[Federal Register Volume 67, Number 111 (Monday, June 10, 2002)]
[Notices]
[Pages 39769-39771]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-14523]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-46025; File No. SR-NASD-2002-70]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the National Association of 
Securities Dealers, Inc. Regarding Replacement Hearing Officers' 
Authority to Participate in Hearing Panel Decisions

June 4, 2002.
    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 31, 2002, 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 as described in 
Items I, II and III below, which Items have been prepared by NASD 
Regulation. NASD Regulation filed the proposal pursuant to section 
19(b)(3)(A) of the Act,\3\ and Rule 19b-4(f)(6) thereunder,\4\ which 
renders the proposal effective upon filing with the Commission.\5\ The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4(f)(6).
    \5\ NASD Regulation asked the Commission to waive the 30-day 
operative delay. 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    NASD Regulation proposes to amend NASD Procedural Rules 9231 and 
9233 to clarify a replacement Hearing Officer's authority when he or 
she is appointed after a hearing has begun or been concluded. The text 
of the proposed rule is below. Proposed new language is in italics.
9231. Appointment by the Chief Hearing Officer of Hearing Panel or 
Extended Hearing Panel or Replacement Hearing Officer
    (a) No Change.
    (b) Hearing Panel.
    The Hearing Panel shall be composed of a Hearing Officer and two 
Panelists, except as provided in paragraph (e) and in Rule 9234 (a), 
(c), (d), or (e). The Hearing Officer shall serve as the chair of the 
Hearing Panel. Each Panelist shall be associated with a member of the 
Association or retired therefrom.
    (1) through (2) No Change.
    (c) through (d) No Change.
    (e) Appointment of Replacement Hearing Officer.
    In the event that a Hearing Officer withdraws, is incapacitated, or 
otherwise is unable to continue service after being appointed, the 
Chief Hearing Officer shall appoint a replacement Hearing Officer. To 
ensure fairness to the parties and expedite completion of the 
proceeding when a replacement Hearing Officer is appointed after the 
hearing has commenced, the replacement Hearing Officer has discretion 
to exercise the following powers:
    (1) Allow the Hearing Panelists to resolve the issues in the 
proceeding and issue a decision without the participation of the 
replacement Hearing Officer in the decision. The replacement Hearing 
Officer may advise the Hearing Panelists regarding legal issues, and 
shall exercise the powers of the Hearing Officer under Rule 9235(a), 
including preparing and signing the decision on behalf of the Hearing 
Panel, in accordance with Rule 9268; or
    (2) Certify familiarity with the record and participate in the 
resolution of the issues in the case and in the issuance of the 
decision. In exercising this power, the replacement Hearing Officer may 
recall any witness before the Hearing Panel.
* * * * *
9233. Hearing Panel or Extended Hearing Panel: Recusal and 
Disqualification of Hearing Officers
    (a) Recusal, Withdrawal of Hearing Officer.
    If at any time a Hearing Officer determines that he or she has a 
conflict of interest or bias or circumstances otherwise exist where his 
or her fairness might reasonably be questioned, the Hearing Officer 
shall notify the Chief Hearing Officer and the Chief Hearing Officer 
shall issue and serve on the Parties a notice stating that the Hearing 
Officer has withdrawn from the matter. In the event that a Hearing 
Officer withdraws, is incapacitated, or otherwise is unable to continue 
service after being appointed, the Chief Hearing Officer shall appoint 
a replacement Hearing Officer. In such a case, the replacement Hearing 
Officer shall proceed according to Rule 9231(e).
    (b) through (c) 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 basis for its proposal and 
discussed any comments it received regarding the proposal. 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 proposed amendments clarify a replacement Hearing Officer's 
authority when he or she is appointed after a hearing has begun or been 
concluded. For various reasons, Hearing Officers are sometimes unable 
to finish hearings and participate in the issuance of decisions. NASD 
Code of Procedure Rule 9233 provides that the Chief Hearing Officer 
shall appoint a replacement Hearing

