[Federal Register Volume 65, Number 152 (Monday, August 7, 2000)]
[Notices]
[Pages 48266-48272]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-19909]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43102; File No. SR-NASD-99-76]


Self-Regulatory Organizations; Order Approving a Proposed Rule 
Change by the National Association of Securities Dealers, Inc. Relating 
to Amendments to the Code of Procedure and Other Provisions

August 1, 2000.
    On December 28, 1999, the National Association of Securities 
Dealers, Inc. (``NASD'' or ``Association''), through its wholly-owned 
subsidiary, NASD Regulations, 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

[[Page 48267]]

19b-4 thereunder.\2\ NASD Regulation has proposed amendments to the 
NASD Code of Procedure and other provisions of the NASD Rules. The 
proposed rule change and Amendment No. 1 \3\ to the proposal were 
published for comment in the Federal Register on May 10, 2000.\4\ The 
Commission received one comment letter on the proposal.\5\ This order 
approves the proposed rule change, as amended.
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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 (``Amendemnt 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.
    \4\ Securities Exchange Act Release No. 42751 (May 3, 1999), 65 
FR 30163 (File No. SR-NASD-99-76).
    \5\ See Letter from George Brunelle, Brunelle & Hadjikow, to 
Jonathan G. Katz, Secretary, Commission, dated May 25, 2000.
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I. Description of the Proposal

    NASD Regulation is proposing amendments to the NASD Code of 
Procedure (the ``Code'') and other provisions of the NASD Rules, that 
include: (1) Requiring members to designate, as the custodian of the 
record on the Ford BDW, persons who are associated with the firm at the 
time the forms are filed; (2) clarifying the authority of Hearing 
Officers and making some limited changes to that authority; (3) 
clarifying the scope of the Association's document production 
requirements; (4) providing for Hearing Panel review of staff 
determinations to impose limitations on member firms' business 
activities because of financial and/or operational difficulties; (5) 
providing for changes to the process for appeals of disciplinary 
actions, statutory disqualification proceedings, and certain other 
accelerated proceedings; (6) providing for a streamline process to 
impose bars or expulsions for the failure to provide information to the 
Association; and (7) 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.

Custodian of the Record

    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 of NASD Governor. The Association believes that 
this unnecessarily limits the pool of potential panelists. Accordingly, 
the Association is proposing to eliminate this restriction.

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. Because the Rule 8220 Series 
proceedings are brought on an accelerated basis, the Association is 
proposing to amend the Rule 8220 Series to:
    (1) 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.

Severance of Cases

    The Association is proposing to amend NASD Rule 9214 to authorize 
the Chief Hearing Officer to sever disciplinary proceedings involving 
multiple respondents into two or more proceedings. The proposed rule 
also lists the factors the Chief Hearing Officer must consider in 
determining whether to order severance.

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 the 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 communications. 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 statements 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 Association is proposing to eliminate the restriction 
in NASD Rule 9212 that amendments must be based on ``new matters of 
fact or law.'' The Association is further proposing to modify NASD Rule 
9212 to permit amendments to make complaints conform to the evidence 
presented, and to state that amendments to complaints will be freely 
granted when justice so requires. Association staff will still need to 
obtain Hearing Officer approval to amend complaints after answers have 
been filed.

[[Page 48268]]

Effective Dates of Sanctions

    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 to delete it. The NASD stated that this 
change will not affect its policy of automatically staying the 
imposition of the fines, disgorgement, and suspensions, pending review.

Summary Dispositions

    The Association is proposing to modify NASD Rule 9264(a) to track 
the language in the FRCP, which permits parties to file a motion to 
eliminate issues that do not involve entire ``causes of actions.''
    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 act 
on such motions, which generally involve technical legal questions, and 
do not require the input of industry representatives.

Default Decisions

    The Association is proposing to modify NASD Rules 9269 to state 
that a motion to set aside a default decision should be made to the 
Hearing Officer 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.

