[Federal Register Volume 65, Number 92 (Thursday, May 11, 2000)]
[Notices]
[Pages 30460-30464]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-11807]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42760; File No. SR-NASD-99-26]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by National Association of Securities Dealers, Inc. Relating to 
Denial of Access Procedures

    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 May 27, 1999, the National Association of Securities Dealers, Inc. 
(``NASD''), through its wholly owned subsidiary, NASD Regulation, Inc. 
(``NASD Regulation'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change. The Association submitted 
Amendment No. 1 to its proposal on August 24, 1999.\3\ The proposed 
rule change, as amended, is described in Items I, II, and III below, 
which Items have been prepared by NASD Regulation. The Commission is 
publishing this notice to solicit comments on the proposed rule change 
from interested persons.\4\
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ In Amendment No. 1, the NASD clarified: (1) Operational 
distinctions between the NASD Regulation and the NASD; (2) what 
initiates a proceeding; and (3) other technical matters. See 
Restated 19b-4 filing marked Amendment No. 1 (``Amendment No. 1'').
    \4\ Technical and clarifying changes to the notice were made 
pursuant to a telephone conversation between Eric Moss, Assistant 
General Counsel, Office of the General Counsel, NASD Regulation, and 
Katherine England, Assistant Director, Division of Market 
Regulation, Commission, on April 28, 2000.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    NASD Regulation is proposing to amend the NASD Rule 9510 Series of 
the National Association of Securities Dealers, Inc. (``NASD'' or 
``Association'') to: (i) Expand the circumstances under which an 
aggrieved Party may request a hearing to challenge an Association 
action that the Party believes constitutes a ``denial of access;'' (ii) 
expand the pool of potential hearing panelists in

[[Page 30461]]

denial of access proceedings, and simplify the process by which 
panelists are selected; (iii) establish the General Counsel for the 
NASD as the custodian of the record in denial of access cases; and (iv) 
make other changes. Below is the text of the proposed rule change. 
Proposed new language is in italics; proposed deletions are in 
[brakets].
* * * * *
9000. CODE OF PROCEDURE
9120. Definitions
    (a) through (w) No change.
    (x) ``Party''
    With respect to a particular proceeding, the term ``Party'' means:
    (1) through (2) No change.
    (3) in the Rule 9510 Series, the department or office designated 
under Rule 9514(b) or a member or person that is the subject of a 
notice under Rule 9512 or Rule 9513(a) or an aggrieved Party who 
initiates a proceeding under Rule 9513(b) to review an action taken by 
the Association under Rule 9511(a)(2)(B); or
    (4) No change.
    (y) through (cc) No change.
* * * * *
9500. OTHER PROCEEDINGS
9510. Summary and Non-Summary Proceedings
9511. Purpose and Computation of Time
    (a) Purpose
    The Rule 9510 Series sets forth procedures for the conduct and 
review of: (1) summary proceedings authorized by Section 15A(h)(3) of 
the Act; [and] non-summary proceedings [to impose] regarding the 
imposition of (A) a suspension or cancellation for failure to comply 
with an arbitration award or a settlement agreement related to an 
arbitration or mediation pursuant to Article VI, Section 3 of the NASD 
By-Laws; (B) a suspension or cancellation of a member, or a limitation 
or prohibition on 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 member or person does 
not meet the qualification requirements or other prerequisites for such 
access or such member or person cannot be permitted to continue to have 
such access with safety to investors, creditors, members, or the 
Association; (C) an advertising pre-use filing requirement; or (D) a 
suspension or cancellation of the membership of a member or the 
registration of a person for failure to comply with a permanent cease 
and desist order entered pursuant to a decision issued under the Rule 
9200 Series or Rule 9300 Series or a temporary cease and desist order 
entered pursuant to a decision issued under the Rule 9800 Series.\5\
---------------------------------------------------------------------------

    \5\ The language in proposed NASD Rule 9511(a) reflects proposed 
language changes from pending File No. SR-NASD-98-80. See Securities 
Exchange Act Release No. 40826 (December 22, 1998); 63 FR 71984 
(December 30, 1998) (Proposed rule change to enable the NASD to 
issue temporary cease and desist orders). In SR-NASD-98-80, NASD 
Regulation proposed modifying NASD Rule 9511(a) as follows 
(additions are italicized; deletions are [bracketed]): ``The Rule 
9510 Series sets forth procedures for: (1) summary proceedings 
authorized by Section 15A(h)(3) of the Act; and (2) non-summary 
proceedings to impose (A) a suspension or cancellation for failure 
to comply with an arbitration award or a settlement agreement 
related to an arbitration or mediation pursuant to Article VI, 
Section 3 of the NASD By-Laws; (B) a suspension or cancellation of a 
member, or a limitation or prohibition on 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 member or person does not meet the 
qualification requirements or other prerequisites for such access or 
such member or person cannot be permitted to continue to have such 
access with safety to investors, creditors, members, or the 
Association; [or] (C) an advertising pre-use filing requirement; or 
(D) a suspension or cancellation of the membership of a member of 
the registration of a person for failure to comply with a permanent 
cease and desist order entered pursuant to a decision issued under 
the Rule 9200 Series or Rule 9300 Series or a temporary cease and 
desist order entered pursuant to a decision issued under the Rule 
9800 Series.''
---------------------------------------------------------------------------

