex parte communications in Rule 9143 
shall become effective under the Rule 9420 Series when Association 
staff has knowledge that a member intends to file a written application 
for review or that the National Business Conduct Committee intends to 
review a decision on its own motion under this Rule.]
[(b) Subcommittee Consideration]
[(1) Appointment of Subcommittee]
    [The National Business Conduct Committee shall appoint a 
Subcommittee to participate in the review. The Subcommittee shall be 
composed of two or more members. One member shall be a member of the 
National Business Conduct Committee, and the remaining member or 
members shall be current or former Directors of the NASD Regulation 
Board or former Governors of the NASD Board.]
[(2) Oral Argument]
    [If oral argument is requested by the member, oral argument shall 
be held before the Subcommittee within 14 days after service of the 
decision under Rule 9422. If oral argument is ordered by the 
Subcommittee, oral argument shall be held before the Subcommittee 
within seven days after service of the order. The oral argument shall 
be recorded and a transcript prepared by a court reporter. The member 
may purchase a copy of the transcript from the court reporter. Any 
corrections to the transcript shall be submitted within three days 
after the oral argument or within three days after receipt of the 
transcript, whichever is later.]
[(3) Review on Record]
    [If oral argument is not requested or ordered, the Subcommittee 
shall conduct its review on the basis of the record and any written 
submissions by the Parties.]
[(4) Additional Evidence]
    [The Subcommittee may consider additional evidence if the member 
shows good cause for not previously submitting such evidence.]
[(5) Recommendation]
    [The Subcommittee shall present a recommended decision in writing 
to the National Business Conduct Committee and all other Directors not 
later than seven days before the meeting of the National Business 
Conduct Committee at which the proceeding shall be considered.]
[(c) Decision]
[(1) Decision of National Business Conduct Committee, Including Remand.
    After considering all matters presented in the review and the 
written recommended decision of the Subcommittee, the National Business 
Conduct Committee may affirm, modify, or reverse the Department's 
decision or remand the proceeding with instructions. The National 
Business Conduct Committee shall prepare a proposed written decision 
pursuant to subparagraph (2).]
[(2) Contents of Decision]
    [The decision shall include:
    (A) a description of the Department's decision, including its 
rationale;
    (B) a description of the principal issues regarding the change in 
the member's exemptive status raised in the review and a statement 
supporting the disposition of such issues;
    (C) a summary of the evidence on each issue;
    (D) a statement of whether the Department's decision is affirmed, 
modified, or reversed, and a rationale therefor; and
    (E) if any limitations are imposed, a description of the 
limitations and a statement describing a fitting sanction that will be 
imposed under Rule 9426 if the member fails to comply with any of the 
limitations.]

[[Page 38165]]

[(3) Issuance of Decision After Expiration of Call for Review Period]
    [The National Business Conduct Committee shall provide its proposed 
written decision to the NASD Regulation Board, and, if the proceeding 
is not called for review by the NASD Regulation Board, to the NASD 
Board. The NASD Regulation Board may call the proceeding for review 
pursuant to Rule 9424. The NASD Board may call the proceeding for 
review pursuant to Rule 9425. If neither the NASD Regulation Board nor 
the NASD Board calls the proceeding for review, the proposed written 
decision of the National Business Conduct Committee shall become final, 
and the National Business Conduct Committee shall serve its written 
decision pursuant to Rules 9132 and 9134. The decision shall constitute 
the final action of the Association, unless the National Business 
Conduct Committee remands the proceeding.]
[9424. Discretionary Review by the NASD Regulation Board]
[(a) Call for Review by Director]
    [A Director may call a proceeding for review by the NASD Regulation 
Board if the call for review is made within the period prescribed in 
paragraph (b).]
[(b) Seven Day Period; Waiver]
    [After receiving the proposed written decision of the National 
Business Conduct Committee pursuant to Rule 9423, a Director shall have 
not less than seven days to determine if the proceeding should be 
called for review. A Director shall call a proceeding for review by 
notifying the General Counsel of NASD Regulation. By a unanimous vote 
of the NASD Regulation Board, the NASD Regulation Board may shorten the 
period to less than seven days. By an affirmative vote of the majority 
of the NASD Regulation Board then in office, the NASD Regulation Board 
may, during the seven day period, vote to extend the period to more 
than seven days.]
[(c) Review at Next Meeting]
    [If a Director calls a proceeding for review within the period 
prescribed by paragraph (b), the NASD Regulation Board shall review the 
proceeding not later than the next meeting of the NASD Regulation 
Board. The NASD Regulation Board may order the filing of briefs in 
connection with its review proceedings pursuant to this Rule.]
[(d) Decision of NASD Regulation Board, Including Remand]
    [After review, the NASD Regulation Board may affirm, modify, or 
reverse the proposed written decision of the National Business Conduct 
Committee or remand the proceeding with instructions. The NASD 
Regulation Board shall prepare a proposed written decision that 
includes all of the elements described in Rule 9423(c)(2).]
[(e) Issuance of Decision After Expiration of Call for Review Period]
    [The NASD Regulation Board shall provide its proposed written 
decision to the NASD Board. The NASD Board may call the proceeding for 
review pursuant to Rule 9425. If the NASD Board does not call the 
proceeding for review, the proposed written decision of the NASD 
Regulation Board shall become final, and the NASD Regulation Board 
shall serve its written decision pursuant to Rules 9132 and 9134. The 
decision shall constitute the final action of the Association, unless 
the NASD Regulation Board remands the proceeding.]
[9425. Discretionary Review by NASD Board]
[(a) Call for Review by Governor]
    [A Governor may call a proceeding for review by the NASD Board if 
the call for review is made within the period prescribed in paragraph 
(b).]
[(b) Seven Day Period; Waiver]
[(1) Proceeding Called for Review by NASD Regulation Board]
    [If the NASD Regulation Board reviewed the proceeding under Rule 
9424, a Governor shall make his or her call for review not later than 
the next meeting of the NASD Board that is at least seven days after 
the date on which the NASD Board receives the proposed written decision 
of the NASD Regulation Board.]
[(2) Proceeding Not Called for Review by NASD Regulation Board]
    [If no Director of the NASD Regulation Board called the proceeding 
for review under Rule 9424, a Governor shall make his or her call for 
review not later than the next meeting of the NASD Board that is at 
least seven days after the date on which the NASD Board receives the 
proposed written decision of the National Business Conduct Committee.]
[(3) Waiver]
    [By a unanimous vote of the NASD Board, the NASD Board may shorten 
the period in subparagraph (1) or (2) to less than seven days. By an 
affirmative vote of the majority of the NASD Board then in office, the 
NASD Board may, during the seven day period in subparagraph (1) or (2), 
vote to extend the period in subparagraph (1) or (2) to more than seven 
days.]
[(c) Review at Next Meeting]
    [If a Governor calls a proceeding for review within the period 
prescribed in paragraph (b), the NASD Board shall review the proceeding 
not later than the next meeting of the NASD Board. The NASD Board may 
order the filing of briefs in connection with its review proceedings 
pursuant to this Rule.]
[(d) Decision of NASD Board, Including Remand]
    [After review, the NASD Board may affirm, modify, or reverse: (1) 
the proposed written decision of the NASD Regulation Board, or (2) if 
the NASD Regulation Board did not call a proceeding for review under 
Rule 9424, the proposed written decision of the National Business 
Conduct Committee. Alternatively, the NASD Board may remand the 
proceeding with instructions. The NASD Board shall prepare a written 
decision that includes all of the elements described in Rule 
9423(c)(2).]
[(e) Issuance of Decision]
    [The NASD Board shall issue and serve its written decision pursuant 
to Rules 9132 and 9134. The decision shall constitute the final action 
of the Association, unless the NASD Board remands the proceeding.]
[9426. Enforcement of Sanctions]
[(a) Order]
    [If the Department determines that a member has failed to comply 
with limitations imposed by a decision under Rule 9422, 9423, 9424, or 
9425, the Department shall issue an order to be served pursuant to 
Rules 9132 and 9134 imposing the sanctions set forth in the decision 
and specifying the effective date and time of such sanctions.]
[(b) Hearing]
    [A member aggrieved by an order issued under paragraph (a) may file 
a written request for a hearing before the Department. The request 
shall be filed pursuant to Rule 9135, 9136, and 9137 within four days 
after service of the order. The member shall be entitled to be heard in 
person, to be represented by an attorney, and to submit any relevant 
evidence. The hearing shall be recorded and a transcript prepared by a 
court reporter. The member may purchase a copy of the transcript from 
the court reporter. Any corrections to the transcript shall be 
submitted within two days after the hearing or within two days after 
receipt of the transcript, whichever is later.]

[[Page 38166]]

[(c) Decision]
    [Within four days after the hearing, the Department shall affirm, 
modify, or reverse the order issued under paragraph (a). The Department 
shall serve the decision on the member pursuant to Rule 9132 and 9134. 
The decision shall become effective upon service and shall constitute 
final action of the Association.]
[9427. Application to Commission for Review]
    [Any person aggrieved by final action pursuant to the Rule 9420 
Series may apply for review by the Commission under Section 19 of the 
Act. The filing of an application for review shall not stay the 
effectiveness of final action by the Association, unless the Commission 
otherwise orders.]