[[Page 39770]]

Officer. The rule does not, however, delineate the replacement Hearing 
Officer's powers when he or she is appointed after a hearing has begun 
or been concluded. The proposed amendments to Rules 9231 and 9233 
clarify a replacement Hearing Officer's authority in such 
situations.\6\
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    \6\ NASD Regulation notes that the Chief Hearing Officer will 
promptly notify the parties of the appointment of the replacement 
Hearing Officer. In general, the parties also should be provided an 
opportunity to comment on the manner in which the matter should 
proceed.
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    In part, the proposed amendments respond to an ambiguity in the 
current rules that was highlighted by the National Adjudicatory 
Council's (``NAC'') recent decision in U.S. Rica Financial, Inc., 
Complaint No. C01000003 (NAC Oct. 26, 2001). In that case, the Hearing 
Officer designated as a member of the Hearing Panel left the NASD after 
the record in the matter had closed but before a decision had been 
issued. A replacement Hearing Officer was then appointed, and the 
decision was issued. The decision made clear that the replacement 
Hearing Officer had not taken part in the decision, which reflected the 
determinations of the remaining two members of the Hearing Panel. On 
appeal, the NAC remanded the matter for a rehearing based on the 
current rules' ambiguity in such a situation.
    The proposed amendments would allow, in appropriate cases, the 
remaining Hearing Panelists to resolve the issues in the proceeding and 
issue a decision without the participation of the replacement Hearing 
Officer in the decision. In that scenario, the replacement Hearing 
Officer may advise the Hearing Panelists regarding legal issues and 
prepare and sign the decision on behalf of the Hearing Panel.\7\ The 
amendments, however, also would allow the replacement Hearing Officer 
the discretion to participate in the resolution of the issues in the 
case and in the issuance of the decision if he or she certifies 
familiarity with the record.\8\ In exercising this power, the 
replacement Hearing Officer could recall any witness before the Hearing 
Panel.\9\ The proposed amendments would provide a replacement Hearing 
Officer with discretion, and thus flexibility, to deal with various 
situations. That discretion, of course, is not unfettered, as the NAC 
and the Commission could reverse a replacement Hearing Officer 
determination based on an abuse of discretion.\10\
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    \7\ Industry representatives have always had a central role in 
bringing their securities industry expertise to bear on the NASD's 
disciplinary process. The NASD procedural rules recognize that role 
by providing that industry representatives shall constitute a 
majority of each hearing panel. The current amendments also 
recognize that central role by making clear that, under paragraph 
(e)(1) of Rule 9231, the remaining Hearing Panel members may, in 
appropriate circumstances, decide the case and issue the decision 
with the assistance of the replacement Hearing Officer regarding 
legal issues and drafting of the decision.
    \8\ To certify familiarity with the record, the replacement 
Hearing Officer must read and consider all relevant portions of the 
record. NASD Regulation anticipates that, in most cases, 
certification will be made by written order signed by the 
replacement Hearing Officer (although certification could be made by 
written correspondence or oral representation transcribed by a court 
reporter).
    \9\ If the replacement Hearing Officer determines to proceed 
under paragraph (e)(2) of Rule 9231, he or she normally should 
afford the parties an opportunity to suggest which, if any, 
witnesses they believe should be recalled. Although the decision to 
recall witnesses is left to the sound discretion of the replacement 
Hearing Officer, if the replacement Hearing Officer determines not 
to recall any witnesses, he or she must have sufficient confidence 
in the existing record to be able to resolve the case on a fair and 
reasoned basis.
    NASD Regulation recognizes that a witness who is recalled might 
be unavailable or, if available, might change his or her previous 
testimony. These potential complications, however, are not unique to 
the proposed amendments, and hearing panels and courts have a long 
tradition of dealing with these types of situations. If the 
replacement Hearing Officer who proceeds under Rule 9231(e)(2) 
directs that a witness who testified at the hearing be recalled, the 
party who sponsored the witness will be responsible for producing 
the witness or establishing that the witness is unavailable. If the 
party fails to do so, the Hearing Panel may disregard the prior 
testimony. Where a witness is shown to be unavailable, the 
replacement Hearing Officer would have to rely on the transcripts of 
the witness's testimony. Where an available witness is recalled but 
testifies differently during the subsequent hearing, the parties may 
impeach the witness with his or her prior inconsistent statement(s). 
The trier of fact would then take those inconsistencies into account 
when determining how much weight, if any, to give to the witness's 
testimony.
    \10\ For example, depending on the facts and circumstances of 
the particular case, a replacement Hearing Officer who proceeds 
under Rule 9231(e)(2) likely would abuse his or her discretion by 
refusing to recall a witness whose testimony he or she had not heard 
where such testimony is material and disputed and where the witness 
is available to testify without undue burden. Conversely, a 
replacement Hearing Officer likely would not abuse his or her 
discretion by relying on evidence heard by a predecessor Hearing 
Officer when the particular testimony is undisputed or immaterial or 
when a witness has become unavailable.
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2. Statutory Basis
    NASD Regulation believes that the proposal is consistent with the 
provisions of sections 15A(b)(6) \11\ and 15A(b)(8) \12\ of the Act. 
Section 15A(b)(6) of the Act 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. Section 15A(b)(8) states, in pertinent part, that the 
NASD's rules must provide a fair procedure for the disciplining of 
members and persons associated with members.
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    \11\ 15 U.S.C. 78o-3(b)(6).
    \12\ 15 U.S.C. 78o-3(b)(8).
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    NASD Regulation believes the proposed rule change clarifies NASD 
Procedural Rules 9231 and 9233 with regard to a replacement Hearing 
Officer's authority to participate in a Hearing Panel's decision. Under 
the current rules, when a Hearing Officer withdraws, is incapacitated, 
or otherwise is unable to continue service, the Chief Hearing Officer 
appoints a replacement Hearing Officer under Rule 9233. That rule, 
however, presently does not describe the powers of a replacement 
Hearing Officer who is appointed after a hearing has begun or been 
concluded. By clarifying replacement Hearing Officers' powers in such 
situations, NASD Regulation believes the proposed rule change promotes 
the fair and efficient resolution of disciplinary cases and thus 
furthers the purposes of the Act.

