[Federal Register Volume 65, Number 91 (Wednesday, May 10, 2000)]
[Notices]
[Pages 30163-30167]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-11610]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42751; File No. SR-NASD-99-76]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 by the National Association of Securities 
Dealers, Inc. Relating to Amendments to the Code of Procedure and Other 
Provisions

May 3, 2000.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'' or ``Exchange Act''),\1\ and rule 19b-4 thereunder,\2\ notice 
is hereby given that on December 28, 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 NASD Regulation. On 
April 17, 2000, NASD Regulation amended its 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, dated April 17, 
2000 (``Amendment No. 1''). Amendment No. 1 made substantive changes 
to the proposed rule language, including the deletion of certain 
provisions in the 9300 Series, Review of Disciplinary Proceeding by 
National Adjudicatory Council and NASD Board; Application for 
Commission Review.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    NASD Regulation is proposing amendments to the NASD Code of 
Procedure and other provisions of the NASD Rules, that include: (1) 
Clarifying the Department of Market Regulation's role in disciplinary 
proceedings; (2) requiring members to designate, as the custodian of 
the record of the Form BDW, persons who are associated with the firm at 
the time the forms are filed; (3) clarifying the authority of hearing 
officers and making some limited changes to that authority; (4) 
clarifying the scope of the Association's document production 
requirements; (5) providing for hearing panel review of staff 
determinations to impose limitations on member firm's business 
activities because of financial and/or operational difficulties; (6) 
providing for changes to the process for appeals of disciplinary 
actions, statutory disqualification proceedings, and certain other 
accelerated proceedings; (7) providing for a streamlined process to 
impose bars or expulsions for the failure to provide information to the 
Association; and (8) providing for a process by which the Association 
can more expeditiously cancel memberships of firms that fail to meet 
the Association's eligibility and qualification standards. The text of 
the proposed rule change is available at the Office of the Secretary, 
the NASD 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, NASD Regulation 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. NASD Regulation 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 NASD Code of Procedure (the ``Code''), implemented on August 7, 
1997, provides detailed requirements governing NASD Regulation's 
process for:
    (1) Authorizing, litigating, and issuing disciplinary decisions;
    (2) Providing for appeals of those decisions;
    (3) Taking certain actions through categories of accelerated 
proceedings; and
    (4) Determining requests for relief from statutory 
disqualifications.
    Since August 7, 1997, the Association staff has had significant 
experience under the Code, and has noted certain areas that need to be 
clarified or changed. The Association is proposing a series of 
clarifying and substantive amendments to the Code and other provisions 
as described below.
    Custodian of the Record. Firms often list persons not associated 
with the firms as custodians of records on the SEC Form BDW, and then 
the Association may have difficulty obtaining records when firms no 
longer conduct business. The Association is proposing to establish NASD 
Rule 3121 that would require members to designate, as the custodians of 
the record on the Form BDW, persons who are associated with the firms 
at the time the forms are filed.
    Eligibility of Panel Members. In certain circumstances, the 
National Adjudicatory Council (NAC) or the Review Subcommittee of the 
NAC (Review Subcommittee) may appoint panels to conduct hearings. Under 
NASD Rule 1015, only one panel member can be from the NAC, unless a 
panel member is also a former NASD Regulation Director or NASD 
Governor. The Association believes that this unnecessarily limits the 
pool of potential panelists. The Association believes that members of 
the NAC possess specialized expertise that may not be fully utilized 
under the current rule language. Accordingly, the Association is 
proposing to eliminate this restriction.
    Market Regulation's Role in Disciplinary Process. Both the 
Department of Market Regulation and the Department of Enforcement 
represent NASD Regulation in formal disciplinary matters under the 
Code. However, the disciplinary rules only refer to the Department of 
Enforcement as the representative of the Association

[[Page 30164]]

