[Federal Register Volume 62, Number 249 (Tuesday, December 30, 1997)]
[Notices]
[Pages 67927-67930]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-33831]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-39470; File No. SR-NASD-97-81]
Self-Regulatory Organizations; Order Granting Accelerated
Approval of Proposed Rule Change and Amendment Nos. 1 and 2 to the
Proposed Rule Change, and Notice of Filing and Order Granting
Accelerated Approval of Amendment No. 3 to the Proposed Rule Change by
the National Association of Securities Dealers, Inc. Relating to
Changes to the Rule 1010 Series, the Rule 8000 Series, and the Rule
9000 Series to Reflect Changes in the Corporate Organization of the
National Association of Securities Dealers, Inc. and Its Subsidiaries
December 19, 1997.
On October 31, 1997, the National Association of Securities
Dealers, Inc. (``NASD''), through its regulatory subsidiary NASD
Regulation, Inc. (``NASD Regulation'') filed with the Securities and
Exchange Commission (``SEC'' or ``Commission'') a proposed rule change
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'')''),\1\ and Rule 19b-4 thereunder.\2\ In this filing, the NASD
proposed amendments to (a) Article V of the NASD Regulation By-Laws;
(b) the Rule 1010 Series; (c) the Rule 8000 Series; (d) the Rule 9000
Series; and (e) certain other Rules of the Association, generally to
conform such rules to the corporate restructuring of the Association
and to make clarifying and technical changes to such rules. Notice of
this proposed rule filing was published in the Federal Register on
December 3, 1997 (as amended, the ``Notice'').\3\ The Commission did
not receive any comment letters on the filing.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 39350 (November 21,
1997), 62 FR 64000 (File No. SR-NASD-97-81). Amendment Nos. 1 and 2
to the proposed rule filing were filed on November 12, 1997 and
November 18, 1997, respectively. The changes contained in these
amendments were included in the Notice. See Letter from Joan C.
Conley, Secretary, NASD Regulation to Katherine A. England,
Assistant Director, Division of Market Regulation, Commission dated
November 12, 1997 (note corrected sender); Letter Amendment No. 2
from Alden S. Adkins, Vice President and General Counsel, NASD
Regulation to Katherine A. England, Assistant Director, Division of
Market Regulation, Commission dated November 18, 1997. Several
additional technical amendments were also included in the Notice.
Telephone Conversation between Sharon Zackula, Office of General
Counsel, NASD Regulation and Mandy S. Cohen, Office of Market
Supervision, Commission (November 20, 1997). Amendment No. 3 to the
proposed rule filing, which amended the requested effective date of
the proposal and included several additional technical amendments
(see discussion infra p. 9, fn. 20), was filed on December 12, 1997.
Letter Amendment No. 3 from Alden S. Adkins, Vice President and
General Counsel, NASD Regulation to Katherine A. England, Assistant
Director, Division of Market Regulation, Commission dated December
12, 1997.
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I. Introduction and Background
In November 1994, the NASD Board of Governors appointed the Select
Committee on Structure and Governance (``Select Committee'') to review
the NASD's corporate governance structure and to recommend changes to
enable the NASD to better meet its regulatory and business obligations,
including its oversight of the Nasdaq market. Following the
recommendations of the Select Committee, the NASD proposed reorganizing
its corporate structure. Nasdaq was given sole responsibility to
operate and oversee the Nasdaq market and other over-the-counter
(``OTC'') markets, while NASD Regulation was given responsibility for
regulation and member and constituent services.\4\ The NASD retained
ultimate policymaking, oversight, and corporate authority as the parent
holding company and statutory self-regulatory organization (``SRO''),
while granting substantial deference to the operating Subsidiaries in
the areas of their respective jurisdictions. These revisions to the
corporate structure were first proposed and adopted in mid-1996.\5\
Final revisions to the corporate structure were approved on November
14, 1997.\6\
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\4\ NASD Regulation and Nasdaq are collectively referred to
herein as the ``Subsidiaries.''
\5\ See Securities Exchange Act Release No. 37106 (April 11,
1996), 61 FR 16944 (April 18, 1996) (File No. SR-NASD-96-02);
Securities Exchange Act Release No. 37107 (April 11, 1996), 61 FR
16948 (April 18, 1996) (File No. SR-NASD-96-16).
\6\ Securities Exchange Act Release No. 39326 (November 14,
1997), 62 FR 62385 (November 21, 1997) (File No. SR-NASD-97-71).