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.

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

    Because the foregoing proposed rule change does not:
    (i) Significantly affect the protection of investors or the public 
interest;
    (ii) Impose any significant burden on competition; and
    (iii) Become operative for 30 days from the date on which it was 
filed, or such shorter time as the Commission may designate, it has 
become effective pursuant to section 19(b)(3)(A) of the Act \13\ and 
Rule 19b-4(f)(6) thereunder.\14\ At any time within 60 days of the 
filing of the proposed rule change, the Commission may summarily 
abrogate such rule change if it appears to the Commission that such 
action is necessary or appropriate in the public interest, for the 
protection of investors,

[[Page 39771]]

or otherwise in furtherance of the purposes of the Act.
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    \13\ 15 U.S.C. 78s(b)(3)(A).
    \14\ 17 CFR 240.19b-4(f)(6).
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    NASD Regulation has requested that the Commission waive the 30-day 
operative delay. The Commission finds good cause to waive the 30-day 
operative delay because such designation is consistent with the 
protection of investors and the public interest. Acceleration of the 
operative date will ensure that the clarifying amendments outlined in 
this proposed rule change are not needlessly delayed. For these 
reasons, the Commission finds good cause to waive the 30-day operative 
waiting period.\15\
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    \15\ For purposes only of accelerating the operative date of 
this proposal, the Commission has considered the proposed rule's 
impact on efficiency, competition, and capital formation. 15 U.S.C. 
78c(f).
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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, NW, Washington, DC 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 file number SR-NASD-2002-70 and should be 
submitted by July 1, 2002.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-14523 Filed 6-7-02; 8:45 am]
BILLING CODE 8010-01-P