[Federal Register Volume 63, Number 108 (Friday, June 5, 1998)]
[Notices]
[Pages 30789-30791]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-14920]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40026, File No. SR-NASD-98-34]


Self-Regulatory Organizations; Order Granting Accelerated 
Approval to Proposed Rule Change by the National Association of 
Securities Dealers, Inc., Relating to Cancellations and Suspensions for 
Failure To Comply With Arbitration Award

May 26, 1998.
    On May 1, 1998, the National Association of Securities Dealers, 
Inc. (``NASD'' or ``Association'') 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\ The filing was thereafter 
amended on May 4, 1998.\3\ In its proposal, the Association sought 
approval of an amendment to its Code of Procedure, to permit members of 
the NASD Regulation, Inc. (``NASD Regulation'') Office of Hearing 
Officers to oversee non-summary proceedings involving cancellations and 
suspensions related to failure to comply with an arbitration award. 
Notice of the proposal, including Amendment No. 1 thereto, was 
published in the Federal Register on May 12, 1998 (``Notice'').\4\ The 
Commission did not receive comment letters on the filing.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Letter from Joan C. Conley, Corporate Secretary, NASD 
Regulation, Inc. to Katherine England, Assistant Director, Division 
of Market Regulation, Commission dated May 4, 1998.
    \4\ See Securities Exchange Act Release No. 39957 (May 1, 1998), 
63 FR 26238 (File No. SR-NASD-98-34).
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I. Introduction and Background

    In connection with the recent reorganization of the Association 
following issuance of the SEC Order Instituting Public Proceedings 
Pursuant to Section 19(h)(1) of the Securities Exchange Act of 1934, 
Making Findings and Imposing Remedial Sanctions \5\ and the Report 
Pursuant to Section 21(a) of the Securities Exchange Act of 1934 
Regarding the NASD and The Nasdaq

[[Page 30790]]

Stock Market \6\ on August 8, 1997, the Association revised a 
substantial portion of its Code of Procedure. Among those amendments 
were included changes to the summary and non-summary proceedings 
addressing (1) limitations of the activities of members experiencing 
financial or operational difficulties; (2) summary and non-summary 
suspension, cancellation, bar, limitation or prohibition on access to 
NASD services; (3) eligibility; and (4) exemptions from specific NASD 
rules. In approving these amendments, which consolidated, reorganized 
and clarified prior rules, the Commission specifically noted that the 
changes would ``assist the NASD in promulgating and applying on a 
consistent basis uniform standards for regulatory and other access 
issues, as well as instituting safeguards to ensure fair and evenhanded 
access to all services and facilities of the NASD, consistent with the 
21(a) Report and the Undertakings [and] the Act * * *.'' \7\ The 
amendments to the Rules of the Association contained in the 
Association's current proposal supplement the earlier revisions 
approved by the Commission in SR-NASD-97-28.\8\
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    \5\ 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). The order included fourteen undertakings (``Undertakings'') 
addressing actions to be taken by the Association in response to the 
findings of the Order.
    \6\ 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).
    \7\ Securities Exchange Act Release No. 38908 (August 7, 1987), 
62 FR 43385, 43407 (August 13, 1997) (File No. SR-NASD-97-28).
    \8\ Id.
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II. Description of the Proposal

    The propose of the Association's proposal is to change the 
composition of the hearing panels used for non-summary proceedings in 
which the Association seeks to suspend or cancel the membership of a 
member or the registration of a person for failure to comply with an 
arbitration award or a settlement agreement related to NASD arbitration 
or mediation. Currently, these proceedings must be heard by a hearing 
panel composed of one current NASD Regulation director plus at least 
one other current or former NASD or NASD Regulation board member.\9\ 
Under the proposal, these procedures would instead by heard by a single 
member of the Office of Hearing Officers, who would be appointed by the 
Chief Hearing Officer.\10\ The Officer of Hearing Officers is an 
independent office within NASD Regulation whose purpose is to provide a 
group of independent and professional hearing officers (comprised of 
attorneys with appropriate experience and training) to preside over all 
formal NASD disciplinary proceedings.\11\ Their jurisdiction will be 
extended to non-summary proceedings upon approval of the current 
proposal.
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    \9\ See current Rule 9514.
    \10\ See proposed Rule 9514.
    \11\ Release No. 34-38908.
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III. Discussion