9500. Suspension, Cancellation, Bar, Denial of Access, and 
Eligibility Procedures

[9510. Procedures for Summary Suspension by NASD]
[9511. Purpose]
    [Section 15A(h)(3) of the Act authorizes a registered securities 
association to summarily: (1) Suspend a member or person associated 
with a member who has been and is expelled or suspended from any self-
regulatory organization or barred or suspended from being associated 
with a member of any self-regulatory organization, (2) suspend a member 
who is in such financial or operating difficulty that the association 
determines and so notifies the Commission that the member cannot be 
permitted to continue to do business as a member with safety to 
investors, creditors, other members, or the association, or (3) limit 
or prohibit any person with respect to access to services offered by 
the association if (1) or (2) applies to such person or, in the case of 
a person who is not a member, if the association determines that such 
person does not meet the qualification requirements or other 
prerequisites for such access and such person cannot be permitted to 
continue to have such access with safety to investors, creditors, 
members, or the association.
    Summary suspension procedures for the grounds listed in Section 
15A(h)(3) of the Act are set forth in the Rule 9510 Series. Other 
procedures for suspending the membership of a member, suspending the 
registration of an associated person, or suspending a person from 
association with any member are found in Rules 8220, 8320, and 9520.]
[9512. Notice]
[(a) Authorization]
    [The NASD Board may authorize the President of NASD Regulation or 
Nasdaq to issue a written notice that:
    (1) Summarily suspends a member or person associated with a member 
who has been and is expelled or suspended from any self-regulatory 
organization or barred or suspended from being associated with a member 
of any self-regulatory organization;
    (2) Summarily suspends a member who is in such financial or 
operating difficulty that the Association determines and so notifies 
the Commission that the member cannot be permitted to continue to do 
business as a member with safety to investors, creditors, other 
members, or the Association; or
    (3) Limits or prohibits any person with respect to access to 
services offered by the Association if subparagraph (1) or (2) applies 
to such person or, in the case of a person who is not a member, if the 
NASD Board determines that such person does not meet the qualification 
requirements or other prerequisites for such access and such person 
cannot be permitted to continue to have such access with safety to 
investors, creditors, members, or the Association.]
[(b) Contents and Service of Notice]
    [A notice issued under this Rule shall state the specific grounds 
for the summary suspension and state that the member or associated 
person may file a written request for a hearing under Rule 9513. The 
notice shall be served by facsimile or pursuant to Rules 9131 and 9134. 
A copy of a notice served on a person who is associated with a member 
shall be served on such member pursuant to Rule 9134.]
[(c) Effective Date]
    [A summary suspension shall be effective on the date and time 
specified in the notice.]
[9513. Hearing and Decision]
[(a) Request]
[(1) Request by Member or Associated Person]
    [A member or associated person subject to a summary suspension may 
file a written request for a hearing with the NASD Board. The request 
shall state the specific grounds for reversing the summary suspension. 
The request shall be filed pursuant to Rules 9135, 9136, and 9137 
within ten days after service of the notice under Rule 9512. The member 
or associated person may withdraw its request for a hearing by filing a 
written notice with the NASD Board pursuant to Rules 9135, 9136, and 
9137.]
[(2) Failure To File Request]
    [If the member or associated person subject to a summary suspension 
does not file a written request for a hearing under subparagraph (1), 
the notice of summary suspension shall constitute final action by the 
Association.]
[(3) No Stay of Summary Suspension]
    [A request for a hearing shall not stay the effectiveness of a 
summary suspension under Rule 9512.]
[(b) Hearing Panel Consideration]
[(1) Appointment of Hearing Panel]
    [If a member or associated person subject to a summary suspension 
files a written request for a hearing, a hearing shall be held before a 
Hearing Panel within 15 days after service of the notice under Rule 
9512. The Hearing Panel shall be composed of two or more members. One 
member shall be a Governor of the NASD Board, and the remaining member 
or members shall be current or former members of the NASD Regulation 
Board, the Nasdaq Board, or the NASD Board.]
[(2) Rights of Member or Associated Person]
    [A member or associated person subject to a summary suspension 
shall be entitled to be heard in person, to be represented by an 
attorney, and to submit any relevant evidence.]
[(3) Witnesses]
    [A person who is subject to the jurisdiction of the Association 
shall testify under oath or affirmation. The oath or affirmation shall 
be administered by a court reporter.]
[(4) Recordation of Hearing]
    [The hearing shall be recorded and a transcript prepared by a court 
reporter. The member or associated person may purchase a copy of the 
transcript from the court reporter. Any corrections to the transcript 
shall be submitted within three days after the hearing or within three 
days after receipt of the transcript, whichever is later.]
[(c) Decision]
[(1) Decision of the Hearing Panel]
    [The Hearing Panel shall affirm, modify, or reverse the summary 
suspension. The Hearing Panel shall prepare a proposed written decision 
pursuant to subparagraph (2).]

[[Page 38167]]

[(2) Contents of Decision]
    [The decision shall include a statement describing the 
investigative or other origin of the proceeding, the grounds for 
issuing the notice under Rule 9512, and a rationale for the disposition 
of the proceeding, and, if a suspension continues to be imposed, the 
specific grounds for imposing such sanction and the terms of the 
suspension.]
[(3) Issuance of Decision After Expiration of Call for Review Period]
    [The Hearing Panel shall provide its proposed written decision to 
the NASD Board. The NASD Board may call the proceeding for review 
pursuant to Rule 9514. If the NASD Board does not call the proceeding 
for review, the proposed written decision of the Hearing Panel shall 
become final, and the Hearing Panel shall serve its written decision 
pursuant to Rules 9132 and 9134. The decision shall constitute final 
action of the Association.]
[9514. Discretionary Review by the NASD Board]
[(a) Call for Review by Governor]
    [A Governor may call a proceeding for review by the NASD Board if 
the call for review is made within the period prescribed by paragraph 
(b).]
[(b) Seven Day Period; Waiver]
    [After receiving the proposed written decision of the Hearing Panel 
pursuant to Rule 9513, a Governor shall have not less than seven days 
to determine if the decision should be called for review. A Governor 
shall call the proceeding for review by notifying the General Counsel 
of the NASD. By a unanimous vote of the NASD Board, the NASD Board may 
shorten the period to less than seven days. By an affirmative vote of 
the majority of the NASD Board then in office, the NASD Board may, 
during the seven day period, vote to extend the period in to more than 
seven days.]
[(c) Review at Next Meeting]
    [If a Governor calls a proceeding for review within the period 
prescribed by paragraph (b), the NASD Board shall review the decision 
not later than the next meeting of the NASD Board. The NASD Board may 
order the filing of briefs in connection with its review proceedings 
pursuant to this Rule.]
[(d) Decision of the NASD Board, Including Remand]
    [After review, the NASD Board may affirm, modify, or reverse the 
proposed written decision of the Hearing Panel. Alternatively, the NASD 
Board may remand the proceeding with instructions. The NASD Board shall 
prepare a written decision that includes all of the elements of Rule 
9513(c)(2).]
[(e) Issuance of Decision]
    [The NASD Board shall issue and serve its decision pursuant to 
Rules 9132 and 9134. The decision shall constitute the final action of 
the Association, unless the NASD Board remands the proceeding.]
[9515. Application to Commission for Review]
    [Any person aggrieved by final action pursuant to the Rule 9510 
Series may apply for review by the Commission under Section 19 of the 
Act. The filing of an application for review by the Commission shall 
not stay the effectiveness of final action by the Association, unless 
the Commission otherwise orders.]
[9516. Other Action Not Foreclosed]
    [Action by the Association under the Rule 9510 Series shall not 
foreclose action by the Association under any other Rule.]

9510. Procedures for Summary and Non-Summary Suspension, Cancellation, 
Bar, Limitation, or Prohibition

9511. Purpose and Computation of Time

(a) Purpose

    (1) The purpose of the Rule 9510 Series is to set forth procedures 
for certain suspensions, cancellations, bars, and limitations and 
prohibitions on access to the Association's services authorized by the 
Act and the NASD By-Laws. Pursuant to Section 15A(h)(3) of the Act, the 
Association may summarily:
    (A) suspend a member or associated person who has been and is 
expelled or suspended from any self-regulatory organization or barred 
or suspended from being associated with a member of any self-regulatory 
organization;
    (B) suspend a member who is in such financial or operating 
difficulty that the Association determines and so notifies the 
Commission that the member cannot be permitted to continue to do 
business as a member with safety to investors, creditors, other 
members, or the Association; or
    (C) limit or prohibit any person with respect to access to services 
offered by the Association if subparagraph (A) or (B) applies to such 
person, or in the case of a person who is not a member, if the 
Association determines that such person does not meet the qualification 
requirements or other prerequisites for such access and such person 
cannot be permitted to continue to have such access with safety to 
investors, creditors, members, or the Association.
    (2) The Association also may take the following actions, after 
notice and opportunity for hearing:
    (A) cancel the membership of a member that becomes ineligible for 
continuance in membership, or that continues to be associated with an 
ineligible person, or suspend or bar a person from continuing to be 
associated with a member because such person is or becomes ineligible 
for association under Article II, Section 3 of the NASD By-Laws;
    (B) suspend or cancel the membership of a member or the 
registration of a person for failure to pay fees, dues, assessments, or 
other charges; failure to submit a required report or information 
related to such payment; or failure to comply with arbitration award or 
a settlement agreement related to an arbitration or mediation under 
Article V, Section 2 of the NASD By-Laws;
    (C) cancel the membership of a member for failure to file or submit 
on request any report, document, or other information required to be 
filed with or requested by the Association under Article VI, Section 2 
of the NASD By-Laws; and
    (D) limit or prohibit any member, associated person, or other 
person with respect to access to services offered by the Association or 
a member thereof if the Association determines that such person does 
not meet the qualification requirements or other prerequisites for such 
access or such person cannot be permitted to continue to have such 
access with safety to investors, creditors, members, or the 
Association.
    (3) Other procedures for suspending the membership of a member, 
suspending the registration of an associated person, or suspending a 
person from association with any member are found in the Rule 8220 
Series and Rule 8320. Procedures for listing qualification matters are 
found in the Rule 9700 Series; the Rule 9510 Series does not apply to 
listing qualification matters.