in these matters. The Department of Market Regulation also represents 
NASD Regulation under a delegation of authority from the Department of 
Enforcement, as stated in NASD Rule 9120(e). The Association is 
proposing amending the Code to clarify the Department of Market 
Regulation's role in the disciplinary process.
    Investigations. The NASD Rule 8220 Series permits the Department of 
Enforcement to initiate proceedings to suspend or cancel membership 
from the Association or suspend the association of a person with a 
member based upon the failure to provide information. These proceedings 
may be initiated for the failure to provide information pursuant to an 
Association request or the failure to make required filings with the 
Association, such as FOCUS reports, or to keep membership applications 
or supporting documents current. Since the Rule 8220 Series proceedings 
are brought on an accelerated basis, the Association is proposing to 
amend the Rule 8220 Series to:
    (1) As discussed below (under the heading Failure To Respond), 
limit the use of Rule 8220 Series proceedings to address the most 
serious on-going violations concerning associated persons and members 
who fail to provide the Association with requested information; and
    (2) Limit the sanctions available under Rule 8220 proceedings to 
suspensions.
    Finally, the Association is proposing to amend the service 
provision under the Rule 8220 Series to make it consistent with the 
service provision under the Rule 9530 Series, a similar rule series. 
The Association is proposing that both the Rule 8220 Series and the 
Rule 9530 Series service provisions permit personal service, service by 
facsimile, and service by overnight courier. The Association is further 
proposing to clarify that attempted delivery of a document by an 
overnight courier constitutes service under these provisions.
    Service of Papers--Address Changes. NASD Rule 9134(b)(1) states 
that service of papers on a natural person in a disciplinary proceeding 
must be at the person's residential address as reflected in the Central 
Registration Depository (CRD). If the Association staff has actual 
knowledge that the person's residential CRD address is out of date, 
then in addition to service at the residential address as reflected in 
the CRD, service should also be make at the person's last know 
residential address and the CRD address of the firm with which the 
person is associated or affiliated, if he/she is currently in the 
industry. The Association is proposing to modify the rule to permit 
adjudicators to waive the requirement of sending papers to CRD 
addresses when they are no longer valid, and there is a more current 
address available. This change would only relate to documents served on 
respondents after complaints have been served.
    Further, the Association is proposing to amend NASD Rule 9135(a) to 
clarify that complaints shall be deemed timely filed so long as they 
are either mailed or delivered to the Office of Hearing Officers within 
the two-year jurisdictional period, as outlined in the By-Laws.
    Severance of Cases. NASD Rule 9214, ``Consolidation of Disciplinary 
Proceedings,'' authorizes the Chief Hearing Officer to order the 
consolidation of disciplinary hearings. The Association is now 
proposing to amend NASD Rule 9214 to state that the Chief Hearing 
Officer has authority to sever disciplinary proceedings involving 
multiple respondents into two or more proceedings. Under the rule 
proposal, the Chief Hearing Officer may order the severance of a 
disciplinary matter into two or more disciplinary proceedings, upon his 
or her own motion, or upon motion of a Party.
    In determining whether to order the severance, the Chief Hearing 
Office shall consider: (1) Whether the same or similar evidence 
reasonably should be expected to be offered at each of the possible 
hearings; (2) whether the severance would conserve the time and 
resources of the Parties; and (3) whether any unfair prejudice would be 
suffered by one or more of the Parties if the severance is (not) 
ordered. If the Chief Hearing Officer issues an order to sever a 
disciplinary proceeding for which a Hearing Panel, or if applicable, 
Extended Hearing Panel has been appointed, the Chief Hearing Officer's 
order shall specify whether the same Hearing Panel or, if applicable, 
Extended Hearing Panel, shall preside over the severed disciplinary 
proceedings, or whether a new Hearing Panel(s) or, if applicable 
extended Hearing Panel(s), shall preside over all severed proceedings, 
based on the criteria set forth in NASD Rules 9231 and 9232.
    Producing Documents. The Association is proposing amendments to 
NASD Rule 9253 to clarify the scope of the Association's document 
production requirements. NASD Rule 9251(a) requires Association staff 
to make available to respondents documents prepared or obtained by the 
staff in connection with the investigations that led to the institution 
of a disciplinary proceeding. Exceptions to the production requirements 
are listed in NASD Rule 9251(b), and include examination and inspection 
reports and internal employee communication. Notwithstanding these 
exceptions, documents containing the staff's investigative techniques 
might become discoverable under Rule 9253, if staff members are called 
as witnesses during hearings. NASD Rule 9253 requires Association staff 
to produce written statements made or adopted by staff members, if they 
relate to the subject matter of those persons' testimony. It also 
requires the staff to produce contemporaneously recorded recitals of 
oral statements made by witnesses, if those written statements are 
substantially verbatim.
    The proposed modifications of NASD Rule 9253 clarify that the only 
portions of routine examination or inspection reports, internal 
employee communications, and any other internal documents that are 
required to be produced, under this rule, are the portions outlining 
the substance of (and any conclusions regarding) oral statement made by 
persons who are not employees of the Association when evidence of those 
statements are offered by Association staff during disciplinary 
hearings.
    Amending Complaints. The Association is proposing to modify its 
rules regarding amending complaints to more closely follow the Federal 
Rules of Civil Procedure (``FRCP). The FRECP do not limit the types of 
amendments that may be made to complaints. NASD Rule 9212, however, 
only permits amendments to ``new matters of fact or law.'' The 
Association is proposing to amend the rule to eliminate this 
restriction. Thus, for instance, under the proposed rule change, the 
Association staff could amend complaints to include additional 
respondents. Further, the FRCP permit amendments to make complaints 
conform to the evidence presented. The Association is proposing to 
modify NASD Rule 9212 to permit such amendments. Also, the FRCP state 
that amendments to complaints will be freely granted when justice so 
requires. The Association is proposing to amend NASD Rule 9212 to state 
that amendments to complaints will be freely granted when justice so 
requires. Association staff will need to obtain hearing officer 
approval to amend complaints after answers have been filed.
    Effective Dates of Sanctions. The Central Registration Depository 
currently sets the effective dates of the imposition of sanctions 
imposed under the Code by notifying respondents in