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On August 8, 1996, the Commission issued an order pursuant to
Section 19(h)(1) of the Act (``SEC Order''), including fourteen
undertakings (``Undertakings''),\7\ and a related report pursuant to
Section 21(a) of the Act (``21(a) Report'').\8\ In these documents, the
Commission indicated that the NASD had not complied with its own rules
and had failed to satisfy its obligations under the Act to enforce such
rules and the federal securities laws. In response to the Commission's
findings in the 21(a) Report and to comply with the terms of certain
undertakings, the NASD subsequently proposed amendments to its Rules of
the Association.\9\ These changes were approved by the Commission on
August 7, 1997.\10\ The proposed amendments supplement the changes
contained in the Commission's August 1997 order.
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\7\ Securities Exchange Act Release No. 37538 (Aug. 8, 1996)
(SEC Order Instituting Public Proceedings Pursuant to Section
19(h)(1) of the Securities Exchange Act of 1934, Making Findings and
Imposing Remedial Sanctions, In the Matter of National Association
of Securities Dealers, Inc., Administrative Proceeding File No. 3-
9056).
\8\ Report and Appendix to Report Pursuant to Section 21(a) of
the Securities Exchange Act of 1934 Regarding the NASD and The
Nasdaq Stock Market (Aug. 8, 1996).
\9\ Securities Exchange Act Release No. 38545 (April 24, 1997)
62 FR 25226 (May 8, 1997) (File No. SR-NASD-97-28), as amended.
\10\ Securities Exchange Act Release No. 38908 (August 7, 1997),
62 FR 43385 (August 13, 1997) (Rules of the Association).
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II. Description of the Proposal
The Association's proposed rule amendments are intended to (A)
conform the Rules of the Association to reflect the terms of the recent
corporate reorganization of the NASD, NASD Regulation, and Nasdaq,\11\
and (B) clarify and simplify certain portions of those Rules of the
Association approved in SR-NASD-97-28.\12\ The following outlines the
proposed amendments.\13\
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\11\ See Release No. 34-39326 (File No. SR-NASD-97-71).
\12\ See Release No. 34-28908.
\13\ A complete list of all changes is contained in the Notice,
see supra Release No. 34-39350.
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A. Conforming Amendments
The structural changes to the NASD and its Subsidiaries modified
the sizes of the three governing boards, interwove
[[Page 67928]]
the membership of such boards and included significant non-industry and
public participation throughout the Association's decision making
processes. Corresponding changes to the procedures described in the
Rules of the Association are required to effect these changes
operationally. For example, since all of the members of the Subsidiary
governing boards (the NASD Regulation or Nasdaq ``Directors'') now sit
on the NASD Board of Governors, review by both a subsidiary board and
the parent board is duplicative. The change in the corporate structure
contemplated removal of the subsidiary layer of review, and the
proposed amendments effect that change through appropriate
regulation.\14\
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\14\ While the present rules include two levels of review, an
aggrieved party does not have two rights of appeal. Review by the
governing boards, referred to as a ``call for review'' is at the
sole discretion of each board.
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In addition, the corporate restructuring created an adjudication
review committee separate from the NASD Regulation Board of Directors.
The revised by-laws substituted the new National Adjudicatory Council
(the ``NAC,'' a non-board committee) for the National Business Conduct
Committee (the ``NBCC,'' composed of NASD Regulation Directors). The
proposed amendments replace references to the NBCC with references to
the NAC. In addition, the amendments transfer certain responsibilities
formerly delegated to the NBCC chair and vice chair, to a new Review
Subcommittee of the NAC. The composition and quorum requirements of
this subcommittee are set forth in a proposed amendment to Article V of
the NASD Regulation By-Laws. Upon approval of the proposed amendments,
the Review Subcommittee will have delegated authority to make decisions
regarding (a) the administration of disciplinary proceedings during the
review and appeal process; (b) the review and acceptance of letters of
acceptance, waiver, and consent; (c) the review and acceptance of minor
rule plan violation letters; and (d) the review and acceptance of
offers of settlement. The corresponding authority of the chair and vice
chair to make such determinations will be deleted.
B. Clarifying and Simplifying Amendments
In addition to the conforming amendments described above, the
Association is also proposing several clarifying and/or simplifying
changes to some of the Rules of the Association approved in SR-NASD-97-
28. These changes will (a) allow members to maintain an electronic
version of the NASD Manual as their required copy of this manual; (b)
consolidate several rules addressing provision of information within
one Rule series; (c) clarify the delegated responsibilities of NASD
Regulation's Departments of Enforcement and Market Regulation; (d)
allow appointment of persons to serve as observers to disciplinary
proceedings; and (e) correct certain minor procedural inconsistencies
and/or uncertainties regarding notice, notice periods, service, stays,
and exemptions. The particulars of these changes are set forth in
detail in the Notice.