(b) Computation of Time

    For purposes of the 9510 Rule Series, time shall be computed as set 
forth in Rule 9138, except that intermediate Saturdays, Sundays, and 
holidays shall be included in the computation.

[[Page 38168]]

9512. Initiation of Proceedings for Summary Suspension, Limitation, or 
Prohibition

(a) Authorization

    (1) The NASD Board may authorize the President of NASD Regulation 
to issue on a case-by-case basis a written notice that:
    (A) summarily suspends a member or associated person who has been 
and is expelled or suspended from any self-regulatory organization or 
barred or suspended from being associated with a member of any self-
regulatory organization; or
    (B) summarily suspends a member who is in such financial or 
operating difficulty that the Association determines and so notifies 
the Commission that the member cannot be permitted to continue to do 
business as a member with safety to investors, creditors, other 
members, or the Association.
    (2) The NASD Board may authorize the President of NASD Regulation 
or the President of Nasdaq to issue on a case-by-case basis a written 
notice that summarily limits or prohibits any person with respect to 
access to services offered by the Association if paragraph (a)(1) 
applies to such person or, in the case of a person who is not a member, 
if the NASD Board determines that such person does not meet the 
qualification requirements or other prerequisites for such access and 
such person cannot be permitted to continue to have such access with 
safety to investors, creditors, members, or the Association.

(b) Contents and Service of Notice

    A notice issued under this subsection shall state the specific 
grounds and include the factual basis for the summary suspension, 
limitation, or prohibition and state that the member, associated 
person, or other person may file a written request for a hearing under 
Rule 9514. The notice shall be served by facsimile or overnight 
commercial courier.

(c) Effective Date

    A summary suspension, limitation, or prohibition shall be effective 
upon service of the notice under paragraph (b).

9513. Initiation of Proceeding for Non-Summary Suspension, 
Cancellation, Bar, Limitation, or Prohibition

(a) Notice

    Association staff shall initiate a proceeding authorized under 
Section 3 of Article II, Section 2 of Article V, or Section 2 of 
Article VI of the NASD By-Laws, or Rule 9511(a)(2)(D), by issuing a 
written notice to the member, associated person, or other person. The 
notice shall specify the grounds for and effective date of the 
cancellation, suspension, bar, limitation, or prohibition and shall 
state that the member, associated person, or other person may file a 
written request for a hearing under Rule 9514. The notice shall be 
served by facsimile or overnight commercial courier.

(b) Effective Date

    For any cancellation, suspension, or bar under Section 3 of Article 
II of the NASD By-Laws, the effective date shall be at least seven days 
after service of the notice on the member or associated person. For any 
cancellation or suspension under Section 2 of Article V or Section 2 of 
Article VI of the NASD By-Laws, the effective date shall be at least 15 
days after service of the notice on the member or associated person. 
For any limitation or prohibition on access to services offered by the 
Association or a member thereof pursuant to Rule 9511(a)(2)(D), the 
effective date shall be upon receipt of the notice with respect to 
services to which the member, associated person, or other person does 
not have access and shall be at least seven days after service of the 
notice with respect to services to which the member, associated person, 
or other person already has access.

9514. Hearing and Decision

(a) Request

(1) Request by Member, Associated Person, or Other Person

    A member, associated person, or other person who is subject to a 
notice issued under Rule 9512(a) or 9513(a) may file a written request 
for a hearing with the Association. The request shall state either the 
specific grounds for reversing the summary suspension, limitation, or 
prohibition or for opposing the cancellation, suspension, bar, 
limitation, or prohibition. The request shall be filed pursuant to 
Rules 9135, 9136, and 9137 within seven days after service of the 
notice under Rule 9512 or 9513. The member, associated person, or other 
person may withdraw its request for a hearing at any time by filing a 
written notice with the Association pursuant to Rules 9135, 9136, and 
9137.

(2) Failure To File Request

    If the member, associated person, or other person subject to the 
notice issued under Rule 9512(a) or 9513(a) does not file a written 
request for a hearing under subparagraph (1), the notice shall 
constitute final action by the Association.

(3) Ex Parte Communications

    The prohibition against ex parte communications in Rule 9143 shall 
become effective under the Rule 9510 Series when Association staff has 
knowledge that a member, associated person, or other person intends to 
request a hearing under this paragraph.

(b) Designation of Party for the Association and Appointment of Hearing 
Panel

    If a member, associated person, or other person subject to a notice 
under Rule 9512 or 9513 files a written request for a hearing, an 
appropriate department or office of the Association shall be designated 
as a Party in the proceeding, and a Hearing Panel shall be appointed.
    (1) If the President of NASD Regulation or NASD Regulation staff 
issued the notice initiating the proceeding under Rule 9512(a) or 
9513(a), the President of NASD Regulation shall designate an 
appropriate NASD Regulation department or office as a Party, and the 
NASD Regulation Board shall appoint a Hearing Panel. The Hearing Panel 
shall be composed of two or more members. One member shall be a 
Director of NASD Regulation, and the remaining member or members shall 
be a current or former Director of NASD Regulation or a former Governor 
of the NASD. The President of NASD Regulation may not serve on the 
Hearing Panel.
    (2) If the President of Nasdaq or Nasdaq staff issued the notice 
under Rule 9512(a) or 9513(a), the President of Nasdaq shall designate 
an appropriate Nasdaq department or office as a Party, and the Nasdaq 
Board shall appoint a Hearing Panel. The Hearing Panel shall be 
composed of two or more members. One member shall be a Director of 
Nasdaq, and the remaining member or members shall be a current or 
former Director of Nasdaq or a former Governor of the NASD. The 
President of Nasdaq may not serve on the Hearing Panel.

(c) Stays

(1) Summary Suspension, Limitation, or Prohibition

    Unless the NASD Board orders otherwise, a request for a hearing 
shall not stay the effectiveness of a summary suspension, limitation, 
or prohibition under Rule 9512.

[[Page 38169]]

(2) Non-Summary Cancellation, Suspension, Bar, Limitation, or 
Prohibition

    Unless the NASD Board orders otherwise, a request for a hearing 
shall stay the notice issued under Rule 9513, except that a request for 
a hearing shall not stay a notice of a limitation or prohibition on 
services offered by the Association or a member thereof with respect to 
services to which a member, associated person, or other person does not 
have access.

(d) Time of Hearing

(1) Summary Suspension

    If a member, associated person, or other person who is subject to a 
notice issued under Rule 9512(a) files a written request for a hearing, 
a hearing shall be held within seven days after the filing of the 
request for hearing. Not less than five days before the hearing, the 
Hearing Panel shall provide written notice to the Parties of the 
location, date, and time of the hearing by facsimile or overnight 
commercial courier.

(2) Non-Summary Suspension, Cancellation, Bar, Limitation or 
Prohibition

    If a member, associated person, or other person who is subject to a 
notice issued under Rule 9513(a) files a written request for a hearing, 
a hearing shall be held within 21 days after the filing of the request 
for hearing. The Hearing Panel may, during the initial 21 day period, 
extend the time in which the hearing shall be held by an additional 21 
days on its own motion or at the request of a Party. Not less than five 
days before the hearing, the Hearing Panel shall provide written notice 
to the Parties of the location, date, and time of the hearing by 
facsimile or overnight commercial courier.

(e) Transmission of Documents

    (1) Not less than five days before the hearing, the Association 
shall provide to the member, associated person, or other person who 
requested the hearing, by facsimile or overnight commercial courier, 
all documents that were considered in issuing the notice under Rule 
9512 or 9513, unless a document meets the criteria of Rule 9251(b)(1) 
(A), (B), or (C). A document that meets such criteria shall not 
constitute part of the record, but shall be retained by the Association 
until the date upon which the Association serves a final decision or, 
if applicable, upon the conclusion of any review by the Commission or 
the federal courts.
    (2) Not less than five days before the hearing, the Parties shall 
exchange proposed exhibit and witness lists. The exhibit and witness 
lists shall be served by facsimile or by overnight commercial courier.

(f) Hearing Panel Consideration

(1) Rights of Parties

    The Parties shall be entitled to be heard in person, to be 
represented by an attorney, and to submit any relevant evidence.

(2) Witnesses

    A person who is subject to the jurisdiction of the Association 
shall testify under oath or affirmation. The oath or affirmation shall 
be administered by a court reporter.

(3) Recordation of Hearing

    The hearing shall be recorded and a transcript prepared by a court 
reporter. The member, associated person, or other person may purchase a 
copy of the transcript from the court reporter at prescribed rates. A 
witness may purchase a copy of the transcript of his or her own 
testimony from the court reporter at prescribed rates. Proposed 
corrections to the transcript may be submitted by affidavit to the 
Hearing Panel within a reasonable time determined by the Hearing Panel. 
Upon notice to the participants in the hearing, the Hearing Panel may 
order corrections to the transcript as requested or sua sponte.

(4) Record

    The record shall consist of: (1) The notice issued under Rule 9512 
or 9513; (2) all documents transmitted by the Association under Rule 
9514(e)(1); (3) the request for hearing; (4) any other submissions by 
the Parties; (5) any evidence considered at the hearing; and (6) the 
transcript of the hearing and any corrections thereto.

(5) Custodian of the Record

    If the President of NASD Regulation or NASD Regulation staff 
initiated the proceeding under Rule 9512 or 9513, the Office of the 
General Counsel of NASD Regulation shall be the custodian of the 
record. If the President of Nasdaq or Nasdaq staff initiated the 
proceeding under Rule 9512 or 9513, the Office of the General Counsel 
of Nasdaq shall be the custodian of the record.

