[Federal Register Volume 69, Number 164 (Wednesday, August 25, 2004)]
[Notices]
[Pages 52317-52318]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E4-1917]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50221; File No. SR-NASD-2004-121]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment Nos. 1 and 2 by the National Association of 
Securities Dealers, Inc. To Include Failures To Submit Timely 
Amendments to Form U5 in its Minor Rule Violation Plan

August 19, 2004.
    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 August 11, 2004, the National Association of Securities Dealers, 
Inc. (``NASD'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
items I, II, and III below, which items have been prepared by NASD. On 
August 17, 2004, NASD filed Amendment No. 1 to the proposed rule 
change.\3\ On August 19, 2004, NASD filed Amendment No. 2 to the 
proposed rule change.\4\ The Commission is publishing this notice to 
solicit comments on the proposed rule change, as amended, from 
interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letter from Shirley H. Weiss, Associate General Counsel, 
NASD, to Katherine A. England, Assistant Director, Division of 
Market Regulation, Commission (August 16, 2004) (``Amendment No. 
1''). In Amendment No. 1, NASD alphabetically rearranged the 
contents of Exhibit 3 to the proposed rule change. Exhibit 3 
included comment letters NASD received from its members with respect 
to the proposed rule change.
    \4\ See letter from Shirley H. Weiss, Associate General Counsel, 
NASD, to Katherine A. England, Assistant Director, Division of 
Market Regulation, Commission (August 19, 2004) (``Amendment No. 
2''). In Amendment No. 2, NASD made technical corrections to conform 
the proposed rule text with the rule text of current IM-9216.
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I. Self Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    NASD proposes to amend NASD Interpretative Material 9216 (``IM-
9216'') (Violations Appropriate for Disposition Under the Plan Pursuant 
to SEC Rule 19d-1(c)(2)) to expand the list of violations eligible for 
disposition under NASD's Minor Rule Violation Plan (``MRVP'') to 
include failure to submit timely amendments to Form U5, as required by 
Article V, Section 3(a) of the NASD By-Laws. The proposed rule filing 
also changes ``U-4'' to ``U4,'' to be consistent with the most recent 
amendments to that form. The text of the proposed rule change is 
available at the principal office of NASD and the Commission's Public 
Reference Room.\5\
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    \5\ On February 10, 2004, NASD proposed additional amendments to 
the MRVP. See SR-NASD-2004-025. NASD has stated that it would amend 
the rule text set forth in this proposed rule change in the event 
the Commission approves SR-NASD-2004-025 before approval of this 
proposed rule change.
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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 included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
item IV below. NASD 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
    In 1984, the Commission adopted amendments to Rule 19d-1(c) under 
the Act \6\ to allow a self-regulatory organization to adopt, with 
Commission approval, plans for the disposition of minor violations of 
the rules of such self-regulatory organization.\7\ In 1993, pursuant to 
Commission Rule 19d-1(c), NASD established the MRVP for the disposition 
of minor violations of certain NASD rules.\8\ In 2001, the Commission 
approved significant amendments to the MRVP \9\ and, in February 2004, 
NASD proposed additional amendments to the MRVP.\10\
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    \6\ 17 CFR 240.19d-1(c).
    \7\ See Exchange Act Release No. 21013 (June 1, 1984), 49 FR 
23828 (June 8, 1984).
    \8\ See NASD Rule 9216(b). See also Exchange Act Release No. 
32076 (March 31, 1993), 58 FR 18291 (April 8, 1993); and Notice to 
Members 93-42 (SEC Approves NASD's Minor Rule Violation Plan) (July 
1993).
    \9\ See Exchange Act Release No. 44512 (July 3, 2001), 66 FR 
36812 (July 13, 2001).
    \10\ See SR-NASD-2004-025.
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    According to NASD, the MRVP provides for meaningful sanctions for 
minor or technical violations of certain NASD rules when the initiation 
of a NASD disciplinary proceeding through the NASD formal complaint 
process would be more costly and time-consuming than would be 
warranted. NASD represents that inclusion of an NASD rule in the MRVP 
does not mean that such rule is unimportant; rather, a minor or 
technical violation of such rule may be appropriate for disposition 
under the MRVP. NASD retains the discretion to bring full disciplinary 
proceedings for a minor or technical violation of such rule.
    NASD Rule 9216(b) authorizes NASD to impose a fine of $2,500 or 
less on any member or associated person of a member for a violation of 
NASD rules specified in IM-9216. NASD staff reviews the number and 
seriousness of the violation, as well as the previous disciplinary 
history of the violator, to determine if a matter is appropriate for 
disposition under the MRVP, and, if appropriate for disposition under 
the MRVP, to determine the amount of the fine. Once NASD has fined an 
individual or a member firm for a minor or technical violation pursuant 
to the MRVP, NASD may, at its discretion,

