[Federal Register Volume 70, Number 134 (Thursday, July 14, 2005)]
[Notices]
[Pages 40764-40767]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-3746]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51994; File No. SR-NASD-2004-025]


Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Notice of Filing of Proposed Rule Change and Amendments 
No. 1 and 2 Thereto To Amend NASD's Minor Rule Violation Plan

July 7, 2005.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\

[[Page 40765]]

notice is hereby given that on February 10, 2004, the National 
Association of Securities Dealers, Inc. (``NASD'') 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. On March 17, 2005, NASD filed Amendment No. 1 to 
the proposed rule change.\3\ On June 27, 2005, 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\ Amendment No. 1 replaced the original filing in its 
entirety.
    \4\ Amendment No. 2 replaced Amendment No. 1 in its entirety.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    NASD is proposing 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''). The text of the rule change is available on NASD's Web site 
(http://www.nasd.com), at NASD's principal office, and at the 
Commission's Public Reference Room.

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, as 
amended, and discussed any comments it received on the proposal. 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

Background

    In 1984, the Commission adopted amendments to Rule 19d-1(c) under 
the Act \5\ that allow self-regulatory organizations to adopt, with 
Commission approval, plans for the disposition of minor violations of 
rules.\6\ In 1993, pursuant to Rule 19d-1(c), NASD established its 
MRVP.\7\ In 2001, the Commission approved significant amendments to 
NASD's MRVP.\8\ In addition, in 2004, the Commission approved an 
amendment to NASD's MRVP to include failure to timely submit amendments 
to the Form U5 (``Uniform Termination Notice for Securities Industry 
Registration'').\9\
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    \5\ 17 CFR 240.19d-1(c).
    \6\ See Securities Exchange Act Release No. 21013 (June 1, 
1984), 49 FR 23828 (June 8, 1984).
    \7\ See Securities Exchange Act Release No. 32383 (May 28, 
1993), 58 FR 31768 (June 4, 1993) (SR-NASD-93-6). See also NASD Rule 
9216(b) and Notice to Members 93-42 (July 1993).
    \8\ See Securities Exchange Act Release No. 44512 (July 3, 
2001), 66 FR 36812 (July 13, 2001) (SR-NASD-00-39).
    \9\ See Securities Exchange Act Release No. 50466 (September 24, 
2004), 69 FR 58568 (September 30, 2004) (SR-NASD-2004-121).
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    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 
any of the rules specified in NASD IM-9216. NASD staff reviews the 
number and seriousness of the violations, as well as the previous 
disciplinary history of the respondent, to determine if a matter is 
appropriate for disposition under the MRVP and to determine the amount 
of the fine. Once NASD has brought an MRVP action against an individual 
or member firm, NASD may, at its discretion, issue progressively higher 
fines for all subsequent minor rule violations within the next 24-month 
period or initiate more formal disciplinary proceedings.
    NASD states that the purpose of the MRVP is to provide 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. NASD further states that the inclusion of a rule in NASD's 
MRVP does not mean that it is unimportant; rather, a minor or technical 
violation of the rule may be appropriate for disposition under the 
MRVP. Moreover, NASD states that it retains the discretion to bring 
full disciplinary proceedings if violations of such rule occur.

Discussion

    NASD proposes to amend its MRVP to make the following changes:
     Transaction Reporting and Audit Trail Requirements in 
Equity and Debt Securities.
    NASD proposes to combine in one entry all of the rule violations 
eligible for disposition under the MRVP that relate to transaction 
reporting and audit trail requirements in equity and debt securities. 
As proposed, this entry would include violations of transaction 
reporting and audit trail requirements related to (1) the Nasdaq Market 
Center; (2) NASD's Trade Reporting and Comparison Service 
(``TRACS'');\10\ and (3) Trade Reporting and Compliance Engine 
(``TRACE'').
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    \10\ TRACS is the trade reporting system for NASD's Alternative 
Display Facility (``ADF''). ADF is a quotation collection, trade 
comparison, and trade reporting facility developed by NASD in 
accordance with the Commission's SuperMontage Approval Order.
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    To effectuate this, NASD proposes to eliminate the separate minor 
rule violation pertaining to NASD Rules 6130 and NASD 6170 (transaction 
reporting to the Automated Confirmation Transaction Service) and add 
those rules to this consolidated entry. NASD further proposes to add to 
the MRVP, and this consolidated entry, violations of NASD Rules 4632A, 
5430, 6130A, and 6170A, which relate to TRACS requirements.\11\ 
Currently, NASD's MRVP includes transaction reporting for various 
systems, including the Nasdaq Market Center. NASD believes that 
including violations of ADF transaction reporting requirements in the 
MRVP is consistent with the current provisions for minor rule 
violations of transaction reporting requirements in equity securities.
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    \11\ NASD notes that NASD Rule 5430 governs both TRACS and the 
Nasdaq Market Center transaction reporting requirements.
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    NASD also proposes to eliminate the reference in the MRVP to a 
violation of the Fixed Income Pricing System (``FIPS''), NASD Rule 
6240, and replace it with a violation of NASD Rule 6230, the TRACE 
transaction reporting rule.\12\ In adopting the TRACE rules in 2001, 
NASD eliminated FIPS, which required members to report trades for 50 
high-yield debt securities. Because the TRACE system replaced and 
expanded upon FIPS, NASD proposes to amend its MRVP to replace the FIPS 
violation with a violation of the TRACE system transaction reporting 
requirement and also combine it into this single entry.
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    \12\ Prior to July 1, 2002, the NASD Rule 6200 Series pertained 
to FIPS, and NASD Rule 6240 governed transaction reporting in high-
yield fixed income securities.
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    Communications with the Public. NASD proposes to include in its 
MRVP violations of the standards applicable to member communications 
with the public. NASD's advertising rules (NASD Rules 2210, 2211, and 
2220, and related Interpretive Materials) contain general and specific 
standards applicable to all member communications with the public. 
These standards prohibit incomplete, unbalanced, or unfair