(6) Evidence Not Admitted

    Evidence that is proffered but not admitted during the hearing 
shall not be part of the record, but shall be retained by the custodian 
of the record until the date when the Association's decision becomes 
final or, if applicable, upon the conclusion of any review by the 
Commission or the federal courts.

(g) Decision of the Hearing Panel

(1) Summary Suspension, Limitation, or Prohibition

    Based on its review of the record, the Hearing Panel shall affirm, 
modify, or reverse the summary suspension, limitation, or prohibition. 
The Hearing Panel shall prepare a proposed written decision pursuant to 
subparagraph (3).

(2) Non-Summary Suspension, Cancellation, Bar, Limitation, or 
Prohibition

    Based on its review if the record, the Hearing Panel shall decide 
whether a cancellation, suspension, bar, limitation, or prohibition 
shall be imposed or continue to be imposed. The Hearing panel shall 
prepare a proposed written decision pursuant to subparagraph (3).

(3) Contents of Decision

    The decision shall include:
    (A) A statement setting forth the specific statute, rule, or NASD 
by-law that authorized the proceeding;
    (B) A statement describing the investigative or other origin of the 
proceeding;
    (C) The grounds for issuing the notice under Rule 9512 or 9513;
    (D) A statement of findings of fact with respect to any act or 
practice that was alleged to have been committed or omitted by the 
member, associated person, or other person;
    (E) A statement in support of the disposition of the principal 
issues raised in the proceedings; and
    (F) If a summary suspension, limitation, or prohibition continues 
to be imposed, the specific grounds for imposing such suspension, 
limitation, or prohibition, and the terms of the suspension, 
limitation, or prohibition, or, if a non-summary suspension, 
cancellation, bar, limitation, or prohibition is to be imposed or 
continue to be imposed, the effective date, time, and terms of the 
suspension, cancellation, bar, limitation, or prohibition.

(4) Issuance of Decision After Expiration of Call for Review Period

    The Hearing Panel shall provide its proposed written decision to 
the NASD Board. The NASD Board may call the proceeding for review 
pursuant to Rule 9515. If the NASD Board does not call the proceeding 
for review, the proposed written decision of the Hearing Panel shall 
become final, and the Hearing Panel shall serve its written decision on 
the Parties pursuant to Rules 9132 and

[[Page 38170]]

9134. The decision shall be effective upon service and shall constitute 
the final action of the Association.

9515. Discretionary Review by the NASD Board

(a) Call for Review by Governor

    A Governor may call a proceeding for review by the NASD Board if 
the call for review is made within the period prescribed by paragraph 
(b).

(b) Seven Day Period; Waiver

    A Governor shall make his or her call for review not later than the 
next meeting of the NASD Board that is at least seven days after the 
date on which the NASD Board receives the proposed written decision of 
the Hearing Panel. By a unanimous vote of the NASD Board, the NASD 
Board may shorten this period. By an affirmative vote of the majority 
of the NASD Board then in office, the NASD Board may, during the 
period, vote to extend the period.
(c) Review at Next Meeting
    If a Governor calls a proceeding for review within the period 
prescribed by paragraph (b), the NASD Board shall review the decision 
not later than the next meeting of the NASD Board. The NASD Board may 
order the filing of briefs in connection with its review proceedings 
pursuant to this Rule.

(d) Decision of the NASD Board, Including Remand

    After review, the NASD Board may affirm, modify, or reverse the 
proposed written decision of the Hearing Panel. Alternatively, the NASD 
Board may remand the proceeding with instructions. The NASD Board shall 
prepare a written decision that includes all of the elements of Rule 
9514(g)(3).
(e) Issuance of Decision
    The NASD Board shall issue and serve its written decision on the 
Parties pursuant to Rules 9132 and 9134. The decision shall be 
effective upon service. The decision shall constitute the final action 
of the Association, unless the NASD Board remands the proceeding.

9516. Reinstatement

    A member, associated person, or other person who has been suspended 
or limited by a final action of the Association after a non-summary 
proceeding under the Rule 9510 Series may file a written request for 
reinstatement on the ground of full compliance with the conditions of 
the suspension or limitation. The request shall be filed with the 
department or office of the Association that acted as a Party in the 
proceeding. The head of the department or office shall serve its 
response on the member or person via facsimile or overnight commercial 
courier within five days after receipt of the request. If the head of 
the department or office denies the request, the member or person may 
file a written request for relief with NASD Board. The NASD Board shall 
respond to the request in writing within 14 days after receipt of the 
request. The NASD Board shall serve its response by facsimile or 
overnight commercial courier.

9517. Copies of Notices and Decisions to Members

    A copy of a notice initiating a proceeding, a notice of a hearing, 
or any other notice or decision that is served on a person associated 
with a member under the Rule 9510 Series shall be served simultaneously 
on such member by the same method of service provided for in the 
applicable rule.

9518. Application to Commission for Review

    The right to have any action pursuant to this Rule Series reviewed 
by the Commission is governed by Section 19 of the Act. The filing of 
an application for review by the Commission shall not stay the 
effectiveness of final action by the Association, unless the Commission 
otherwise orders.

9519. Other Action Not Foreclosed; Costs

    (a) Action by the Association under the Rule 9510 Series shall not 
foreclose action by the Association under any other Rule.
    (b) The Association may impose on a member, associated person, or 
other person such costs of a denial of access proceeding as the 
Association deems fair and appropriate under the circumstances. Costs 
relating to other proceedings under the Rule 9510 Series may be imposed 
under Rule 8330.
[9520. Non-Summary Suspension, Cancellation, and Bar Procedures]
[9521. Purpose]
    [(a) The rule 9520 Series sets forth procedures for the Association 
to:
    (1) Cancel the membership of a member that becomes ineligible for 
continuance in membership, or that continues to be associated with an 
ineligible person, or suspend or bar a person from continuing to be 
associated with a member because such person is or becomes ineligible 
for association under Article III, Section 3 of the NASD By-Laws;
    (2) Suspend or cancel the membership of a member or the 
registration of a person for failure to pay fees, dues, assessments, or 
other charges; failure to submit a required report or information 
related to such payment; or failure to comply with an arbitration award 
or a settlement agreement related to an arbitration or mediation under 
Article VI, Section 3 of the NASD By-Laws; and
    (3) Cancel the membership of a member for failure to file or submit 
on request any report, document, or other information required to be 
filed with or requested by the Association under Article VII, Section 2 
of the NASD By-Laws.]
    [(b) Procedures for summarily suspending a member or associated 
person on grounds set forth in Section 15A(h)(2) of the Act are found 
in the Rule 9510 Series. Other procedures for suspending a member or 
associated person for failure to submit required information or failure 
to pay fines, monetary sanctions, or costs are found in Rules 8220 and 
8320, respectively.]
[9522. Initiation of Proceeding]
[(a) Notice]
    [Association of staff shall initiate a proceeding authorized under 
Section 3 of Article III, Section 3 of Article VI, or Section 2 of 
Article VII of the NASD By-Laws by sending a written notice to the 
member or associated person. The notice shall specify the grounds for 
and effective date of the cancellation, suspension, or bar and shall 
state that the member or associated person may file a written request 
for a hearing. The notice shall be served by facsimile or pursuant to 
Rule 9131 and 9134.]
[(b) Copy of Notice to Member]
    [A copy of a notice served on a person associated with a member 
shall be served on such member pursuant to Rule 9134.]
[(c) Effective Date]
    [For any cancellation, suspension, or bar under Section 3 of 
Article III of the NASD By-Laws, the effective date shall be at least 
seven days after service of the notice on the member or associated 
person. For any cancellation or suspension under Section 3 of Article 
VI or Section 2 of Article VII of the NASD By-Laws, the effective date 
shall be at least 15 days after service of the notice on the member or 
associated person.]
[9523. Hearing Panel Consideration]
[(a) Request for Hearing]
    [A member or associated person who receives a notice under Rule 
9522(a) may file a written request for a hearing with the NASD 
Regulation Board. The request shall be filed pursuant to Rules 9135, 
9136, and 9137 before the

[[Page 38171]]