[[Page 30165]]

writing when fines are due and of the effective date of suspensions. 
The Association is proposing to amend NASD Rules 9216, 9268, 9269, and 
9360 to state that the effective dates of sanctions are the dates set 
by the Association staff, unless stated otherwise in orders, decisions, 
or settlement agreements. As a result of these changes, the Association 
believes that IM-8310-2 is no longer needed and, accordingly, is 
proposing it be deleted. This change will not affect the NASD's policy 
of automatically staying the imposition of the fines, disgorgement and 
suspensions, pending review.
    Summary Dispositions. NASD Rule 9264(a) authorizes either the 
Association or respondents to file motions to summarily dispose of 
``any or all the causes of action in the complaint.'' This rule 
however, does not permit parties to move to eliminate issues that do 
not involve entire ``causes of actions.'' The Association is proposing 
to modify NASD Rule 9264(a) to track the language in the FRCP, which 
permits courts to dismiss issues.
    Further, the Association is proposing to modify NASD Rule 9264 to 
authorize hearing officers to deny, grant, or defer motions to dismiss 
without referring the matter to the full panel. The authority to grant 
such motions would be limited to jurisdictional issues, such as whether 
the complaint was filed within the two-year jurisdictional period. The 
Association believes that Hearing Officers should be permitted to 
dismiss such motions which generally are technical legal questions, and 
do not require the input of industry representatives.
    Default Decisions. NASD Rule 9269 provides that motions to set 
aside default decisions should be made to the Review Subcommittee or 
the NAC. The hearing officers who issue the default decisions, however, 
are particularly familiar with the matters. The Association is 
proposing to modify the rule to state that a motion to set aside a 
default decision should be made to the hearing officers that originally 
decided the motion for a default decision. If the hearing officer that 
issued the original order is not available, the Chief Hearing Officer 
shall appoint another hearing officer to decide the motion. Appeals 
from such denials could be made to the NAC or the Review Subcommittee.
    Remand Cases. NASD Rule 9349 authorizes the NAC to remand 
disciplinary cases to hearing panels. The Association is proposing to 
amend NASD Rules 9344 and 9349 to clarify that the Review Subcommittee 
may also remand disciplinary cases to hearing panels.
    Office of General Counsel. Under NASD Rules 9311 and 9312, the 
General Counsel of NASD Regulation is required to obtain Review 
Subcommittee or NAC authorization to order parties to brief particular 
matters. The General Counsel rarely seeks additional briefing on 
particular points, but where the General Counsel believes that 
additional briefing is necessary, the Review Subcommittee or the NAC 
would most likely order it. Thus, requiring the General counsel to seek 
authorization for additional briefing is an unnecessary use of 
resources. The Association is proposing that this requirement be 
eliminated. The Association is proposing to include in the rules a 
process by which parties may challenge, before the Review subcommittee 
or the NAC, requests for additional briefing made by the General 
Counsel.
    Briefing Schedules. NASD Rule 9347(b) establishes briefing 
schedules for papers filed in NAC proceedings. The Association is 
proposing amending this rule to clarify that the time periods listed in 
the rule are only applicable to the principal briefing schedule and not 
applicable to the briefing of subsequent collateral issues.
    Procedures for Regulation of Activities of a Member Experiencing 
Financing or Operational Difficulties. Under the NADA Rule 9410 Series, 
