[Federal Register Volume 67, Number 250 (Monday, December 30, 2002)]
[Notices]
[Pages 79674-79675]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-32915]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-47054; File No. SR-NASD-2002-171]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the National Association of 
Securities Dealers, Inc. Relating to NASD's Minor Rule Violation Plan

December 19, 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 November 29, 2002 the National Association of Securities Dealers, 
Inc. (``NASD'') filed a proposed rule change with the Securities and 
Exchange Commission (``SEC'' or ``Commission''). The proposed rule 
change is described in Items I, II, and III below, which Items have 
been prepared by the NASD. The NASD filed the proposed rule change 
pursuant to section 19(b)(3)(A) of the Act,\3\ and Rule 19b-4(f)(6) 
thereunder,\4\ which renders the proposed rule change effective upon 
filing with the Commission. 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).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The NASD is proposing to amend Interpretative Material 9216 (``IM-
9216'') to clarify that a failure to timely file annual audit reports 
is eligible for disposition under the NASD's Minor Rule Violation Plan 
(``MRVP'' or the ``Plan''). The text of the proposed rule change is 
available at the office of the secretary of 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, the NASD included statements 
concerning the purpose of, and basis for, the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The NASD has prepared summaries, set forth in sections 
A, B, and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of this proposed rule change is to clarify that a 
failure to timely file annual audit reports is appropriate for 
disposition under the NASD's MRVP. As described in more detail herein, 
the NASD believes that the current rule language in IM-9216 referring 
to Rule 17a-5 under the Act does not clearly reflect that a failure to 
timely file annual audit reports is included in the NASD's MRVP.
    In 1984, the SEC adopted amendments to Rule 19d-1(c) under the Act 
\5\ to allow self-regulatory organizations to adopt, with SEC approval, 
plans for the disposition of minor violations of rules.\6\ In 1993, 
pursuant to Rule 19d-1(c), the NASD established an MRVP,\7\ which is 
currently set forth in NASD Rule 9216. In 2001, the SEC approved 
amendments to the NASD's MRVP.\8\
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    \5\ 17 CFR 240.19d-1(c).
    \6\ See Securities Exchange Act Release No. 21013 (June 1, 
1984), 49 FR 23833 (June 8, 1984).
    \7\ See Securities Exchange Act Release No. 32076 (March 31, 
1993), 58 FR 18291 (April 8, 1993). See also Notice to Members 93-42 
(July 1993).
    \8\ See Securities Exchange Act Release No. 44512 (July 3, 
2001), 68 FR 36812 (July 13, 2001).
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    NASD Rule 9216(b) authorizes the NASD to impose a fine of $2,500 or 
less on any member or associated person of a member for a violation of 
any of the rules specified in NASD IM-9216. The number and seriousness 
of the violations, as well as the previous disciplinary history of the 
respondent, is reviewed to determine if a matter is

[[Page 79675]]

appropriate for disposition under the MRVP and to determine the amount 
of the fine. Once the NASD has brought a minor violation of a rule 
against an individual or member firm, the NASD may, at its discretion, 
issue progressively higher fines for all subsequent minor violations of 
rules within the next 24-month period or initiate more formal 
disciplinary proceedings.
    The purpose of the MRVP is to provide for a meaningful sanction for 
the minor or technical violation of a rule when the initiation of a 
disciplinary proceeding through the formal complaint process would be 
more costly and time-consuming than would be warranted. Inclusion of a 
rule in the NASD's MRVP does not mean it is an unimportant rule; 
rather, a minor or technical violation of the rule may be appropriate 
for disposition under the MRVP. The NASD retains the discretion to 
bring full disciplinary proceedings.
    As stated above, in 2001, the NASD amended the MRVP to include 
additional violations. One of these violations is listed in IM-9216 as 
``SEC Exchange Act Rule 17a-5--failure to timely file FOCUS reports.'' 
In the Notice of Filing of Proposed Rule Change adding SEC Rule 1a-5 to 
the NASD's MRVP, the SEC, referring to language in the NASD's filing, 
stated that the NASD ``proposes to institute minor rule violations for 
failure of a member to timely file monthly, quarterly, and annual 
reports required by SEC Rule 17a-5, also known as FOCUS reports.'' \9\ 
Rule 17a-5 requires that firms file both FOCUS reports and annual audit 
reports; however, for purposes of the NASD's MRVP, an annual audit 
report currently is defined as being included in the term ``FOCUS 
reports.'' As a result, the NASD believes that the MRVP may not clearly 
reflect that a failure to timely file annual audit reports, as well as 
FOCUS reports, under Rule 17a-5 is proper for disposition as a minor 
rule violation. The NASD therefore is proposing this rule change to 
clarify that a failure to timely file annual audit reports is 
encompassed within the MRVP.
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    \9\ See Securities Exchange Act Release No. 43330 (September 22, 
2000), 65 FR 58585 (September 29, 2000). This statement is also 
repeated in Notice to Members 01-54 (August 2001), which announced 
the SEC approval order.
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2. Statutory Basis
    The NASD believes that the proposed rule change is consistent with 
the provisions of section 15A(b)(6) of the Act,\10\ which requires, 
among other things, that the NASD'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 this proposed rule 
change is necessary to clarify that a failure to timely file annual 
audit reports is included in the NASD's MRVP.
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    \10\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The NASD does not believe that the proposed rule change will result 
in any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.

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

    Written comments were neither solicited nor received.

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

    The foregoing rule change has become effective upon filing pursuant 
to section 19(b)(3)(A) of the Act \11\ and Rule 19b-4(f)(6) \12\ 
thereunder because the 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 the proposed rule change was filed, or 
such shorter time as the Commission may designate. At any time within 
60 days of the filing of a rule change pursuant to section 19(b)(3)(A) 
of the Act,\13\ the Commission may summarily abrogate the rule change 
if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act.
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    \11\ 15 U.S.C. 78s(b)(3)(A).
    \12\ 17 CFR 240.19b-4(f)(6).
    \13\ 15 U.S.C. 78s(b)(3)(A).
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    As required, the NASD filed its notice of intent to file the 
proposed rule change on November 12, 2002. The NASD also requested that 
the Commission waive the 30-day operative date. The Commission believes 
waiving the 30-day operative delay is consistent with the protection of 
investors and the public interest because it will allow the NASD to 
continue to proceed under its MRVP for failure to file annual audit 
reports without interruption. Thus, the foregoing rule change has 
become effective pursuant to section 19(b)(3)(A) of the Act \14\ and 
subparagraph (f)(6) of Rule 19b-4.\15\ At any time within 60 days of 
the filing of such 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, or otherwise in furtherance of the purposes of 
the Act.
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    \14\ 15 U.S.C. 78s(b)(3)(A).
    \15\ 17 CFR 240.19b-4.
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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 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, 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 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 the File No. SR-NASD-2002-171 and 
should be submitted by January 21, 2003.

    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. 02-32915 Filed 12-27-02; 8:45 am]
BILLING CODE 8010-01-M