effective date set forth in the notice. The request shall state the 
grounds for opposing the cancellation, suspension, or bar. The member 
or associated person may withdraw its request at any time by filing a 
written notice with the NASD Regulation Board pursuant to Rules 9135, 
9136, and 9137.]
[(b) Stay of Action]
    [Unless otherwise ordered by the NASD Regulation Board, a request 
for a hearing under paragraph (a) shall stay the notice issued under 
Rule 9522.]
[(c) Appointment of Hearing Panel]
    [If a member or associated person files a request for a hearing, 
the NASD Regulation Board shall appoint a Hearing Panel to conduct a 
hearing. The Hearing Panel shall be composed of two or more current or 
former Directors of the NASD Regulation Board.]
[(d) Rights of Member]
    [The member or associated person shall be entitled to be heard in 
person, to be represented by an attorney, and to submit any relevant 
evidence.]
[(e) Witnesses]
    [A person who is subject to the jurisdiction of the Association 
shall testify under oath or affirmation. The oath or affirmation shall 
be administered by a court reporter.]
[(f) Recordation of Hearing]
    [The hearing shall be recorded and a transcript prepared by a court 
reporter. The member or associated person may purchase a copy of the 
transcript from the court reporter. Any corrections to the transcript 
shall be submitted within three days after the hearing or within three 
days after receipt of the transcript, whichever is later.]
[(g) Decision]
[(1) Decision of Hearing Panel]
    [The Hearing Panel shall decide whether a cancellation, suspension, 
or bar shall be imposed. The Hearing Panel shall prepare a proposed 
written decision pursuant to subparagraph (2).]
[(2) Contents of Decision]
    [The decision shall include:]
    (A) An identification of the article of the NASD By-Laws that 
authorizes the proceedings;
    (B) A statement describing the origin of the proceeding;
    (C) A statement of the nature of the ineligibility or the failure 
to take action that is at issue;
    (D) A statement of findings of fact and conclusions as to any 
violations of the By-Laws;
    (E) A rationale for the disposition of the proceeding; and,
    (F) If a suspension, cancellation, or bar is imposed, the effective 
date and time and the terms of the sanction.]
[(3) Issuance of Decision After Expiration of Call for Review Period]
    [The Hearing Panel shall provide its proposed written decision to 
the NASD Board. The NASD Board may call the proceeding for review 
pursuant to Rule 9524. If the NASD Board does not call the proceeding 
for review, the proposed written decision of the Hearing Panel shall 
become final, and the Hearing Panel shall serve its written decision 
pursuant to Rules 9132 and 9134. The decision shall constitute final 
action of the Association.]
[9524. Discretionary Review by NASD Board]
[(a) Call for Review by Governor]
    [A Governor may call a proceeding for review by the NASD Board if 
the call for review is made within the period described by paragraph 
(b).]
[(b) Seven Day Period; Waiver]
    [After receiving the proposed written decision of the Hearing Panel 
pursuant to Rule 9523, a Governor shall have not less than seven days 
to determine if the decision should be called for review. A Governor 
shall call a proceeding for review by notifying the General Counsel of 
the NASD. By a unanimous vote of the NASD Board, the NASD Board may 
shorten the period to less than seven days. By an affirmative vote of 
the majority of the NASD Board then in office, the NASD Board may, 
during the seven day period, vote to extend the period to more than 
seven days.]
[(c) Review at Next Meeting]
    [If a Governor calls a proceeding for review within the period 
prescribed by paragraph (b), the NASD Board shall review the proceeding 
not later than the next meeting of the NASD Board. The NASD Board may 
order the filing of briefs in connection with its review proceedings 
pursuant to this Rule.]
[(d) Decision and Final Action of the Association]
    [After review, the NASD Board may affirm, modify, or reverse the 
decision of the Hearing Panel or remand the proceeding with 
instructions. The NASD Board shall prepare a written decision that 
includes all of the elements of Rule 9523(g)(2).]
[(e) Issuance of Decision After Expiration of Call for Review Period]
    [The NASD Board shall issue and serve its decision pursuant to 
Rules 9132 and 9134. The decision shall constitute final action of the 
Association, unless the NASD Board remands the proceeding.]
[9525. Application to Commission for Review]
    [Any person aggrieved by final action pursuant to the Rule 9520 
Series may apply for review by the Commission under Section 19 of the 
Act. The filing of an application for review shall not stay the 
effectiveness of final action by the Association, unless the Commission 
otherwise orders.]
[9526. Other Action Not Foreclosed]
    [Action by the Association under the Rule 9520 Series shall not 
foreclose action by the Association under any other Rule.]
[9530] 9520. Eligibility Proceedings
[9531] 9521. Purpose
    The Rule [9530] 9520 Series sets forth procedures for 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 and for a current member or person associated with 
[any] a member to obtain relief from the eligibility or qualification 
requirements of the NASD By-Laws and the Rules of the Association. Such 
actions hereinafter are referred to as ``eligibility proceedings.''
[9532] 9522. Initiation of Eligibility Proceedings
(a) Notice of Disqualification or Ineligibility
(1) Issuance
    If [the Department of Member Regulation (hereinafter ``Department'' 
in the Rule 9530 Series)] Association staff has reason to believe that 
a statutory disqualification exists or that a member or person 
associated with a member otherwise fails to meet the eligibility 
requirements of the Association, [the Department] Association staff 
shall issue a written notice to the member or associated person. The 
notice shall specify the grounds for such disqualification or 
ineligibility.
(2) Notice to Member
    A notice issued to a member that is subject to a statutory 
disqualification or is otherwise ineligible for membership shall state 
that the member may apply for relief by filing a written application 
for relief with the [Department] National

[[Page 38172]]

Business Conduct Committee within [seven] ten days after service of the 
notice.
(3) Notice to Associated Person
    A notice issued to an associated person who is subject to a 
statutory disqualification or is otherwise ineligible for association 
shall state that [the member with which the person is or may become 
associated] a member may apply for relief on behalf of itself and such 
person by filing a written application for relief with the [Department] 
National Business Conduct Committee within [seven] ten days after 
service of the notice.
(4) Service
    A notice issued under this section shall be served by facsimile or 
pursuant to Rules 9131 and 9134.
(b) Application by Member
    A member shall file a written application for relief from the 
eligibility requirements of the Association with the [Department] 
National Business Conduct Committee if the member:
    (1) Determines that it is subject to a statutory disqualification 
or otherwise is no longer eligible for membership;
    (2) Determines that a person associated with it is subject to a 
statutory disqualification or otherwise is no longer eligible for 
association with the member; or
    (3) Wishes to sponsor the association of a person who is subject to 
a statutory disqualification or otherwise is ineligible for association 
with a member.
(c) Form of Application for Relief
    A written application for relief shall be submitted on Form MC400 
and shall include a detailed statement demonstrating why the requested 
relief should be granted.
(d) Withdrawal of Application
    A member may withdraw its application for relief at any time by 
filing a written notice with the [Department] National Business Conduct 
Committee pursuant to Rules 9135, 9136, and 9137.
(e) Ex Parte Communications
    The prohibitions against ex parte communications set forth in Rule 
9143 shall become effective under the Rule [9530] 9520 Series when [the 
Department of Member Regulation] Association staff has initiated the 
eligibility proceeding and Association staff has knowledge that a 
member intends to file a written application for relief with the 
[Department] National Business Conduct Committee.
[9533] 9523. National Business Conduct Committee Consideration
(a) Hearing Panel Consideration
(1) Appointment of Hearing Panel
    If a member files an application for relief, the National Business 
Conduct Committee shall appoint a Hearing Panel composed of two or more 
members, who shall be current or former Directors of the NASD 
Regulation Board or former Governors of the NASD Board. The Hearing 
Panel shall conduct a hearing and recommend a decision on the request 
for relief.
(2) Notice of Hearing
    Not less than fourteen days before the hearing, the member shall be 
notified via facsimile or commercial courier of the location, time, and 
date of the hearing.
(3) Transmission of Documents
    (i) If Association staff initiated the eligibility proceeding by 
issuing a notice under Rule 9522(a), Association staff shall provide to 
the member and its current or prospective associated person all 
documents that were relied on in issuing the notice. Such documents 
shall be served on the member and its current or prospective associated 
person by facsimile or commercial courier not less than ten days before 
the hearing.
    (ii) Not less than ten days before the hearing, the Department of 
Member Regulation, who shall act as a Party in the eligibility 
proceeding, and the member and its current or prospective associated 
person shall exchange proposed exhibit and witness lists. The exhibit 
and witness lists shall be served by facsimile or commercial courier.
[(2)] (4) Rights of Member, Current or Prospective Associated Person, 
and Department of Member Regulation
    The member, [and] its current or prospective associated person, [as 
applicable,] and the Department of Member Regulation shall be entitled 
to be heard in person, to be represented by an attorney, and to submit 
any relevant evidence.
[(3)] (5) Recordation of Hearing
    The hearing shall be recorded and a transcript prepared by a court 
reporter. The member and the current or prospective associated person 
may purchase a copy of the transcript from the court reporter at 
prescribed rates. [Any corrections to the transcript shall be submitted 
within three days after the hearing or within three days after receipt 
of the transcript, whichever is later.] A witness may purchase a copy 
of the transcript of his or her own testimony from the court reporter 
at prescribed rates. Proposed corrections to the transcript may be 
submitted by affidavit to the Hearing Panel within a reasonable time 
determined by the Hearing Panel. Upon notice to the participants in the 
hearing, the Hearing Panel may order corrections to the transcript as 
requested or sua sponte.
(6) Record
    The record shall consist of: (1) The notice issued pursuant to Rule 
9522(a), if applicable; (2) all documents relied upon in issuing the 
notice under Rule 9522(a), if applicable; (3) the application for 
relief filed pursuant to Rule 9522(b); (4) any other submissions by the 
member, the current or prospective associated person, and the 
Department of Member Regulation; (5) any evidence considered at the 
hearing; and (6) the transcript of the hearing and any corrections 
thereto.
(7) Custodian of the Record
    The custodian of the record shall be the Office of General Counsel 
of NASD Regulation.
(8) Evidence Not Admitted
    Evidence that is proffered but not admitted during the hearing 
shall not be part of the record, but shall be retained by the custodian 
of the record until the date when Association's decision becomes final 
or, if applicable, upon the conclusion of any review by the Commission 
or the federal courts.
[(4)] (9) Recommendation
    [The] On the basis of the record, the Hearing Panel shall present a 
recommended decision in writing on the request for relief to the 
Statutory Disqualification Committee. After considering the record and 
recommendation of the Hearing Panel, the Statutory Disqualification 
Committee shall present its recommended decision in writing to the 
National Business Conduct Committee and all other Directors not later 
than seven days before the meeting of the National Business Conduct 
Committee at which the eligibility proceeding shall be considered.
(b) Decision
(1) Decision of the National Business Conduct Committee
    After considering all matters presented in the request for relief, 
the Statutory Disqualification Committee's recommended decision, the 
public interest, and the protection of investors, the National Business 
Conduct Committee may grant or deny the request for relief, and, if 
relief is