    (b) No Change.
    * * *
9513. Initiation of Proceedings for Non-Summary Limitation, or 
Prohibition [Non-Summary Proceeding]
    (a) Initiation of Proceeding by Association [Notice]
    No change.
    (b) Initiation of Proceeding by Aggrieved Party
    An aggrieved Party may initiate a proceeding authorized under Rule 
9511(a)(2)(B) by filing a request for a hearing under Rule 9514 to 
challenge the Associations' actions.
    (c) Effective Date
    For any cancellation or suspension or pursuant to Rule 
9511(a)(2)(A), the effective date shall be at least 15 days after 
service of the notice on the member or associated person. For any 
action taken pursuant to Rule 9511(a)(2)(B) or (D), the effective date 
shall be at least seven days after service of the notice on the member 
or person, or the date when the Party otherwise learns of the 
limitation or prohibition on access to services (which ever occurs 
first). E[e]except that the effective date for a notice of a limitation 
or prohibition on access to services offered by the Association or a 
member thereof with respect to services to which the member, associated 
person, or other person does not have access or is requesting expanded 
access, shall be upon receipt of the notice, or the date when the Party 
otherwise learns of a limitation or prohibition on access to services 
(whichever occurs first).\6\
---------------------------------------------------------------------------

    \6\ In SR-NASD-98-80, NASD Regulation proposed modifying NASD 
Rule 9513(b) as follows: ``For any cancellation or suspension 
pursuant to Rule 9511(a)(2)(A), the effective date shall be at least 
15 days after service of the notice on the member or associated 
person. For any action taken pursuant to Rule 9511(a)(2)(B) or (D), 
the effective date shall be at least seven days after service of the 
notice on the member or person, except that the effective date for a 
notice of a limitation or prohibition on access to services offered 
by the Association or a member thereof with respect to services to 
which the member, associated person, or other person does not have 
access shall be upon receipt of the notice.'' See note 5, above.
---------------------------------------------------------------------------

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 2210, 2220, 9512(a), or 9513(a) or who 
initiates a proceeding under rule 9513(b), may file a written request 
for a hearing with the General Counsel for the NASD [Association]. The 
request shall state the specific grounds for requesting the hearing to 
review the Association's action(s) [setting aside the notice]. 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(a), 
[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, or with 
respect to a proceeding initiated under rule 9513(b), within seven days 
after the date that the Party learns of the anticipated Association 
action for which the Party is seeking review. 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.
    In the event that the Association issues a notice under Rule 
9513(a) regarding limitation or prohibition will respect to access to 
services offered by the Association, or a member thereof, and an 
aggrieved party also attempts to initiate a proceeding under Rule 
9513(b) to challenge the Association action covered by the notice 
issued under Rule 9513(a), the aggrieved party will be entitled to one 
hearing on the matter. The proceeding will be deemed to be initiated by 
the notice issued under Rule 9513(a), unless the aggrieved party has 
mailed or otherwise served on the Association the request for hearing 
prior to receiving the notice, which case, the

[[Page 30462]]