Office of General Counsel--Requests for Additional Briefing

    Under the 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 
Association is proposing to eliminate this requirement because the 
Association believes that it is an unnecessary use of resources. 
However, 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.

Procedures for Regulation of Activities of a Member Experiencing 
Financial or Operational Difficulties

    Under the NASD 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 or operational difficulties. members can appeal Member 
Regulation's decisions to the 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 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 appeals under this rule series.
    Currently, under the NASD Rule 9410 Series, an NASD Governor may 
initiate the review of a decision issued by the NAC not later than the 
next meeting of the NASD Board that is at least 15 days after the date 
on which the NASD Board received the proposed written decision of the 
NAC. The Association is proposing instead to allow the Executive 
Committee of the NASD Board to initiate the review of the Hearing Panel 
decision for a period of 15 days. In addition, the Department of Member 
Regulation's decision is currently stayed unless otherwise ordered by 
the NAC. 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 Association is proposing several amendments 
to the rules that govern the Code's Summary and Non-Summary 
Proceedings. The Association is proposing to add a provision to the 
NASD Rules 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 
the Rule 9500 Series need to be held within 21 days after respondent 
requests a hearing. Hearing Panels may, during the initial 21-day 
period, 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 for a further extension.
    A member, associated person, or other person who has been suspended 
or limited by a final action of the Association under the Rule 9510 
Series may file a written request for reinstatement on the ground of 
full compliance with the conditions of the suspension or limitation. If 
the Association denies the request, the Association is proposing that 
the Review Subcommittee of the NAC, rather than the NASD Board, address 
an appeal from that denial, pursuant to NASD Rule 9516.

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.
    Currently, NASD Rule 9524(b)(3) misstates that a decision by NAC 
becomes effective upon service to the disqualified member, sponsoring

[[Page 48269]]

member, or disqualified person. However, only the denials are effective 
upon service on applicants (subject to the applicant requesting a stay 
of effectiveness from the Commission). Under Rule 19h-1 under the Act, 
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 clarify 
NASD Rule 9524(b)(3) to accurately reflect the provisions of Rule 19h-
1.
    The Association is further proposing that Association 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 initiates 
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, the CRD staff will gather 
all of the information necessary to process the application, including:
    (1) CRD records for the disqualified member or person, sponsoring 
member, and the proposed supervisor; and
    (a) 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 the CRD 
staff 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 with 10 business days of the hearing, unless otherwise 
agreed.
    The NASD is also amending the Rule 9520 Series dealing with the 
review procedures used 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) \6\ in cases where the 
disqualified member or person is subject to an injunction that was 
entered 10 or more years prior to the proposed admission or 
association. Under Exchange Act Rule 19h-1,\7\ 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 assocation of a disqualified person and the NASD 
concurs wit 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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    \6\ A member firm is required to file an MC-400 application 
under NASD Eligibility Rules when the firm sponsors the association 
of a person subject to disqualification. Telephone conversation 
between Bradford Ali, Attorney, NASDR, and Anitra Cassas, Attorney, 
Commission, on July 19, 2000.
    \7\ 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 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 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''), the 
Association amended the proceedings initiated under the Rule 8220 
Series to address the most serious on-going violations concerning 
associated persons and members that are failing to provide the 
Association with information. The Association is also proposing to 
create a new Rule 9540 Series that would apply to 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 information 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 a hearing to challenge a proposed suspension. 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 a 
hearing to challenge the suspension during the six-month period 
following the receipt of a notice initiating proceedings under this 
rule series will be automatically barred or expelled.

[[Page 48270]]

    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 set 
forth in Article III of the Association's By-Laws. 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 Hearing 
Officers.