[[Page 38173]]

granted, impose conditions on the member and its current or prospective 
associated person. Alternatively, the National Business Conduct 
Committee may remand the eligibility proceeding. The National Business 
Conduct Committee shall prepare a proposed written decision pursuant to 
subparagraph (2).
(2) Contents of Decision
    The decision shall include:
    (A) A description of the origin of the eligibility proceeding and 
the nature of the disqualification;
    (B) A description of the prospective business or employment 
requested to be engaged in; and
    (C) A statement in support of the disposition of the request for 
relief, which, if granted, includes any of the applicable elements 
under SEC Rule 19h-1(e) and a description of any conditions that are 
imposed on the member and current or prospective associated person.
(3) Issuance of Decision After Expiration of Call for Review Period
    The National Business Conduct Committee shall provide its proposed 
written decision to the NASD Regulation Board, and, if the eligibility 
proceeding is not called for review by the NASD Regulation Board, to 
the NASD Board. The NASD Regulation Board may call the eligibility 
proceeding for review pursuant to Rule [9534] 9524. The NASD Board may 
call the eligibility proceeding for review pursuant to Rule [9535] 
9525. If neither the NASD Regulation Board nor the NASD Board calls the 
eligibility proceeding for review, the proposed written decision of the 
National Business Conduct Committee shall become final, and the 
National Business Conduct Committee shall serve its written decision on 
the member, the current or prospective associated person, and 
Department of Member Regulation pursuant to Rules 9132 and 9134. The 
decision shall be effective upon service. The decision shall constitute 
final action of the Association, unless the National Business Conduct 
Committee remands the eligibility proceeding.
[9534] 9524. Discretionary Review by the NASD Regulation Board
(a) Call for Review by Director
    A Director may call an eligibility proceeding for review by the 
NASD Regulation Board[,] if the call for review is made within the 
period prescribed in paragraph (b).
(b) Seven Day Period; Waiver
    After receiving the proposed written decision of the National 
Business Conduct Committee pursuant to Rule [9533] 9523, a Director 
shall have not less than seven days to determine if the eligibility 
proceeding should be called for review. A Director shall call an 
eligibility proceeding for review by notifying the General Counsel of 
NASD Regulation. By a unanimous vote of the NASD Regulation Board, the 
NASD Regulation Board may shorten the period to less than seven days. 
By an affirmative vote of the majority of the NASD Regulation Board 
then in office, the NASD Regulation Board may, during the seven day 
period, vote to extend the period to more than seven days.
(c) Review at Next Meeting
    If a Director calls the eligibility proceeding for review within 
the period prescribed by paragraph (b), the NASD Regulation Board shall 
review the eligibility proceeding not later than the next meeting of 
the NASD Regulation Board. The NASD Regulation Board may order the 
filing of briefs in connection with its review proceedings pursuant to 
this Rule.
(d) Decision of NASD Regulation Board, Including Remand
    After review, the NASD Regulation Board may affirm, modify, or 
reverse the proposed written decision of the National Business Conduct 
Committee. Alternatively, the NASD Regulation Board may remand the 
eligibility proceeding with instructions. The NASD Regulation Board 
shall prepare a proposed written decision that includes all of the 
elements described in Rule [9533(b)(2)] 9523(b)(2).
(e) Issuance of Decision After Expiration of Call for Review Period
    The NASD Regulation Board shall provide its proposed written 
decision to the NASD Board. The NASD Board may call the eligibility 
proceeding for review pursuant to Rule [9535] 9525. If the NASD Board 
does not call the eligibility proceeding for review, the proposed 
written decision of the NASD Regulation Board shall become final, and 
the NASD Regulation Board shall serve its written decision on the 
member, the current or prospective associated person, and Department of 
Member Regulation pursuant to Rules 9132 and 9134. The decision shall 
be effective upon service. The decision shall constitute the final 
action of the Association, unless the NASD Regulation Board remands the 
eligibility proceeding.
[9535] 9525. Discretionary Review by the NASD Board
(a) Call for Review by Governor
    A Governor may call an eligibility proceeding for review by the 
NASD Board if the call for review is made within the period prescribed 
in paragraph (b).
(b) Seven Day Period; Waiver
(1) Eligibility Proceeding Called for Review by NASD Regulation Board
    If the NASD Regulation Board reviewed the eligibility proceeding 
under Rule [9534] 9524, a Governor shall make his or her call for 
review not later than the next meeting of the NASD Board that is at 
least seven days after the date on which the NASD Board receives the 
proposed written decision of the NASD Regulation Board.
(2) Eligibility Proceeding Not Called for Review by NASD Regulation 
Board
    If no Director of the NASD Regulation Board called the eligibility 
proceeding for review under Rule [9534] 9524, a Governor shall make his 
or her call for review no later than the next meeting of the NASD Board 
that is at least seven days after the date on which the NASD Board 
receives the proposed written decision of the National Business Conduct 
Committee.
(3) Waiver
    By a unanimous vote of the NASD Board, the NASD Board may shorten 
the period in subparagraph (1) or (2) to less than seven days. By an 
affirmative vote of the majority of the NASD Board then in office, the 
NASD Board may, during the seven day period in subparagraph (1) or (2), 
vote to extend the period in subparagraph (1) to (2) to more than seven 
days.
(c) Review at Next Meeting
    If a Governor calls [a] an eligibility proceeding for review within 
the period prescribed in paragraph (b), the NASD Board shall review the 
eligibility proceeding not later than the next meeting of the NASD 
Board. The NASD Board may order the filing of briefs in connection with 
its review proceedings pursuant to this Rule.
(d) Decision of NASD Board, Including Remand
    After review, the NASD Board may affirm, modify, or reverse: (1) 
The proposed written decision of the NASD Regulation Board, or (2) if 
the NASD Regulation Board did not call an eligibility proceeding for 
review under Rule [9534] 9524, the proposed written decision of the 
National Business

[[Page 38174]]

Conduct Committee. Alternatively, the NASD Board may remand the 
eligibility proceeding with instructions. The NASD Board shall prepare 
a written decision that includes all of the elements described in Rule 
[9533(b)(2)] 9523(b)(2).
(e) Issuance of Decision
    The NASD Board shall issue and serve its written decision on the 
member, the current or prospective associated person, and Department of 
Member Regulation pursuant to Rules 9132 and 9134. The decision shall 
be effective upon service. The decision shall constitute the final 
action of the Association, unless the NASD Board remands the 
proceeding.
[9536] 9526. Aplication to Commission for Review
    [Any person aggrieved by final] The right to have any action taken 
pursuant to [the] this Rule [9530] Series [may apply for review] 
reviewed by the Commission [under] is governed by Section 19 of the 
Act. The filing of an application for review shall not stay the 
effectiveness of final action by the Association, unless the Commission 
otherwise orders.

9600. Procedures for Exemptions

9610. Application

(a) File With General Counsel
    A member seeking an exemption from Rule 1021, 1022, 1070, 2210, 
2340, 2520, 2710, 2720, 2810, 2850, 2851, 2860. Interpretive Material 
2860-1, 3210, 3350, 11870, or 11900, Interpretive Material 2110-1, or 
Municipal Securities Rulemaking Board Rule G-37 shall file a written 
application with the Office of General Counsel of NASD Regulation.
(b) Content
    An application filed pursuant to this Rule shall contain the 
member's name and address, the name of a person associated with the 
member who will serve as the primary contact for the application, the 
Rule from which the member is seeking an exemption, and a detailed 
statement of the grounds for granting the exemption. If the member does 
not want the application or the decision on the application to be 
publicly available in whole or in part, the member also shall include 
in its application a detailed statement, including supporting facts, 
showing good cause for treating the application or decision as 
confidential in whole or in part.
(c) Applicant
    A member that files an application under this Rule is referred to 
as ``Applicant'' hereinafter in the Rule 9600 Series.

9620. Decision

    After considering an application, NASD Regulation staff shall issue 
a written decision setting forth its findings and conclusions. The 
decision shall be served on the Applicant pursuant to Rules 9132 and 
9134. After the decision is served on the Applicant, the application 
and decision shall be publicly available unless NASD Regulation staff 
determines that the Applicant has shown good cause for treating the 
application or decision as confidential in whole or in part.