the Department of Member Regulation issues notices and holds initial 
hearings to determine whether members must limit their business 
activities as a result of financial and/or operational difficulties. 
Members can appeal Member Regulation's decisions to NAC, and the NAC or 
the Review Subcommittee will appoint a Subcommittee to participate in 
the review. The Association is proposing to amend the rule series to 
provide that firms may appeal limitations in notices issued by the 
Department of Member Regulation to hearing panels that will consist of 
a hearing officer and two other panelists. Under the proposal, the 
Department of Member Regulation would not hold hearings, and the NAC 
would not participate in matters handled under this rule series.
    Currently, an NASD Governor may initiate the review of a decision 
issued by the NAC, under the NASD rule 9410 Series, not later than the 
next meeting of the NASD Board that is at least 15 days after the date 
on which the NASD Board reviews the proposed written decision of the 
NAC. The Association is proposing to replace this procedure with a 
mechanism by which the Executive Committee of the NASD Board may 
initiate the review of the hearing panel decision for a period of 15 
days. Currently, the Department of Member Regulations's decision is 
stayed unless otherwise ordered by the NAC decision. The Association is 
proposing to modify this provision to provide that the Department of 
Member Regulation's recommendation is stayed unless ordered otherwise 
by the Executive Committee.
    Other Proceedings. Two categories of expedited proceedings 
available under the NASD Rule 9510 Series are referred to as ``Summary 
Proceedings`` and ``Non-Summary Proceedings.'' The key differences 
between Summary and Non-Summary proceedings are that: (1) In a Summary 
Proceeding, the Association can impose sanctions against a member or 
associated person before a hearing is held and a final Association 
decision is served, whereas in a Non-Summary Proceeding, generally a 
hearing must be held and a final decision served before any sanction 
may be imposed; (2) a Summary Proceeding requires prior authorization 
by the NASD Board of Governors, whereas a Non-Summary Proceeding may be 
initiated by staff without Board involvement; and (3) while the various 
forms of Summary Proceedings are enumerated in Section 15A(h)(3) of the 
Act, \4\ the othe reforms of expedited proceedings, including Non-
Summary, are not.
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    \4\ 15 U.S.C. 78o-3(h)(3).
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    The Association is proposing several amendments to the rules that 
govern the Code's Summary and Non-Summary Proceedings. Under the 
current rules, it is unclear as to whether hearing officers have all of 
the powers in Summary and Non-Summary Proceedings (the Rule 9500 
Series) that they have in regular disciplinary proceedings (the Rule 
9200 Series). The Association is proposing to add a provision to the 
NASD Rule 9500 series stating that: The hearing officer shall have 
authority to do all things necessary and appropriate to discharge his 
or her duties as set forth under Rule 9235.''
    NASD Rule 9514(a)(1) requires that requests for hearings be filed 
within 7 days of receipt of suspension letters (or, with respect to 
notice of a pre-use filing requirement under Rule 2210(c)(4) and Rule 
2220(c)(2), within 30 days of such notice). The Association is 
proposing to amend NASD Rule 9514(a)(2) to clarify that if the member 
or person subject to the notice does not timely request a hearing under 
Rule 9514(a)(1), the notice shall constitute final Association action.
    NASD Rule 9514(d)(2) states that Non-Summary Proceedings held under

[[Page 30166]]