    As discussed below, the Commission has determined at this time to 
approve the Association'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 approval 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.\12\ 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 
proposal.\13\
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    \12\ 15 U.S.C. 78s(b).
    \13\ 15 U.S.C. 78o-3.
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    The Commission has determined that substitution of a single hearing 
officer instead of two board members is warranted because of the 
advantages to such substitution. First, the proposed rule change does 
not alter the right to a hearing concerning a failure to pay an 
arbitration award; it merely alters the composition of the hearing 
panel. Moreover, it would be considerably more efficient to have one 
hearing officer conduct the hearing on these issues and render a 
decision, rather than the multiple Board members required by the 
current version of Rule 9514. The members of the Board, who serve the 
Association on a part-time basis, have many constraints upon their 
time. The attorneys comprising the Office of Hearing Officers, however, 
are full-time Association employees who primarily focus on NASD 
Regulation proceedings. In addition, the members of the Office of 
Hearing Officers are well-suited to resolve the issues presented in 
these types of hearings due to the training and experience gained in 
oversight of the NASD's disciplinary proceedings under the Rule 9200 
Series. Finally, the issues to be resolved in the proceedings 
underlying this proposal are somewhat narrow, and generally limited to 
(i) whether the member or person paid the award in full or fully 
complied with the settlement agreement, (ii) whether the claimant has 
agreed to installment payments or has otherwise settled the matter, 
(iii) whether the member or person has filed a timely motion to vacate 
or modify the arbitration award and such motion has not been denied, 
(iv) whether the member or person has filed a petition in bankruptcy 
and the bankruptcy proceeding is pending, or the award or payment owed 
under the settlement agreement has been discharged by the bankruptcy 
court, and (v) whether the member or person is unable to pay the 
award.\14\ All of these reasons indicate that the proposal is 
consistent with the Act, and ``should enhance both the fair and 
efficient operation of the NASD, and the dispassionate and fair 
application of the rules in the NASD's regulatory activities.\15\
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    \14\ The Commission has recognized that a bona fide inability to 
pay an arbitration award is an important consideration determining 
whether any sanction for failure to pay an arbitration award is 
excessive or oppressive. See In the Matter of the Application of 
Bruce M. Zipper, Securities Exchange Act Release No. 33376, Admin. 
Proc. File No. 3-7908. (Dec. 23, 1993).
    \15\ Release No. 34-38908.
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IV. Date of Effectiveness of the Proposed Rule Change and Timing 
for Commission Action

    In its filing, the NASD requested that the Commission find good 
cause pursuant to Section 19(b)(2) for approving the proposed rule 
change prior to the 30th day after publication in the Federal Register. 
As discussed above, the Commission finds that the proposed rule change 
is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to the NASD and, in particular, the 
requirements of Section 15A and the rules and regulations thereunder. 
In addition, the Commission finds good cause for approving the proposed 
rule change prior to the 30th day after the date of publication of 
notice of filing thereof in that accelerated approval will benefit 
public interest and the protection of investors by enhancing the 
efficiency of the Association's procedures for suspending or canceling 
the membership of a member or the registration of a person for failure 
to comply with an arbitration award or a settlement agreement related 
to an NASD arbitration or mediation. The current rule requiring current 
or former NASD Governors or NASD Regulation Directors to serve on such 
Hearing Panels is imposing a burden on the process due to the part-time 
nature of service on the governing boards and the amount of time 
necessary to resolve these types of disputes. The procedure needs to be 
changed quickly so that such persons will no longer be called upon to 
resolve these relatively narrow

[[Page 30791]]

disputes. Thus, the commission finds good causes to accelerate approval 
of the Association's proposal.

V. Conclusion

    The Commission believes that the proposed rule change is consistent 
with the Act, and, particularly, with Section 15A thereof.\16\ In 
approving the proposal, the Commission has considered its impact on 
efficiency, competition, and capital formation.\17\
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    \16\ U.S.C. 78o-3.
    \17\ 15 U.S.C. 78c(f).
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\18\ that the proposed rule change (SR-NASD-98-34), as amended, is 
approved.

    \18\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-14920 Filed 6-4-98; 8:45 am]
BILLING CODE 8010-01-M