proceeding will be deemed to be initiated by the request for hearing 
under Rule 9513(b).
    (2) Failure to File Request
    If the member, associated person, or other person subject to the 
notice issued under Rule 2210, 220, 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. For purposes of proceedings 
initiated under Rule 9513(b), if a member, associated person, or other 
person does not file a written request for a hearing pursuant to 
subparagraph (1) of the Rule, the Association's action with respect to 
a limitation or prohibition on access to services will constitute final 
Association action.
    (3) Ex Parte Communications
    No change.
    (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 2210, 2220, 9512, or 9513(a) files a written request for a 
hearing or initiates a proceeding under Rule 9513(b),  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 2210, 2220, 
9512(a), or 9513(a), or if an aggrieved party initiates a hearing under 
Rule 9513(b) to challenge NASD Regulation staff action(s), the 
President of NASD Regulation shall designate an appropriate NASD 
Regulation department or office as Party. For proceeding initiated 
under Rule 9513(a) concerning failure to comply with an arbitration 
award or a settlement agreement related to an NASD arbitration or 
medication, the Chief Hearing Officer shall appoint a Hearing Panel 
composed of a Hearing Office. For any other proceedings initiated under 
Rule 2210, 2220, 9512(a) or 9513(a) by the President of NASD Regulation 
or NASD Regulation staff, the NASD Regulation Board shall appoint a 
Hearing Panel composed of two or more members; one member shall be a 
Director of NASD Regulation, and the remaining member or members shall 
be Hearing Officer(s) or current or former Directors of NASD Regulation 
or Governors. The President of NASD Regulation may not serve on a 
Hearing Panel.
    (2) If the President of Nasdaq or Nasdaq staff issued the notice 
under Rule 9512(a) or 9513(a) or if an aggrieved party initiates a 
hearing under Rule 9513(b) to challenge Nasdaq staff action(s), 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 director of Nasdaq, and the remaining member or members shall 
be Hearing Officers or current or former directors of Nasdaq or 
Governors. The President of Nasdaq may not serve on the Hearing Panel.
    (c) Stays
    (1) Summary Proceeding
    No change.
    (2) Non-Summary Proceeding
    Unless the NASD Board or the Executive Committee of the NASD Board 
orders otherwise, a request for a hearing shall stay the notice issued 
under Rule 2210, 2220, [or] 9513 (a), or the Association action 
challenged under Rule 9513(b), except that a request for a hearing 
shall not stay: (i) 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 or is requesting expanded access; or (ii) the Association action 
challenged under Rule 9513(b) with respect to services to which a 
member, associated person, or other person does not have access or is 
requesting expanded access.
    (d) Time of Hearing
    (1) Summary Proceeding
    No change.
    (2) Non-Summary Proceeding
    If a member, associated person, or other person [who is subject to 
a notice issued under Rule 2210, 2220, or 9513(a)] files a written 
request for a hearing under 9514(a) (except for proceedings brought 
under 9512(a)), 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 for 
good cause shown. 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 
2210, 2220, 9512, or 9513, or were considered by the Association in 
making the determination to take the action being challenged under Rule 
9513(b), 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 and the period 
for review lapses or, if applicable, upon the conclusion of any review 
by the Commission or the federal courts.
    (2) No change.
    (f) Hearing Panel Consideration
    (1) through (4) No change.
    (5) Custodian of the Record
    [If the President of NASD Regulation or NASD Regulation staff 
initiated the proceeding under Rule 2210, 2220, 9512, or 9513, t]The 
[Office of the] General Counsel of NASD [Regulation] shall be the 
custodian of the record for proceedings initiated under Rule 2210, 
2220, 9512, or 9513, except that the Office of Hearing Officers shall 
be the custodian of record for proceedings initiated under Rule 9513(a) 
concerning failure to comply with an arbitration award or a settlement 
agreement related to an NASD arbitration or mediation. [If the 
President of Nasdaq or Nasdaq staff initiated the proceeding under Rule 
9512 or 9513, the Office of General Counsel of Nasdaq shall be the 
custodian of the record.]
    (6) No change.
    (g) Decision of the Hearing Panel
    (1) through (2) No change.
    (3) Contents of Decision
    The decision shall include:
    (A) through (B) No change.
    (C) if applicable, the grounds for issuing the notice under Rule 
2210, 2220, 9512, or 9513(a);
    (D) if applicable, either: (i) an explanation why the action being 
challenged under Rule 9513(b) is not a limitation or prohibition on 
access to services subject to review under Section 19 of the Act; or 
(ii) the grounds for the limitation or prohibition to access to service 
that is the basis for the proceeding;
    (E) 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;
    (F)[(E)] a statement in support of the disposition of the principal 
issues raised in the proceedings; and
    (G)[(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;

[[Page 30463]]

or, if a non-summary suspension, cancellation, bar, limitation, 
prohibition or pre-use filing requirement is to be imposed or continue 
to be imposed, its effective date, time, and terms.
    (4) No change.

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 statutory 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
    A. Initiating Denial of Access Proceedings. Currently, before the 
Association takes an action that it believes constitutes a denial of 
access, the Association issues a notice under NASD Rule 9513 that 
informs a Party that: (1) it is taking such an action; and (2) the 
Party has a right to appeal the matter. Under NASD Rule 9514, a Party 
may not request a hearing to challenge an alleged denial of access 
unless the requisite notice was issued under NASD Rule 9513.
    Under the current procedures, the Association is generally the 
``gatekeeper'' to the appeal process because the NASD must make the 
legal conclusion \7\ that a matter constitutes a denial of access to 
services requiring the issuance of a notice. The current rules create 
difficulties in situations where the NASD does not issue an NASD Rule 
9513 notice because it does not believe an action constitutes a denial 
of access to services but where the Party who is the subject of the 
action believes the underlying action amounts to a denial of access to 
services.
---------------------------------------------------------------------------