Miscellaneous Technical Revisions

1. Market Regulation's Role in Disciplinary Process
    The Department of Market Regulation 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.
2. Service Of Papers--Address Changes
    The Association is proposing to modify NASD Rule 9134(b)(1) to 
permit adjudicators to waive the requirement to send 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.
3. Remand Cases
    The Association is proposing to amend NASD Rules 9344 and 9349 to 
clarify that the Review Subcommittee, in addition to NAC, may remand 
disciplinary cases to Hearing Panels.
4. Briefing Schedules
    The Association is proposing to amend NASD Rule 9347(b) to clarify 
that the time periods listed in the rule are only applicable to the 
principle briefing schedule and not applicable to the briefing of 
subsequent collateral issues.\8\
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    \8\ The briefing schedule for any subsequent collateral issues 
is set by the Association staff on behalf of the Hearing 
Subcommittee. Telephone conversation between Shirley Weiss, 
Associate General Counsel, NASDR, and Anitra Cassas, Attorney, 
Commission, on July 19, 2000.
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II. Comments and Responses

    The Commission received one comment letter regarding the proposed 
rule change, which objected to the proposed amendments to NASD Rule 
9253.\9\ The commenter contends that under proposed changes to NASD 
Rule 9253, when the SRO decides not to call a SRO staff member as a 
witness during a hearing, any exculpatory interviews the staff member 
conducted would become unavailable to the defense. The commenter stated 
that the effect of the proposed rule change would, therefore, allow 
SROs to deliberately conceal exculpatory evidence.
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    \9\ See supra note 5.
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    The NASD responded that under NASD Rule 9251(b)(2), the NASD 
Regulation staff may not withhold any material exculpatory 
evidence.\10\ Thus, the proposed changes would not change the 
Association's obligation to produce material exculpatory information. 
NASD Regulation continues to believe that the proposal is an 
appropriate and reasonable resolution of the issues.
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    \10\ See Letter from Alden S. Adkins, General Counsel and Senior 
Vice President, NASD Regulation, to Katherine A. England, Assistant 
Director, Division, Commission, dated June 28, 2000.
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III. Discussion

    The Commission finds that the proposed rule change, as amended, is 
consistent with the Act, and the rules and regulations thereunder 
applicable to a national securities association.\11\ In particular, the 
Commission finds that the proposed rule change is consistent with the 
requirements of Sections 15A(b)(2), 15A(b)(6), 15A(b)(7), and 15A(b)(8) 
of the Act, as described below.\12\ It also continues to preserve the 
independence of the regulatory staff of the NASD and the NASDR.\13\
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    \11\ In reviewing this proposal, the Commission has considered 
its impact on efficiency, competition, and capital formation. 15 
U.S.C. 78c(f).
    \12\ 15 U.S.C. 78o-3(b)(2); 15 U.S.C. 78o-3(b)(6); 15 U.S.C. 
78o-3(b)(7); and 15 U.S.C. 78o-3(b)(8).
    \13\ See Commission's Order Instituting Public Proceedings 
Pursuant to Section 19(h)(1) of the Securities Exchange Act of 1934, 
Making Findings and Imposing Remedial Sanctions, Securities Exchange 
Act Release No. 37538 (August 8, 1996).
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    Section 15A(b)(2) requires national securities associations to have 
the capacity to enforce compliance by their members and persons 
associated with members, with the provisions of the Act, the rules and 
regulations thereunder, and the rules of the association.\14\ Several 
of the provisions of the proposed rule change modify the disciplinary 
procedures of the Association to enhance its membership oversight 
capabilities. For example, the Commission believes that proposed NASD 
Rule 3121, which requires members to designate associated persons as 
the custodians of record on the Form BDW, may enhance the Association's 
capacity to enforce compliance by allowing the Association to more 
easily obtain records from their members. Further, the clarification, 
simplification and consolidation of the procedures in the NASD Rule 
8220 Series, 9410 Series, 9510 Series, and 9520 Series further the 
Association's ability to effectively and expeditiously conduct these 
disciplinary proceedings.
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    \14\ 15 U.S.C. 78o-3(b)(2).
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    In addition, the creation of the 9540 series enhances the 
Association's capacity and authority to enforce its rules. This series 
creates a more streamlined disciplinary procedure for those members and 
associated persons who fail to provide the Association with certain 
information, and for those firms that fail to meet the Association's 
eligibility and qualification standards eligibility and qualification 
standards set forth in Article III of the Association's By-Laws.
    The Commission further finds that the proposed rule change is 
consistent with Section 15A(b)(6), which provides, among other things, 
that the rules of the Association must be designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, to remove impediments to and perfect the 
mechanism of a free and open market and national market system, and, in 
general, to protect investors and the public interest.\15\ The creation 
of the NASD Rule 9540 Series, in particular, should enhance investor 
protection by allowing the Association to promptly cancel the 
membership of firms that fail to meet the Association's eligibility and 
qualification standards, such as a member firm that is not conducting a 
securities business.\16\ At the same time, members will have an 
opportunity for a hearing to challenge the Association's 
determinations.
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    \15\ 15 U.S.C. 78o(b)(6).
    \16\ See Article II, Section 1(a) of the Association's By-Laws.
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    Section 15A(b)(7) requires that members and persons associated with 
members be appropriately disciplined for violation of any provision of 
the Act, the rules and regulations thereunder, the rules of the 
Municipal Securities