[[Page 40766]]

communications as well as exaggerated, unwarranted, or misleading 
statements or claims. The rules also enumerate specific standards for 
certain type of communications, including recommendations, hedge 
clauses, and projections. In addition, the rules set forth standards 
for the use and disclosure of the member's name.
    Under the current MRVP, NASD may issue minor rule violations only 
for procedural violations of the advertising rules, such as a failure 
to have advertisements and sales literature approved by a principal 
prior to use or a failure to meet specified time limits for filing 
advertisements. It is NASD's experience, however, that, based on the 
facts and circumstances, certain content-related violations of these 
rules can warrant more than a Letter of Caution, yet not rise to a 
level requiring or meriting full disciplinary action. Accordingly, the 
proposed rule change would allow NASD to address these minor or 
technical violations of content-related advertising rules, which might 
include, for example only, a technical violation of the provisions on 
the use and disclosure of members' names. NASD, therefore, proposes to 
include in its MRVP violations of the standards applicable to member 
communications with the public.
    Contact Information. NASD proposes to expand the MRVP to include, 
as a general category, a member's failure to identify to NASD and keep 
current information regarding any contact person that a member must 
provide to NASD under any current or future NASD rule. For example, a 
member's failure to provide or update emergency contact information 
under NASD Rule 3520 or failure to provide or update its executive 
representative designation and contact information as required by NASD 
Rule 1150 would be eligible for disposition as a minor rule violation 
under this category.\13\
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    \13\ See also NASD Rule 1120(a)(7) (requirement to provide 
continuing education regulatory element contact person). NASD notes 
that it generally has sought to achieve consistency regarding the 
frequency with which members must review and update contact 
information (namely, within 17 business days after the end of each 
calendar quarter).
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    Other Changes. In addition, NASD proposes to change ``the 
Association'' to ``NASD'' in the minor rule violation provision 
relating to NASD Rule 3110 \14\ and change ``ECN's'' to ``ECNs'' in the 
minor rule violation provision relating to Rule 11Ac1-1(c)(5) under the 
Act.\15\
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    \14\ NASD no longer refers to itself or its subsidiary, NASD 
Regulation, Inc., using its full corporate name, ``the 
Association,'' ``the NASD,'' or ``NASD Regulation, Inc.'' Instead, 
NASD uses ``NASD'' unless otherwise appropriate for corporate or 
regulatory reasons.
    \15\ 17 CFR 240.11Ac1-1(c)(5).
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    NASD would announce the effective date of the proposed rule change 
in a Notice to Members to be published no later than 60 days following 
Commission approval, if the Commission approves this proposal. The 
effective date would be 30 days following publication of that Notice to 
Members.
2. Statutory Basis
    NASD believes that the proposed rule change, as amended, is 
consistent with the provisions of Section 15A(b)(6) of the Act,\16\ 
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. NASD believes that the proposed rule 
change, as amended, is consistent with Section 15A(b)(7) of the Act 
\17\ in that it works to safeguard adequately the interests of 
investors while establishing fair and reasonable rules for members and 
persons associated with members. NASD also believes that the proposed 
rule change also is consistent with Section 15A(b)(8) of the Act \18\ 
in that it furthers the statutory goals of providing a fair procedure 
for disciplining members and associated persons. NASD believes that the 
addition of these violations to the MRVP will provide NASD with the 
ability to impose a meaningful sanction for violations of the rules 
discussed herein that warrant more than a Letter of Caution but do not 
necessarily rise to a level meriting a full disciplinary proceeding.
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    \16\ 15 U.S.C. 78o-3(b)(6).
    \17\ 15 U.S.C. 78o-3(b)(7).
    \18\ 15 U.S.C. 78o-3(b)(8).
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B. Self-Regulatory Organization's Statement on Burden on Competition

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

    NASD neither solicited nor received any comments.

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 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, as amended, 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-2004-025 on the subject line.
Paper Comments
     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, Station Place, 100 F 
Street, NE, Washington, DC 20549-9303.
    All submissions should refer to File No. SR-NASD-2004-025. 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 Room. Copies of such 
filing also will be available for inspection and copying at the 
principal office of NASD.

[[Page 40767]]

    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 the File Number SR-NASD-2004-
025 and should be submitted on or before August 4, 2005.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\19\
J. Lynn Taylor,
Assistant Secretary.
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    \19\ 17 CFR 200.30-3(a)(12).
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[FR Doc. E5-3746 Filed 7-13-05; 8:45 am]
BILLING CODE 8010-01-P