[[Page 52318]]

issue progressively higher fines for all subsequent minor or technical 
violations of NASD rules specified in IM-9216 within the next 24-month 
period or initiate more formal disciplinary proceedings.\11\
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    \11\ See Notice to Members 04-19 (NASD Releases Minor Rule 
Violation Plan (MRVP) Guidelines) (March 2004) (providing interested 
parties with guidance concerning the application of the MRVP to each 
of the rules under the Plan, as specified in NASD IM-9216 and 
identifying the factors to be considered in determining whether to 
dispose of an action under the MRVP and discussing the appropriate 
levels for fines).
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    NASD proposes to amend the MRVP to include the failure to submit 
timely amendments to Form U5, as required by Article V, Section 3(a) of 
the NASD By-Laws. NASD represents that the inclusion of the failure to 
timely submit amendments to Form U5 would be consistent with the 
current MRVP, which includes failure to timely submit amendments to 
Form U4, as required by Article V, Section 2(c) of the NASD By-Laws, 
and failure to timely submit amendments to Form BD, as required by 
Article IV, Section 1(c) of the NASD By-Laws. NASD believes that 
expanding the MRVP to include violations of the failure to timely 
submit amendments to Form U5 would give NASD's Department of 
Enforcement the same flexibility to resolve such violations, as 
violations with respect to the failure to submit timely amendments to 
the Form U4 and/or Form BD. In addition, NASD believes that the 
addition of this violation to the MRVP would provide NASD staff with 
the ability to impose a meaningful sanction for violations that warrant 
more than a Letter of Caution but do not necessarily rise to a level 
meriting a full disciplinary proceeding.
2. Statutory Basis
    NASD believes that the proposed rule change is consistent with the 
provisions of section 15A(b)(6) of the Act,\12\ which requires, among 
other things, that NASD 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. Further, NASD believes that the proposed rule change 
is consistent with section 15A(b)(7) of the Act \13\ in that the 
proposed rule change provides for the appropriate discipline for 
violation of NASD rules. Also, NASD believes the proposed rule change 
is consistent with section 15A(b)(8) of the Act \14\ in that the 
proposed rule change provides a fair procedure for the disciplining of 
NASD members and associated persons.
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    \12\ 15 U.S.C. 78o-3(b)(6).
    \13\ 15 U.S.C. 78o-3(b)(7).
    \14\ 15 U.S.C. 78o-3(b)(8).
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B. Self-Regulatory Organization's Statement of Burden on Competition

    NASD does not believe that the proposed rule change would 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 of Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    In March 2004, NASD published Notice to Members 04-23 requesting 
comment on amending the MRVP to include failure to submit timely 
amendments to Form U5 and adopting a rule to create an inactive 
disclosure review registration status. Five of the seven commenters 
commented on the proposed amendment to the MRVP, and all five 
commenters supported the proposal.\15\ In particular, one commenter 
suggested that the amount of fines for late Form U5 filings should be 
based on the percentage of assets under management to encourage 
compliance. NASD notes that the MRVP is restricted to fines of $2,500 
or less. Additionally, NASD notes that, rather than relying on a 
formula to impose sanctions pursuant to the MRVP, NASD considers the 
facts and circumstances of each case in determining appropriate 
sanctions. Moreover, NASD notes that it retains the discretion to bring 
against a violator full disciplinary action, which may involve higher 
monetary sanctions, when the facts and circumstances of the violation 
warrant a formal complaint.
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    \15\ Two commenters addressed the ``inactive disclosure,'' but 
did not address the MRVP.
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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 publishes its reasons for so finding or (ii) as to 
which NASD consents, the Commission will:
    (A) By order approve the proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to [email protected]. Please include 
File Number SR-NASD-2004-121 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., 
Washington, DC 20549-0609.
    All submissions should refer to File Number SR-NASD-2004-121. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). 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 Section, 450 Fifth 
Street, NW., Washington, DC 20549. Copies of such filing also will be 
available for inspection and copying at the principal office of NASD. 
All comments received will be posted without change; the Commission 
does not edit personal identifying information from submissions. You 
should submit only information that you wish to make available 
publicly. All submissions should refer to File Number SR-NASD-2004-121 
and should be submitted on or before September 15, 2004.

    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. E4-1917 Filed 8-24-04; 8:45 am]
BILLING CODE 8010-01-P