the Rule 9500 Series need to be held within 21 days after respondent 
requests a hearing. Hearing panels may, during the initial 21-day 
periods, extend the time in which the hearings shall be held by 
additional 21-day periods. The Association believes that these periods 
are too short, and is proposing amending the rule to extend the initial 
period to 40 days, with an additional 30 days of further extension. 
Since the suspension is not in effect during this time, this additional 
time will not prejudice respondents, and it will provide the staff and 
respondents with ample time to prepare for hearings.
    NASD Rule 9516 gives firms/persons suspended or limited under these 
provisions the opportunity to become reinstated on the grounds of full 
compliance with the conditions of the suspension or limitation. The 
request needs to be filed with the department or office of the 
Association that acted as the party in the proceeding. If the 
department head denies reinstatement, the party may file a request for 
relief with the NASD Board, and the NASD Board must respond in writing 
within 14 days. The Association believes that the matters appealed, 
however, do not require NASD Board review. The Association is proposing 
that appeals under NASD Rule 9516 be addressed by the Review 
Subcommittee of the National Adjudicatory Council, rather than the NASD 
Board.
    Eligibility Proceedings. The Association is proposing several 
changes to the NASD Rule 9520 Series that govern the process by which 
persons may become or remain associated with a member, notwithstanding 
the existence of a statutory disqualification or for a current member 
or person associated with a member to obtain relief from the 
eligibility or qualification requirements. First, the NASD Rule 9520 
Series does not state whether extensions of time or waivers of time 
limitations for filing of papers or holding of hearings may be granted. 
The Association is proposing to create NASD Rule 9524(a)(5) that 
permits such actions by consent of all the parties. Further, the 
eligibility rules do not state whether the disqualification hearing 
panel or the NAC may order that the record be supplemented. The 
Association is proposing to create NASD Rule 9524(a)(3)(c) to permit 
the Hearing Panel to order the Parties to supplement the record with 
any additional evidence the Hearing Panel deems necessary.
    NASD Rule 9524(b)(3) states that NASD Regulation's statutory 
disqualification recommendations become effective upon service on 
applicants. However, only the denials are effective upon service on 
applicants (subject to the applicant requesting a stay of effectiveness 
from the Commission). Approval decisions are not effective until the 
Commission has either sent an acknowledgment letter to NASD Regulation 
(usually within 30 days, and the SEC can request a further 60-day 
extension of that period), or the Commission has entered an order in 
cases that have involved a previously-entered SEC bar (there is no time 
limitation for the entry of such an order). The Association is 
proposing to amend this rule to reflect these points.
    If a member files an application for relief under the eligibility 
rules, the NAC or the Review Subcommittee appoints a hearing panel 
composed of two or more members who are current or former members of 
the NAC or former Directors or Governors. The Association is proposing 
that NASD Rule 9524(a)(1) be amended to state that members of the 
Statutory Disqualification Committee may also serve on hearing panels.
    NASD Rule 9524(a)(3) states that if the Association staff initiated 
the proceedings, the Association will give to the applicant all 
documents that were relied on by the Association in issuing its notice. 
However, most applications are started by member firms, not the 
Association. The Association is proposing to amend this rule to reflect 
this fact.
    The Association is also proposing to amend NASD Rule 9524(a)(3) to 
provide that once an application is filed, CRD will gather all of the 
information necessary to process the application, including:
    (1) CRD records for the disqualified member, sponsoring member, 
and/or disqualified person, and the proposed supervisor; and
    (2) All of the information submitted by the disqualified member or 
sponsoring member in support of the application.
    Proposed NASD Rule 9524(a)(3) would further provide that CRD will 
prepare an index of these documents, and simultaneously provide this 
index and copies of the documents to the disqualified member or 
sponsoring member, the Office of the General Counsel of NASD 
Regulation, and the Department of Member Regulation. The rule also 
would require the Department of Member Regulation to submit its 
recommendation and supporting documents to the hearing panel and the 
disqualified member or sponsoring member within 10 business days of the 
hearing, unless the parties otherwise agree. Similarly, the 
disqualified member or sponsoring member would be required to submit 
its documents to the hearing panel and the Department of Member 
Regulation within 10 business days of the hearing, unless otherwise 
agreed.
    Amendments to the NASD Rule 9520 Series also concern the review 
procedures undertaken by Association staff in the case of certain 
disqualifying events. In particular, the Association is proposing to 
amend NASD Rule 9522(e) to permit members to submit a written request 
for relief (rather than an MC-400 application) in cases where the 
disqualified member or person is subject to an injunction that was 
entered 10 or more years prior to the proposed administration or 
association. Under Exchange Act Rule 19h-1,\5\ the NASD is not required 
to provide any notice to the Commission of the proposed admission or 
association in these types of cases. The Association also proposes that 
members be able to file a written request for relief in cases where a 
member requests to change the supervisor of a disqualified person or 
where, for instance, the New York Stock Exchange has determined to 
approve the proposed association of a disqualified person and the NASD 
concurs with the determination. Member Regulation would also be granted 
discretion to approve the written request for relief in these cases, if 
it deemed such action to be consistent with the public interest and the 
protection of investors.
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    \5\ 17 CFR 240.19h-1.
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    The Association also proposes to amend the NASD Rule 9520 Series to 
permit Member Regulation to approve an MC-400 application for relief in 
those cases where the disqualifying event is excepted from the ``full'' 
notice requirements of Rule 19h-1, but where a``short form'' 
notification to the Commission under Rule 19h-1 is still required. In 
these cases, the member would be required to file an MC-400, but Member 
Regulation would have the discretion to approve the application when 
consistent with the public interest and the protection of investors.
    In addition, the Association is proposing new Rule 9523 to permit 
Member Regulation to recommend the membership or continued membership 
of a disqualified member or sponsoring member or the association or 
continuing association of a disqualified person pursuant to a 
supervisory plan. The procedures set forth in proposed NASD Rule 9523 
are modeled on current Rule 9216 concerning Acceptance, Waiver, and 
Consent procedures, and are intended to avoid the requirement of a 
formal hearing and decision by the Statutory Disqualification Committee 
(and its hearing panels) in cases that