    \7\ The Commission notes that NASD conclusions of law are not 
binding on the Commission.
---------------------------------------------------------------------------

    The proposed rule change defines the circumstances under which an 
aggrieved Party may request a hearing under NASD Rule 9514 for the 
purpose of reviewing Association action concerning a purported denial 
of access. The NASD is proposing removal of the Association's function 
as gatekeeper for determining whether a Party may request review of a 
denial of access. Under the proposed rule change, either the 
Association or the aggrieved Party (regardless of whether a 
notification of the limitation or prohibition is sent under NASD Rule 
9513) may seek to initiate a denial of access proceeding under NASD 
Rule 9514. Thus, the proposed rule change would liberalize the 
Association's procedures for initiating denial of access hearings. In 
those instances where staff intends to take an action that it believes 
constitutes a denial of access, the staff will issue the NASD Rule 
9513(a) notice.
    B. Hearing Panel. The proposed rule change would expand the pool 
from which a Hearing Panel may be drawn for hearings requested under 
NASD Rule 9514 to include Hearing Officers.
    C. Custodian of the Record. Under the proposed rule change, the 
General Counsel for the NASD would be the custodian of record in 
proceedings initiated under NASD Rule 2210, 2220, 9512, or 9513, except 
that the Office of Hearing Officers would be the custodian of record 
for the proceedings initiated under NASD Rule 9513(a) concerning 
failure to comply with an arbitration award or a settlement agreement 
related to an NASD arbitration or mediation. Currently, the Code 
provides that if the President of NASD Regulation or NASD Regulation 
staff initiated the proceeding under NASD Rule 2210, 2220, 9512, or 
9513, the Office of the General Counsel of NASD Regulation would be the 
custodian of the record, except that the Office of Hearing Officers 
would be the custodian of record for proceedings initiated under NASD 
Rule 9513(a) concerning failure to comply with an arbitration award or 
a settlement agreement related to an NASD arbitration or mediation. If 
the President of Nasdaq or Nasdaq staff initiated the proceeding under 
NASD Rule 9512 or 9513, the Office of the General Counsel of Nasdaq 
would be the custodian of the record.
    D. Replacement of NASD Rule 4800 and 9700 Series. On May 4, 1999, 
the Commission approved SR-NASD-98-88, which replaced the existing NASD 
Rule 4800 Series (NASD Rule 4810 through 4890, inclusive) with a new 
Code of Procedure for review of Nasdaq listing determinations.\8\ File 
number SR-NASD-98-88 also temporarily relocated the existing NASD Rule 
4800 Series--which relates to other grievances concerning the automated 
systems--to the NASD Rule 9700 Series, pending submission and approval 
of the subject Rule Filing on denial of access proceedings. SR-NASD-98-
88 also deleted the NASD Rule 9700 Series immediately upon approval of 
revisions to the NASD Rule 9500 Series contained in this filing. 
Accordingly, upon approval of this rule filing, the NASD Rule 9700 
Series will be deleted and denials of access involving Nasdaq's 
automated systems will be reviewed through the NASD Rule 9500 Series 
procedures.
---------------------------------------------------------------------------

    \8\ See Securities Exchange Act Release No. 41367 (May 4, 1999), 
64 FR 25942 (May 13, 1999) (Order approving File No. SR-NASD-98-88).
---------------------------------------------------------------------------

(2) Statutory Basis
    NASD Regulation believes that the proposed rule change is 
consistent with the provisions of Section 15A(b)(6) of the Act,\9\ 
which requires, among other things, that the Association's rules must 
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 
rule change is consistent with Section 15A(b)(8) \10\ in that it 
furthers the statutory goals of providing a fair procedure for imposing 
prohibitions or limitations on Association services. Under the proposed 
rule change, the Code would be amended so as to eliminate the 
Association from serving as the gatekeeper for determining whether an 
aggrieved Party may seek a hearing to determine whether that Party has 
been improperly denied access to Association services, thus allowing 
for greater access to the protections afforded by Section 
15(A)(b)(8).\11\
---------------------------------------------------------------------------

    \9\ 15 U.S.C. 78o-3(b)(6).
    \10\ 15 U.S.C. 17o-3(b)(8).
    \11\ Id.
---------------------------------------------------------------------------

(B) Self-Regulatory Organization's Statement on Burden on Competition

    NASD Regulation 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, as amended.

(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

[[Page 30464]]

publishes its reasons for so finding or (ii) as to which the self-
regulatory organization consents, the Commission will:
    A. By order approve such 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 proposed rule 
change 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 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 the File No. SR-NASD-99-26 and 
should be submitted by June 1, 2000.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
---------------------------------------------------------------------------

    \12\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-11807 Filed 5-10-00; 8:45 am]
BILLING CODE 8010-01-M