[[Page 48271]]

Rulemaking Board, or the rules of the association.\17\ The Commission 
finds that the revisions to the Rule 8220 Series, which address the 
procedure for initiating disciplinary proceedings against a member for 
failing to provide requested information, provide an appropriate 
mechanism for disciplining members. Similarly, the creation of the NASD 
9540 Series also provides for the appropriate discipline of members who 
fail to provide the Association with certain information or who fail to 
meet the Association's eligibility and qualification standards.
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    \17\ 15 U.S.C. 78o(b)(7).
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    The Commission also finds that the proposed rule change is 
consistent with Section 15A(b)(8) of the Act, which requires that the 
rules of the association provide a fair procedure for the disciplining 
of members and persons associated with members.\18\ For example, the 
provisions of the Rule 8220 Series have been revised to enhance the 
fairness of the disciplinary procedure. The Association has limited the 
use of the Rule 8220 proceedings to address only the most serious on-
going violations, and has further limited the available sanctions to 
suspensions.
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    \18\ 15 U.S.C. 78o(b)(8).
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    The Commission also finds that amendments to NASD Rule 9214, which 
authorizes the Chief Hearing Officer to sever disciplinary proceedings 
involving multiple respondents, are consistent with Section 15A(b)(8). 
In determining whether to order the severance, the Chief Hearing 
Officer must consider whether the same or similar evidence should be 
expected to be offered at each hearing, whether severance would 
conserve time and resources, and whether any party would suffer unfair 
prejudice. The Commission believes that this determination may result 
in a more timely and fair disciplinary procedure for all of the parties 
involved.
    Proposed revisions to NASD Rule 9253 clarify that the only portions 
of routine examination or inspection reports, internal employee 
communications, and other internal documents that are required to be 
produced under the rule, are the portions outlining the substance of 
oral statements made by individuals who are not employees of the NASD 
when evidence of those statements are offered by NASD staff during 
disciplinary hearings.
    One commenter expressed concern that the proposed changes to NASD 
Rule 9253 could make it more difficult for respondents to gain access 
to exculpatory information. However, the Commission notes that, under 
9251(b)(2), the Association may not withhold material exculpatory 
evidence. Thus, the amendments to NASD Rule 9253 do not relieve the 
Association of the obligation to produce material exculpatory 
information. The Commission believes that the revised scope of document 
production still provides a fair procedure for disciplining members.
    The Commission further finds that revisions to NASD Rule 9212 
regarding amending complaints are consistent with the requirements of 
Section 15A(b)(8). The Association may need to amend complaints for a 
number of reasons, including adding respondents. Thus, the Association 
proposed to eliminate permitting amendments only for ``new matters of 
fact or law.'' The Commission believes that this should ensure a more 
fair procedure. The Commission notes, however, that the Association may 
only amend a complaint once as a matter of course, before a respondent 
answers to complaint. Thus, respondents will not be subject to 
unchecked delays caused by unlimited amendments.
    The Commission believes that the amendments to NASD Rule 9264 may 
promote fairness of disciplinary procedures by expediting hearings. 
Permitting parties to move to summarily dispose of issues that do not 
involve entire ``causes of actions,'' and authorizing Hearing Officers 
to grant motions on jurisdictional issues without referring the matter 
to the full panel, may allow the proceedings to conclude in a more 
timely manner.
    Similarly, the amendments to NASD Rules 9311 and 9312 may allow for 
a quicker resolution of the issues. Under the proposal, the General 