III. Discussion
A. The Proposed Amendments
As discussed below, the Commission has determined at this time to
approve the NASD's proposal. The standard by which the Commission must
evaluate a proposed rule change is set forth in Section 19(b) of the
Act. The Commission must approve a proposed NASD rule change if it
finds that the proposal is consistent with the requirements of the Act
and the rules and regulations thereunder that govern the NASD.\15\ In
evaluating a given proposal, the Commission examines the record before
it and all relevant factors and necessary information. In addition,
Section 15A of the Act establishes specific standards for NASD rules
against which the Commission must measure the NASD Proposal.\16\
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\15\ U.S.C. 78s(b).
\16\ 15 U.S.C. 78o-3.
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The Commission has evaluated the NASD's proposed rule change in
light of the standards and objectives set forth in the Act
(particularly Sections 15A \17\ and 3(f) \18\), the SEC Order, the
21(a) Report as well as the revised corporate restructuring approved in
SR-NASD-97-71. The Commission believes that the proposed changes to the
Rules of the Association are consistent with the corporate
restructuring, as well as the objectives of the Act, the Undertakings
and the 21(a) Report. The proposed rule change, in furthering the
purpose of the corporate restructuring by appropriate conforming
regulation, should encourage dispassionate performance of the NASD's
responsibilities as an SRO.
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\17\ For example, Section 15A(b)(8) requires that the rules of
an association provide a fair procedure for the disciplining of
members and persons associated with members, the denial of
membership, the barring of any person becoming associated with a
member thereof, and for the prohibition or limitation by the
association of any person with respect to access to services offered
by the association. Section 15A(h)(2) requires a registered
securities association when determining whether a person shall be
denied membership, barred from becoming associated with a member, or
prohibited or limited with respect to access to services offered by
the association or member thereof, to notify such person of and give
him an opportunity to be heard upon, the specific grounds for
denial, bar, or prohibition or limitation under consideration and
keep a record. Section 15A(h)(3) governs when a registered
securities association may summarily suspend a member or a person
associated with a member.
\18\ In approving this proposal, the Commission notes that it
has considered the proposed rule's impact on efficiency,
competition, and capital formation. 15 U.S.C. 78c(f).
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As set forth in the proposal, the conforming changes will allow the
Governors of the NASD Board and the Directors of the Subsidiary boards
to direct their attention to crucial governance matters, and will
decrease unnecessary duplicative procedures. For example, creation of
the NAC and its Review Subcommittee will reduce the administrative
burden on board members by eliminating their required service on these
bodies, while at the same time protecting the integrity of the review
process. Council members, who are nominated in a manner similar to the
Governors, selected by the NASD Regulation Board, and subject to the
same compositional requirements as the NASD Regulation Board, should be
able to perform their important adjudicatory functions without other
governance distractions. Elimination of the duplicative subsidiary
board review of certain committee decisions will similarly reduce the
administrative burden on those Governors who also serve as Subsidiary
Directors, without sacrificing their input into the review process.
The clarifying and simplifying modifications will further enhance
the Association's ability to perform its self-regulatory function.
Permitting use of an electronic NASD manual should lessen the cost and
time involved in the maintenance of an up-to-date manual and increase
the availability of the regulations therein. Gathering the rules
requiring certain persons to provide information to the Association
into one Rule series should help its members and other persons to be
more aware of these related information sharing obligations, and
thereby ease compliance with such rules. Clarifying the respective
duties of the Departments of Enforcement and Market Regulation should
help these offices to properly identify and perform their appropriate
delegated responsibilities. Allowing qualified observers to sit on
disciplinary panels should provide an effective training forum for
future panelists. Finally, correction of the various inconsistencies
and/or uncertainties discovered after approval of the Rules of the
Association in SR-NASD-97-28 should help to promote the smooth and just
application
[[Page 67929]]
of such rules, and contribute to and enhance the Association's ability
to perform its SRO responsibilities in an objective, balanced and
responsive manner.
B. Effectiveness of the Amendments
The Association has requested expedited approval of its proposal,
with an effective date of not later than the day prior to the January
1998 meeting of the NASD Regulation Board. Immediate approval, with
delayed application will allow publication of the revised Rules of the
Association, while allowing the NASD's constituency and the general
public time to become familiar with the changes to such rules prior to
their implementation. The Association has submitted a related rule
filing, SR-NASD-97-90, which conforms the effective dates of its
corporate governance documents to the same date.\19\ The Commission
agrees that expedited approval and a delayed effective date are
appropriate for the reasons stated, as well as to ensure that the
NASD's constituency and the general public will have adequate time to
review the new procedures prior to their implementation.
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\19\ The corporate governance documents, which include the
enacting provisions for the NAC (in the NASD Regulation By-Laws)
were approved by the Commission on November 14, 1997. See Release
No. 34-39326.