9630. Appeal

(a) Notice
    An Applicant may file a written notice of appeal within 15 calendar 
days after service of a decision issued under Rule 9620. The notice of 
appeal shall contain a brief statement of the findings and conclusions 
as to which exception is taken. The National Business Conduct Committee 
may order oral argument. If the Applicant does not want the National 
Business Conduct Committee's decision on the appeal to be publicly 
available in whole or in part, the Applicant also shall include in its 
notice of appeal a detailed statement, including supporting facts, 
showing good cause for treating the decision as confidential in whole 
or in part. The notice of appeal shall be signed by the Applicant.
(b) Expedited Review
    Where the failure to promptly review a decision to deny a request 
for exemption would unduly or unfairly harm the applicant, the National 
Business Conduct Committee shall provide expedited review.
(c) Withdrawal of Appeal
    An Applicant may withdraw its notice of appeal at any time by 
filing a written notice of withdrawal of appeal with the National 
Business Conduct Committee.
(d) Appointment of Subcommittee
    Following the filing of a notice of appeal, the National Business 
Conduct Committee shall designate a Subcommittee to hear an oral 
argument, if ordered, consider any new evidence that the Applicant can 
show good cause for not including in its application, and recommend to 
the National Business Conduct Committee a disposition of all matters on 
appeal.
(e) Decision
    After considering all matters on appeal and the Subcommittee's 
recommendation, the National Business Conduct Committee shall affirm, 
modify, or reverse the decision issued under Rule 9620. The National 
Business Conduct Committee shall issue a written decision setting forth 
its findings and conclusions and serve the decision on the Applicant. 
The decision shall be served pursuant to Rules 9132 and 9134. The 
decision shall be effective upon service and shall constitute final 
action of the Association.
* * * * *

Conforming Rule Changes

Rule 1021. Registration Requirements
    (e)(2) Pursuant to the Rule 9600 Series, the [President of the] 
Association[, upon written request,] may waive the provisions of 
subparagraph (1)[, above,] in situations [which] that indicate 
conclusively that only one person associated with an applicant for 
membership should be required to register as a principal.
1022. Categories of Principal Registration
    (b)(4) Pursuant to the Rule 9600 Series, the Association may exempt 
a member[,] or an applicant for membership in the Association[, may 
upon written request, be exempted by the President of the Association, 
or his delegate,] from the requirement to have a Limited Principal--
Financial and Operations if:
    (A) It has been expressly exempted by the Commission from SEC Rule 
15c3-1(b)(1)(iii);
    (B) It is subject to the provisions of SEC Rule 15c3-1(a)(2) or to 
Section 402.2(c) of the rules of the Treasury Department.
1070. Qualification Examinations and Waiver of Requirements
    (e) Pursuant to the Rule 9600 Series, the [President of the] 
Association may, in exceptional cases and where good cause is shown, 
waive the applicable Qualification Examination [upon written request by 
the member,] and accept other standards as evidence of an applicant's 
qualifications for registration. Advanced age, physical infirmity or 
experience in fields ancillary to the investment banking or securities 
business will not individually of themselves constitute sufficient 
grounds to waive a Qualification Examination.

[[Page 38175]]

2210. Communications With the Public
(c) Filing Requirements and Review Procedures
    (8) Exemptions. Pursuant to the Rule 9600 Series, the Association 
may exempt a member or person associated with a member from the pre-
filing requirements of this paragraph for good cause shown.
2340. Customer Account Statements
    (d) Pursuant to the Rule 9600 Series, the Association[, acting 
through its Operations Committee] may[, pursuant to a written request 
for good cause shown,] exempt any member from the provisions of this 
Rule for good cause shown.
2520. Margin Accounts
    (c)(5)(C) Joint Accounts in Which the Carrying Organization or a 
Partner or Stockholder Therein Has an Interest
    In the case of a joint account carried by a member in which such 
member, or any partner, or stockholder (other than a holder of freely 
transferable stock only) of such member participates with others, each 
participant other than the carrying member shall maintain an equity 
with respect to such interest pursuant to the margin provisions of this 
paragraph as if such interest were in a separate account.
    Pursuant to the Rule 9600 Series, [T]the Association [will consider 
requests for exemption from the] may grant an exemption from the 
provisions of [this] paragraph (c)(5)(C)[, provided] if the account is:
    (i) [The account is] confined exclusively to transactions and 
positions in exempted securities;
    (ii) [The account is] maintained as a Market Functions Account 
conforming to the conditions of Section 220.12(e) (Odd-lot dealers) of 
Regulation T of the Board of Governors of the Federal Reserve System; 
or
    (iii) [The account is] maintained as a Market Functions Account 
conforming to the conditions of Section 220.12(c) (Underwritings and 
Distributions) of Regulation T of the Board of Governors of the Federal 
Reserve System and each other participant margins his share of such 
account on such basis as the Association may prescribe.
2710. Corporate Financing Rule--Underwriting Terms and Arrangements
    (d) Exemptions. Pursuant to the Rule 9600 Series, the Association 
may exempt a member or person associated with a member from the 
provisions of this Rule for good cause shown.
2720. Distribution of Securities of Members and Affiliates--Conflicts 
of Interest
    (p) Requests for Exemption from Rule 2720
    Pursuant to the Rule 9600 Series, [T]the Association [Corporate 
Financing Committee of the Board of Governors, upon written request,] 
may in exceptional and unusual circumstances, taking into consideration 
all relevant factors, exempt a member unconditionally or on specified 
terms from any or all of the provisions of this Rule which it deems 
appropriate. [Unless waived by the party requesting an exemption, a 
hearing shall be held upon a request before the Corporate Financing 
Committee, or a Subcommittee thereof designated for that purpose.]
2810. Direct Participation Programs
    (c) Exemptions. Pursuant to the Rule 9600 Series, the Association 
may exempt a member or person associated with a member from the 
provisions of this Rule for good cause shown.
2850. Position Limits
    (a) Except with the prior written approval of the Association 
pursuant to the Rule 9600 Series for good cause shown in each instance, 
no member shall effect for any account in which such member has an 
interest, or for the account of any partner, officer, director or 
employee thereof, or for the account of any customer, a purchase or 
sale transaction in an index warrant listed on Nasdaq or on a national 
securities exchange if the member has reason to believe that as a 
result of such transaction the member, or partner, officer, director or 
employee thereof, or customer would, acting alone or in concert with 
others, directly or indirectly, hold or control an aggregate position 
in an index warrant position on the same side of the market, combining 
such index warrant position with positions in index warrants overlying 
the same index on the same side of the market, in excess of the 
position limits established by the Association, in the case of Nasdaq-
listed index warrants, or on the exchange on which the warrant is 
listed.
2851. Exercise Limits
    (a) Except with the prior written approval of the Association 
pursuant to the Rule 9600 Series for good cause shown, in each 
instance, no member or person associated with a member shall exercise, 
for any account in which such member or person associated with a member 
has an interest, or for the account of any partner, officer, director 
or employee thereof, or for the account of any customer, a long 
position in any index warrant if as a result thereof such member or 
partner, officer, director or employee thereof or customer, acting 
alone or in concert with others, directly or indirectly;
    (1) Has or will have exercised within any five (5) consecutive 
business days a number of index warrants overlying the same index in 
excess for the limits for index warrant positions contained in Rule 
2850; or
    (2) Has or will have exceeded the applicable exercise limit fixed 
from time to time by an exchange for an index warrant not dealt in on 
Nasdaq.
    (b) The Association, pursuant to the Rule 9600 Series for good 
cause shown, may institute other limitations concerning the exercise of 
index warrants from time to time [by action of the Association]. 
Reasonable notice shall be given of each new limitation fixed by the 
Association. These exercise limitations are separate and distinct from 
any other exercise limitations imposed by the issuers of index 
warrants.
2860. Options
(b) Requirements
(3) Position Limits
    (A) Stock Options--Except in highly unusual circumstances, and with 
the prior written approval of the Association pursuant to the Rule 9600 
Series for good cause shown in each instance, no member shall effect 
for any account in which such member has an interest, or for the 
account of any partner, officer, director or employee thereof, or for 
the account of any customer, an opening transaction through Nasdaq, the 
over-the-counter market or on any exchange in a stock option contract 
of any class of stock options if the member has reason to believe that 
as a result of such transaction the member or partner, officer, 
director or employee thereof, or customer would, acting alone or in 
concert with others, directly or indirectly, hold or control or be 
obligated in respect of an aggregate position in excess of:
    (i) 4,500 option contracts of the put class and the call class on 
the same side of the market covering the same underlying security, 
combining for purposes of this position limit long positions in put 
options with short positions in call options, and short positions in 
put options with long positions in call options; or
    (ii) 7,500 options contracts of the put class and the call class on 
the same side of the market covering the same

[[Page 38176]]