Counsel of NASD Regulation will be able to order parties to brief 
particular matters, without obtaining Review Subcommittee or NAC 
authorization. However, the Commission notes that the proposal also 
includes a process for parties to challenge the General Counsel's 
request for additional briefing.
    The Commission finds that amendments to NASD Rule 9260, which 
governs default decisions, are also consistent with Section 15A(b)(8). 
The Hearing Officers who issue the default decision have the most 
familiarity with the issues. Thus, allowing these Hearing Officers to 
decide a motion to set aside the default decision, rather than 
referring the matter to NAC, should provide a more prompt resolution of 
the motion.
    The Association made several revisions to the NASD Rule 9510 
Series, which govern summary and non-summary proceedings. The 
amendments include: (1) A clarification that Hearing Officers have the 
same powers that they have in regular disciplinary proceedings (the 
Rule 9200 Series); (2) additional time to hold a hearing in non-summary 
proceedings; and (3) having appeals under NASD Rule 9516 be addressed 
by the Review Subcommittee of NAC rather than the NASD Board. The 
Commission believes that, consistent with Section 15A(b)(8), all of 
these amendments may promote more fair disciplinary proceedings. For 
example, the additional time for a hearing in non-summary proceedings 
should provide the Association and respondents with adequate time to 
prepare for hearings. The Commission notes that the additional time 
will not prejudice respondents because the suspension is not in effect 
during this time.
    The Commission further finds that the proposed revisions to the 
NASD Rule 9520 series, which governs the process by which persons may 
become or remain associated with a member, and by which current members 
may obtain relief from the eligibility or qualification requirements, 
are consistent with Sections 15A(b)(8) and 19(d) of the Act. These 
revisions include: (1) Extending the time or waivers of time 
limitations for filing of papers or holding of hearings upon consent of 
all parties; (2) clarifying that the NASD's approval decisions are not 
effective until the Commission has either sent an acknowledgment letter 
to NASD Regulation or has entered an order in cases that involve a 
previously-entered SEC bar; (3) permitting members of the Statutory 
Disqualification Committee to serve on Hearing Panels; (4) providing 
that the CRD staff must gather all of the information necessary to 
process an application, that the CRD staff will prepare an index of 
these documents, and that the CRD will provide the index and copies of 
the documents to the various parties involved; (5) permitting members 
to submit a written request for relief, rather than an MC-400 
application, in cases where the disqualified member is subject to an 
injunction that was entered 10 or more years prior to the proposed 
admission; and (6) permitting Member Regulation to recommend the 
membership or continuing membership of a disqualified member or 
sponsoring member, or association or continuing association of a 
disqualified person pursuant to a supervisory plan. The Commission 
believes that by simplifying and clarifying procedures for which 
persons may become or

[[Page 48272]]

remain associated with a member, and by which current members may 
obtain relief from the eligibility or qualification requirements, the 
Association is promoting fair disciplinary procedures.
    Finally, the Commission finds that the amendments to the Code 
clarifying the NASD's Department of Market Regulation's role in the 
disciplinary process, the amendments to NASD Rule 9134(b) regarding 
service of papers on invalid addresses, the clarification to NASD Rules 
9344 and 9340 regarding the ability of the Review Subcommittee to 
remand disciplinary cases to Hearing Panels, and the clarification to 
NASD Rule 9347(b) regarding briefing schedules are technical in nature, 
and, therefore, raise no new regulatory issues.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (SR-NASD-99-76), as amended, is approved.

    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. 00-19909 Filed 8-4-00; 8:45 am]
BILLING CODE 8010-01-M