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IV. Amendment No. 3
The Commission finds good cause for approving Amendment No. 3 prior
to the thirtieth day after the date of publication of notice thereof in
the Federal Register. Specifically, Amendment No. 3 amends the
requested effective date of the proposal, as discussed above, and makes
several technical amendments of the same type contained in the
Notice.\20\ The Commission believes that these changes, combined with
those in the initial filing of SR-NASD-97-81 are consistent with the
Act, and should enhance both the fair and efficient operation of the
NASD and the dispassionate application of the rules and fairness in the
NASD's adjudicatory and listing processes, as well as other regulatory
activities. Finally, the acceleration of the effectiveness of Amendment
No. 3 will enable the Commission to approve its changes at the same
time as the other modifications to the NASD Rules of the Association
proposed in the Notice. Therefore, the Commission believes that
granting accelerated approval to Amendment No. 3 is appropriate and
consistent with Section 19(b)(2) of the Act.\21\
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\20\ The technical amendments: (A) amend paragraphs (d)(1), (e),
(f), and (g) of Rule IM-8310-2, Release of Disciplinary Information,
by (i) deleting the current terms, ``National Business Conduct
Committee'' and ``NBCC,'' and substituting the term ``National
Adjudicatory Council;'' (ii) deleting an erroneous reference to the
discretionary review by the NASD Regulation Board; and (iii)
replacing erroneous references to two rescinded Rules with reference
to the two current Rules; (B) delete an erroneous reference to the
Rule 9800 Series in Rule 9110; (C) change an erroneous singular
reference in Rule 9270(d)(1)(C) to a plural reference; (D) delete
erroneous references to (i) the discretionary review by the NASD
Regulation Board, and (ii) Rule 9352, in Rule 9311(b); (E) delete an
erroneous reference to a paragraph previously proposed for deletion
in Rule 9351(b)(2); (F) change an erroneous singular reference to a
plural reference in Rule 9414(b)(1); and (G) change the caption of
paragraph (a) in Rule 9610.
\21\ 15 U.S.C. 78s(b)(2).
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V. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning Amendment No. 3 to the proposed rule change.
Persons making written submissions 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 Amendment No. 3 that
are filed with the Commission, and all written communications relating
to Amendment No. 3 between the Commission and any persons, other than
those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for inspection and
copying in the Commission's Public Reference Room. Copies of such
filing will also be available for inspection and copying at the
principal office of the NASD. All submissions should refer to File No.
SR-NASD-97-81 and should be submitted by January 20, 1998.
VI. Conclusion
The Commission believes that the proposed rule change is consistent
with the Act, and, particularly, with Sections 15A(b) (6), (7), and (8)
thereof.\22\ The proposed rule change is consistent with Section
15A(b)(6) of the Act in that it will promote just and equitable
principles of trade by providing fair procedures and standards for
membership admission, and fair procedures and consistent treatment for
requesting information from members or other persons who are obligated
to provide the Association with information. The proposed rule change
is consistent with Section 15A(b)(7) in that it furthers the statutory
mandate that the 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 association with a member, or
any other fitting sanction. The rule change is consistent with Section
15A(b)(8) in that it furthers the statutory goals of providing a fair
procedure for disciplining members and persons associated with members,
fair procedures for admitting or denying membership to any person
seeking membership to the Association, fair procedures for barring any
person from becoming associated with a member of the Association, and
fair procedures for prohibiting or limiting the association of any
person with respect to access to services offered by the Association or
a member thereof.
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\22\ 15 U.S.C. 78o-3.
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The Commission also finds good cause for approving the NASD's
proposal prior to the thirtieth day after the date of publication of
notice thereof in the Federal Register. Specifically, the changes
contained in this rule filing conform the Rules of the Association to
the recently revised corporate governance documents of the NASD, NASD
Regulation and Nasdaq.\23\ The Commission believes that accelerating
the effectiveness of the proposal will enable the NASD to complete
conformance of its Rules of the Association to the recent corporate
restructuring prior to the first Board of Governors meeting
implementing the new corporate structure. Thus, the Commission believes
that granting accelerated approval to SR-NASD-97-81 is appropriate and
consistent with Section 19(b)(2) of the Act.\24\
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\23\ In SR-NASD-97-71, the Association requested an effective
date for that portion of the NASD Regulation By-Laws creating the
NAC of not later than the first meeting of the NASD Board in January
1998, which is one day later than the requested date for this rule
filing. See Release No. 34-39326. The Association recently filed an
amendment to the effective date of the By-Laws creating the NAC, to
conform to the effective date contained in this Order. See SR-NASD-
97-90.
\24\ 15 U.S.C. 78s(b)(2).
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It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\25\ that the proposed rule change (SR-NASD-97-81), including
Amendment No. 3 thereto, is approved on an accelerated basis.
\25\ Id.
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\26\
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\26\ 17 CFR 200.30-3(a)(12).
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[[Page 67930]]
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-33831 Filed 12-29-97; 8:45 am]
BILLING CODE 8010-01-M