[[Page 30167]]

generally only involve the issue of what type of supervisory plan is 
appropriate for the disqualified member or person. Under proposed NASD 
Rule 9523, the member would be required to file an MC-400 application 
with the NASD. Member Regulation, however, would have the discretion to 
recommend the approval of the application in the event an appropriate 
supervisory plan is established. The member would be required to 
execute a letter consenting to the imposition of the supervisory plan. 
The letter and the supervisory plan would then be submitted to the 
Office of General Counsel and/or the Chairman of the Statutory 
Disqualification Committee for review and possible approval. While both 
the Office of General Counsel and the Committee Chairman would have 
authority to approve the application or refer it to the NAC, only the 
Committee Chairman would be permitted to reject the application.
    Failure To Respond. As noted above (under the heading 
``Investigations''), proceedings initiated under the Rule 8220 Series 
are designed to address the most serious on-going violations concerning 
associated persons and members that are failing to provide the 
Association with information. For this reason, these proceedings are 
brought on an accelerated basis.
    The Association is proposing to create a new Rule 9540 Series that 
could be used against those who fail to provide the Association with 
information, required filings, or keep membership applications or 
supporting documents current. Under the proposed NASD Rule 9540 Series, 
the Association would send notices informing respondents that failure 
to provide the Association with previously requested information or 
required filings or the failure to keep its membership application or 
supporting documents current will result in suspensions, unless the 
information is provided to the Association within 20 days. Respondents 
would have five days to request hearings to challenge proposed 
suspensions. These hearings would be conducted before three-member 
hearing panels, and the hearing panels would have the authority to 
order any fitting sanctions, including expulsions and bars. Respondents 
who fail to request hearings to challenge the suspension during the 
six-month period following the receipt of notices initiating 
proceedings under this rule series will be automatically barred or 
expelled.
    Further, the Association is proposing to include in the proposed 
NASD Rule 9540 Series a process by which the Department of Member 
Regulation could quickly cancel the memberships of firms that fail to 
meet the Association's eligibility and qualification standards. Under 
the proposal, the Association would send letters to members informing 
them that their memberships will be canceled within 20 days of receipt 
of the letters, unless the firm becomes eligible for continuance in 
membership within this time period. The members will be provided 
opportunities to request hearings within five days of service of the 
notices to challenge the proposed cancellations. The hearings would be 
held before Hearings Officers.
2. Statutory Basis
    NASD Regulation believes that the proposed rule change is 
consistent with the provisions of Section 15A(b)(6) of the Act,\6\ 
which require that the rules of an association be designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade and, in general, to protect investors and 
the public interest. The NASD believes that the proposed rule change is 
consistent with Section 15A(b)(7) of the Act \7\ in that it works to 
adequately safeguard the interests of investors while establishing fair 
and reasonable rules for its members and persons associated with its 
members. The rule change is consistent with Section 15A(b)(8) of the 
Act \8\ in that it furthers the statutory goals of providing a fair 
procedure for disciplining members and associated persons.
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    \6\ 15 U.S.C. 78o-3(b)(6).
    \7\ 15 U.S.C. 78o-3(b)(7).
    \8\ 15 U.S.C. 78o-3(b)(8).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    NASD Regulation does not believe that the proposed rule change will 
impose 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

    On August 10, 1999, the proposed rule change was published for 
comment in NASD Notice to Members Number 99-73. No comments were 
received in response to the Notice to Members.

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 period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the NASD 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, including whether the proposal is 
consistent with the Act. Persons making written submissions should file 
six copies thereof with the Secretary, Securities and Exchange 
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549-0609. 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. 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. All submissions should refer to File No. SR-NASD-99-76 and should 
be submitted by May 31, 2000.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-11610 Filed 5-9-00; 8:45 am]
BILLING CODE 8010-01-M