[Federal Register Volume 64, Number 79 (Monday, April 26, 1999)]
[Notices]
[Pages 20347-20349]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-10423]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-41311; File No. SR-NASD-99-15]


Self-Regulatory Organization; Notice of Filing of Proposed Rule 
Change by the National Association of Securities Dealers, Inc. Relating 
to the National Adjudicatory Council's Call for Review of Membership 
Decisions

April 20, 1999.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on March 19, 1999, the National Association of Securities Dealers, Inc. 
(``NASD'' or ``Association''), through its wholly owned subsidiary NASD 
Regulation, Inc. (``NASD Regulation''), filed with the Securities and 
Exchange Commission (``SEC'' or ``Commission'') the proposed rule 
change as described in Items I, II, and III below, which Items have 
been prepared by the NASD. On April 16, 1999, the NASD filed an 
amendment to the proposal.\3\ The Commission is publishing this notice 
to solicit comments on the proposed rule change, as amended, from 
interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4
    \3\ See letter from Alden S. Adkins, Senior Vice President and 
General Counsel, NASD Regulation, to Katherine A. England, Assistant 
Director, Division of Market Regulation, Commission (April 16, 1999) 
(``Amendment No. 1''). In Amendment No. 1, the NASD changes the date 
the suspension of the national Adjudicatory Council's (``NAC's'') 
call for review of membership decisions will end from June 1, 1999 
to October 31, 1999. In Amendment No. 1, the NASD also deletes a 
description of the activities and composition of the Membership 
Admissions Review Committee.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Change

    The NASD is proposing to amend NASD Rule 1015 to temporarily 
suspend the authority of the NAC to call for review membership 
decisions issued by district staff. The text of the proposed rule 
change is available at the NASD Office of the Secretary and at the 
Commission.

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 Association 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 NASD 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
    The purpose of the proposed rule change is to temporarily suspend 
the NAC's authority under NASD Rule 1015 to call for review of 
membership decisions while the Association considers other options for 
review of the membership admittance process. Currently, NASD Rule 
1015(a)(2) provides that a membership decision rendered by the 
Department of Member Regulation shall be subject to a call for review 
by the NAC. Since the Association has not been able to adequately 
implement this authority, it proposes to suspend NAC review of 
membership decisions from the date of approval by the Commission until 
October 31, 1999, for the reasons set forth below.

[[Page 20348]]

    In August 1997, the SEC approved substantial revisions to the Rule 
1010 Series \4\ to conform the rules to the requirements of the SEC's 
August 8, 1996, Order with respect to the NASD (``Order'').\5\ One of 
the main changes required by the order was a transfer of authority to 
render decisions on membership applications from the district business 
conduct committees to NASD Regulation staff, subject to appeals by 
applicants to the National Business Conduct Committee (``NBCC''), the 
NAC's predecessor.
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    \4\ Securities Exchange Act Release No. 38908 (Aug. 7, 1997), 62 
FR 43385 (Aug. 13, 1997).
    \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.).
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    The Association asserts that during consideration of the revisions 
to the NASD Rule 1010 Series in 1997, the NBCC requested that a call 
for review provision for the NBCC be included in the Rule 1010 Series 
so that members would have a mechanism to provide input on membership 
decisions. The NBCC was not particularly concerned with decisions to 
deny or restrict an applicant because such applicants would have a 
strong incentive to appeal if they believed that the rules had been 
inconsistently applied. The NBCC was primarily concerned about 
decisions to grant applications without restriction. The successful 
applicant would have no basis or incentive to appeal the decision, and 
the NBCC was concerned that there would not be a mechanism to review 
the decision if a review appeared to be warranted. Thus, the 
Association submitted a proposed rule change including the call for 
review authority in November 1977 which the Commission approved in 
December 1997.\6\
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    \6\ Securities Exchange Act Release Nos. 39350 (Nov. 21, 1997), 
62 FR 64000 (Dec. 3, 1997), (File No. SR-NASD-97-81) and 39470 (Dec. 
19, 1997), 62 FR 67927 (Dec. 30, 1997), respectively.
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    Since receiving Commission approval, the Association has 
encountered significant practical problems in implementing this call 
for review authority. As of November 30, 1998, approximately 1100 
membership decisions--including new member application decisions under 
NASD Rule 1014, decisions to modify or remove a business restriction 
under NASD Rule 1017, and decisions on continuing member applications 
under NASD Rule 1018--have been issued under the new membership rules. 
While the Association has tried several procedures to implement the 
call for review authority for these decisions, it does not believe that 
any of these procedures has been particularly effective. For example, 
reading the decisions, without review of the entire file, has not 
proven to be useful. The NASD also believes that it would be 
duplicative of district staff work and inefficient to review every 
record in its entirety to determine if it supports the decision. While 
NASD Regulation staff has found that decisions that deny or restrict an 
applicant appear to be well-supported by their rationale (in most 
districts the district director (often a vice president) reviews such 
decisions before issuing them), the process does not work for decisions 
that grant a membership application without restriction because they do 
not contain rationale for the district staff's membership 
determination. Instead they simply state that the applicant has met all 
applicable standards. Unlike a call for review of a regular 
disciplinary decision under the NASD Rule 9000 Series, there is no 
hearing panel vote and decision that might indicate a close or 
difficult issue.
    The Association also contemplated limiting the number of staff 
decisions to be considered for a call for review by focusing the 
process on certain categories of decisions, such as only new member 
application decisions or certain types of business expansions. The NASD 
determined, however, that such a procedure might be perceived as biased 
against those firms that fell within a selected category.
    Only one decision has been called for review by the NAC. This 
decision involved a new issue about the appropriate use of 
unadjudicated violations and an interpretation of an SEC order against 
an applicant. The staff believes that the issues raised in this call 
for review could have been resolved by consultation with the Office of 
General Counsel (``OGC'') prior to the issuance of the district 
decision and by the issuance of guidelines to district staff on the 
appropriate consideration of unadjudicated matters in rendering a 
decision on a membership application.
    After discussing the matter with staff, members, and practitioners, 
the Association has concluded that it is not possible yet to implement 
a fair and effective call for review mechanism for all Rule 1010 Series 
decisions. In view of this determination, the NAC and the Board agreed 
to propose temporary suspension of the NAC's call for review authority 
until the Association has more fully reviewed the NASD Rule 1010 Series 
in its entirety, including the role of the NAC in that process.
    The Association proposes to make the proposed rule change effective 
upon approval by the Commission and remain effective until October 31, 
1999.
(2) Statutory Basis
    The NASD believes that the proposed rule change is consistent with 
the provisions of Section 15A(b)(8) of the Act,\7\ which requires, 
among other things, that the Association's rules must be designed to 
provide fair procedures for the denial of membership to any person 
seeking membership therein. According to the NASD, the proposed rule 
change would not result in any change to a membership applicant's 
ability to seek NAC review of a membership decision and thus in no way 
prejudices a membership applicant's rights under the NASD Rules.
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    \7\ 15 U.S.C. 78o-3(b)(8).
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(B) Self-Regulatory Organization's Statement on Burden on Competition

    The NASD does not believe that 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.

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

    Written comments were neither solicited nor received.

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

    Within 35 days of the date of 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 period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will by 
order approve such proposed rule change, or 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, including whether the proposed rule 
change is consistent with the Act. Person making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549-
0609. Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule

[[Page 20349]]

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. 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 NASD Regulation. All 
submissions should refer to File No. SR-NASD-99-15 and should be 
submitted by May 17, 1999.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\8\
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    \8\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-10423 Filed 4-23-99; 8:45 am]
BILLING CODE 8010-01-M