underlying security, providing that the 7,500 contract position limit 
shall only be available for option contracts on securities which 
underlie or qualify to underlie Nasdaq or exchange-traded options 
qualifying under applicable rules for a position limit of 7,500 option 
contracts; or
    (iii) 10,500 option contracts of the put class and the call class 
on the same side of the market covering the same underlying security 
providing that the 10,500 contract position limit shall only be 
available for option contracts on securities which underlie or qualify 
to underlie Nasdaq or exchange-traded options qualifying under 
applicable rules for a position limit of 10,500 option contracts; or
    (iv) 20,000 options contracts of the put and the call class on the 
same side of the market covering the same underlying security, 
providing that the 20,000 contract position limit shall only be 
available for option contracts on securities which underlie or qualify 
to underlie Nasdaq or exchange-traded options qualifying under 
applicable rules for a position limit of 20,000 option contracts; or
    (v) 25,000 options contracts of the put and the call class on the 
same side of the market covering the same underlying security, 
providing that the 25,000 contract position limit shall only be 
available for option contracts on securities which underlie or qualify 
to underlie Nasdaq or exchange-traded options qualifying under 
applicable rules for a position limit of 25,000 option contracts; or
    (vi) Such other number of stock options contracts as may be fixed 
from time to time by the Association as the position limit for one or 
more classes or series of options provided that reasonable notice shall 
be given of each new position limit fixed by the Association.
    (vii) Equity Option Hedge Exemption.
    a. The following positions, where each option contract is 
``hedged'' by 100 shares of stock or securities readily convertible 
into or economically equivalent to such stock, or, in the case of an 
adjusted option contract, the same number of shares represented by the 
adjusted contract, shall be exempted from established limits contained 
in (i) through (vi) above:
    1. Long call and short stock;
    2. Short call and long stock;
    3. Long put and long stock;
    4. Short put and short stock.
    b. Except as provided under the OTC Collar Exemption contained in 
paragraph (b)(3)(A)(viii), in no event may the maximum allowable 
position, inclusive of options contracts hedged pursuant to the equity 
option position limit hedge exemption in subparagraph a. above, exceed 
three times the applicable position limit established in paragraph 
(b)(3)(A) (i)-(v).
    c. The Equity Option Hedge Exemption is a pilot program authorized 
by the Commission through December 31, 1997.
    (viii) OTC Collar Aggregation Exemption
    a. For purposes of this paragraph (b), the term OTC collar shall 
mean a conventional equity option position comprised of short (long) 
calls and long (short) puts overlying the same security that hedge a 
corresponding long (short) position in that security.
    b. Notwithstanding the aggregation provisions for short (long) call 
positions and long (short) put positions contained in subparagraphs (i) 
through (v) above, the conventional options positions involved in a 
particular OTC collar transaction established pursuant to the position 
limit hedge exemption in subparagraph (vii) need not be aggregated for 
position limit purposes, provided the following conditions are 
satisfied:
    1. The conventional options can only be exercised if they are in-
the-money;
    2. Neither conventional option can be sold, assigned, or 
transferred by the holder without the prior written consent of the 
writer;
    3. The conventional options must be European-style (i.e., only 
exercisable upon expiration) and expire on the same date;
    4. The strike price of the short call can never be less than the 
strike price of the long put; and
    5. Neither side of any particular OTC collar transaction can be in-
the-money when that particular OTC collar is established.
    6. The size of the conventional options in excess of the applicable 
basic position limit for the options established pursuant to 
subparagraph (A) (i)-(v) above must be hedged on a one-to-one basis 
with the requisite long or short stock position for the duration of the 
collar, although the same long or short stock position can be used to 
hedge both legs of the collar.
    c. For multiple OTC collars on the same security meeting the 
conditions set forth in subparagraph b. above, all of the short (long) 
call options that are part of such collars must be aggregated and all 
of the long (short) put options that are part of such collars must be 
aggregated, but the short (long) calls need not be aggregated with the 
long (short) puts.
    d. Except as provided above in subparagraph b. and c., in no event 
may a member fail to aggregate any conventional or standardized options 
contract of the put class and the call class overlying the same equity 
security on the same side of the market with conventional option 
positions established in connection with an OTC collar.
    e. Nothing in this subparagraph (vii) changes the applicable 
position limit for a particular equity security.
IM-2860-1. Position Limits
    (B) Index Options
    (i) Except in highly unusual curcumstances, and with the prior 
written approval of the Association Pursuant to the Rule 9600 Series 
for good cause shown in each instance, no members shall effect for any 
account in which such member has an interest, or for the account of any 
partner, officer, director or employee thereof, or for the account of 
any customer, an opening transaction in an option contract of any class 
of index options displayed on Nasdaq or dealt in on an exchange if the 
member has reason to believe that as a result of such transaction the 
member or partner, officer, director or employee thereof, or customer, 
would, acting alone or in concert with others directly or indirectly, 
hold or control or be obligated in respect of an aggregate position in 
excess of position limits established by the Association, in the case 
of Nasdaq index options, or the exchange on which the option trades.
(4) Exercise Limits
    Except in highly unusual cicumstances, and with the prior written 
approval of the Association[,] pursuant to the Rule 9600 Series for 
good cause shown in each instance, no member or person associated with 
a member shall exercise, for any account in which such member or person 
associated with a member has an interest, or for the account of any 
partner, officer, director or employee thereof or for the account of 
any customer, any option contract if as a result thereof such member or 
partner, officer, director or employee thereof or customer, acting 
along or in concert with others, director or indirectly, has or will 
have exercised within any five (5) consecutive business days a number 
of option contracts of a particular class of options in excess of the 
limits for options positions in paragraph (b)(3). The Association may 
institute other limitations concerning the exercise of option contracts 
from time to time by action of the Association. Reasonable notice shall 
be given of each new limitation filed by the Association.

[[Page 38177]]

3210. Securities ``Failed to Receive'' and ``Failed to Deliver''
    (b) Pursuant to the Rule 9600 Series, [F]for good cause shown and 
in exceptional circumstances, the Association may exempt a member or a 
person associated with a member [a member may request exemption] from 
the provisions of this Rule [by written request to the District 
Director of the District in which his principal office is located].
3350. Short Sale Rule
    (j) Pursuant to the Rule 9600 Series or on the Association's [Upon 
application or on its] own motion, the Association may exempt either 
unconditionally, or on specified terms and conditions, any transaction 
or class of transactions from the provisions of this Rule.
11870. Customer Account Transfer Contracts
    (j) Exemptions.
    (1) Pursuant to the Rule 9600 Series, The Association may exempt 
from the provisions of this Rule, either unconditionally or on 
specified terms and conditions, (A) any member or (B) any type of 
account, security or financial instrument.
11900. Clearance of Corporate Debt Securities
    Each member or its agent that is a participant in a registered 
clearing agency, for purposes of clearing over-the-counter securities 
transactions, shall use the facilities of a registered clearing agency 
for the clearance of eligible transactions between members in corporate 
debt securities. Pursuant to the Rule 9600 Series, the Association may 
exempt any transaction or class or transactions in corporate debt 
securities from the provision of this Rule as may be necessary to 
accommodate special circumstances related to the clearance of such 
transactions or class of transactions.
* * * * *

[9800. Corporate Financing and Direct Participation Program 
Matters]

[9810. Purpose]
    [The purpose of this Rule 9800 Series is to provide a procedure for 
review of determination by the Association's staff regarding compliance 
with Rules of the Association relating to corporate financing and 
direct participation program matters by which any member is aggrieved.]
[9820. Application by Aggrieved Member]
    [Any member aggrieved by a determination rendered pursuant to any 
Rule or regulation of the Association relating to underwriting terms or 
arrangements may make application for review of such determination. In 
exceptional or unusual circumstances, a member may request 
conditionally or unconditionally an exemption from such Rules or 
regulations. Applications for review will be accepted only with respect 
to offerings for which a registration statement or similar document has 
been filed with the appropriate federal or state regulatory agency; 
provided, however, that a hearing committee may waive the requirement 
for filing prior to review upon finding that such review is appropriate 
under the circumstances.]
[9830. Application for Review]
    [Any member making application for review pursuant to Rule 9820 
(hereinafter referred to as ``applicant') shall request such review in 
writing and shall specify in reasonable detail the source and nature of 
the aggrievement and the relief requested. The applicant shall state 
whether a hearing is requested and shall sign the written application.]
[9840. Notice of Hearing]
    [Any applicant shall have a right to a hearing before a hearing 
committee constituted as provided in Rule 9850. The hearing committee 
may request a hearing on its own motion. A hearing shall be scheduled 
as soon as practicable, at a location determined by the hearing 
committee. Written notice of the hearing shall be sent to the applicant 
stating the date, time, and location of the hearing.]
[9850. Hearing Committee and Procedure]
    [(a) Any hearing shall be before an individual designated by the 
Association, who shall be current or past members of the appropriate 
standing committee of the Board of Governors, i.e. the ``hearing 
committee.'' Any applicant shall be entitled to appear at, and 
participate in, the hearing, to be represented by counsel, and to 
submit any relevant testimony or evidence. Representatives of the 
Association shall be entitled to appear at, participate in, the 
hearing, to be represented by counsel, and to submit any relevant 
testimony or evidence. Upon agreement of the applicant, representatives 
of the Association, and the hearing committee, a hearing may be 
conducted by means of telephonic or other linkage which permits all 
parties to participate simultaneously in the proceeding.]
    [(b) In the event that the applicant waives a hearing before the 
appropriate hearing committee, the hearing committee shall review the 
matter on the record before it. Any applicant and the Association shall 
be entitled to submit any relevant written testimony or evidence to the 
hearing committee.]
[9860. Requirement for Written Determination]
    [The hearing committee shall render a determination as to all 
issues which the committee finds to be relevant as soon as practicable 
following conclusion of the hearing or, in cases in which a hearing is 
not requested, completion of the committee's review of the record. The 
hearing committee may determine whether the proposed underwriting or 
other terms and arrangements in connection with or relating to the 
distribution of the securities, or the terms and conditions related 
thereto, taking into consideration all elements of compensation and all 
of the relevant surrounding factors and circumstances, are fair and 
reasonable and in compliance with applicable Rules and regulations. The 
determination of the hearing committee shall be issued in writing, and 
a copy shall be sent to each applicant.]
[9870. Review by Committee of Board]
    [(a) Any member aggrieved by a determination of a hearing committee 
shall have a right to have that determination reviewed by the 
appropriate standing committee of the Board of Governors.]
    [(b) Any member seeking a review of a determination of a hearing 
committee shall submit a written request for such review to the 
Association within fifteen (15) business days following issuance of the 
hearing committee's written determination. Any such member shall submit 
with the written request for review a written statement specifying the 
portion of the hearing committee's determination for which review is 
requested and the relief sought. Any such member may submit written 
testimony or evidence for consideration by the committee. 
Representatives of the Association may also submit written testimony or 
evidence to the committee.]
    [(c) Pursuant to a request duly made, the appropriate standing 
committee of the Board of Governors will review the determination of a 
hearing committee, giving consideration to all parts of the record 
which the Board committee finds relevant. The Board committee shall

[[Page 38178]]

render a determination as to all issues which the committee finds to be 
relevant. The determination of the Board committee shall be issued in 
writing, and a copy shall be sent to each member requesting review.]
[9880. Nature of Determination]
    [Any determination by a hearing committee or standing committee 
rendered shall constitute the opinion of that committee as to 
compliance with applicable Association Rules, interpretations or 
policies and shall be advisory in nature only. Such determination shall 
not be subject to review by the Board of Governors. No such 
determination shall constitute a finding of a violation of any Rule, 
interpretation or policy. A finding of a violation shall be made only 
by a District Business Conduct Committee.]

[FR Doc. 97-18728 Filed 7-15-97; 8:45 am]
BILLING CODE 8010-01-M