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87-16 Request for Comments on Proposed Amendments to Article IV, Sections 3 and 4 of the NASD By-Laws and Article IV, Section 5 of the NASD Rules of Fair Practice

TO: All NASD Members and Other Interested Persons

LAST DATE FOR COMMENT: April 9, 1987.

EXECUTIVE SUMMARY

The NASD requests comments on proposed amendments to Article IV, Sections 3 and 4 of the NASD By-Laws and Article IV, Section 5 of the NASD Rules of Fair Practice. The amendments to the By-Laws would codify certain internal procedures presently employed by the NASD in processing terminations for cause. The amendment to the Rules of Fair Practice would clarify the obligation of persons who remain subject to the NASD's jurisdiction to respond to requests for information made by the NASD.

The texts of the proposed amendments are attached as Exhibit 1 and Exhibit 2.

BACKGROUND

A significant aspect of the NASD's self-regulatory activity involves the investigation of terminations for cause to determine whether the circumstances leading to the termination involved violations of the NASD's rules. To ensure adequate time to investigate such matters fully and to bring disciplinary action where appropriate, the NASD's practice has been to place a hold on terminations for cause when the Uniform Termination Notice For Securities Industry Registration (Form U-5) indicates the possibility of misconduct. The effect of the hold is to prevent the termination from becoming effective and thus postpone the commencement of the one-year period within which, under Article IV, Section 4 of the By-Laws, an individual no longer associated with a member firm remains subject to the NASD's jurisdiction to file a complaint. As currently proposed, the amendments to Article IV, Section 4 of the By-Laws would not extend the jurisdictional period; however, the NASD also invites comments concerning the advisability of increasing the jurisdictional period from one year to two years.

The investigation of a termination for cause necessarily involves obtaining information from the terminated individual, typically by means of a request for information pursuant to Article IV, Section 5 of the Rules of Fair Practice. The NASD has consistently taken the position that an individual who remains subject to the filing of a complaint pursuant to Article IV, Section 4 of the By-Laws, or whose termination is subject to a hold, remains a "person associated with a member" for purposes of the individual's obligation to provide information requested by the NASD pursuant to Article IV, Section 5. Further, the NASD regards the failure to respond to Article IV, Section 5 requests as violations of Article III, Section 1 of the Rules of Fair Practice. The NASD's ability to require such persons to provide information regarding the circumstances of their termination and to impose sanctions for failure to do so is essential to the discharge of its regulatory obligations.

As a result of a significant number of recent disciplinary actions involving failure to provide information regarding a termination for cause in response to the NASD's requests made pursuant to Article IV, Section 5, the NASD Board of Governors has determined that it is appropriate to publish these amendments for comment.

SUMMARY OF PROPOSED AMENDMENTS

Article IV of the NASD By-Laws

Section 3

The proposed amendment to Article IV, Section 3 of the NASD By-Laws would codify the NASD's current practice of placing a hold on a termination for cause when the Form U-5 indicates that the circumstances surrounding the termination may have involved actionable misconduct. The proposed amendment would also codify the NASD's position that a hold may be placed retroactively; that is, where a termination is permitted to become effective, the NASD may rescind the effective termination date based upon the subsequent receipt of an amended Form U-5 that discloses previously undiscovered misconduct.

Section 4

Presently, Article IV, Section 4 of the NASD By-Laws provides that the NASD retains, for a period of one year following the effective date of termination, jurisdiction to bring a disciplinary action against a person formerly associated with a member alleging misconduct that occurred during the period of association. The proposed amendment to Section 4 would codify the NASD's practice of placing a hold on a termination for cause and specify that a hold, by preventing the termination from taking effect, extends the one-year jurisdictional period. The amendment would also provide that failure of a person to respond to a request for information pursuant to Article IV, Section 5 of the Rules of Fair Practice during the period that such person is subject to the NASD's jurisdiction to file a complaint may be charged as a violation of the NASD's rules, notwithstanding that such failure occurred after the person was associated with an NASD member.

Article IV, Section 5 of the NASD Rules of Fair Practice

The proposed amendment would codify the NASD's position that the obligation to respond to a request for information made by the NASD pursuant to Article IV, Section 5 extends to persons who remain subject to the NASD's jurisdiction to file a complaint. The NASD believes it essential that persons whose terminations are being investigated for possible misconduct be under an obligation to provide information necessary to enable the staff to determine whether a complaint is warranted.

In addition, the amendment would provide that "failure" to respond to an Article IV, Section 5 request constitutes a violation of the NASD's rules, rather than a "refusal" as is presently provided. The amendment would also provide that a request for information is properly made if sent to a person's last address of record with the NASD.

* * * * *

The NASD encourages all members and other interested persons to comment on the proposed amendments. Comments should be directed to:

Mr. Lynn Nellius
Secretary
National Association of Securities Dealers, Inc.
1735 K Street, N.W.
Washington, D.C. 20006-1506

Comments must be received no later than April 9, 1987. All comments will be made available for public inspection. Comments received by this date will be considered by the NASD's National Business Conduct Committee and the NASD Board of Governors. If the proposed amendments are approved by the Board, they will be submitted to the membership for a vote. If approved by the membership, the amendments must be filed with and approved by the Securities and Exchange Commission before becoming effective.

Questions concerning this notice may be directed to Jacqueline D. Whelan, Attorney, NASD Office of the General Counsel, at (202) 728-8270.

Sincerely,

Frank J. Wilson
Executive Vice President and General Counsel

Attachments

Exhibit 1

PROPOSED AMENDMENTS TO NASD BY-LAWS*

ARTICLE IV



Notification by Member to Corporation of Termination

See. 3. Following the termination of the association with a member of a person who is registered with it, such member shall promptly, but in no event later than thirty (30) calendar days after such termination, give written notice to the Association on a form designated by the Board of Governors of the termination of such association. A member who does not submit such notification in writing within the time period prescribed shall be assessed a late filing fee as specified by the Board of Governors. Termination of registration of such person associated with a member shall not take effect so long as any complaint or action is pending against a member and to which complaint or action such person associated with a member is also a respondent, or so long as any complaint or action is pending against such person individually or so long as any examination of the member or person associated with such member is in process. The Corporation may in its discretion determine that termination of registration of such person associated with a member shall not take effect where the written notice thereof discloses that such person engaged or may have engaged in conduct that may constitute a violation of any statute, rule or regulation governing such person's activities while associated with a member. The Corporation, however, may in its discretion declare the termination effective at any time; provided, however, that if, during the period that such person remains subject to the Corporation's jurisdiction to file a complaint under the Code of Procedure as provided in Section 4 of this Article IV, the Corporation shall receive notice that such person engaged or may have engaged in conduct that may constitute a violation of any statute, rule or regulation governing such person's activities while associated with a member, the Corporation may in its discretion declare the termination ineffective as of the date the Corporation first received notice of the termination.

Retention of Jurisdiction

Sec. 4. A person whose association with a member has been terminated and is no longer associated with any member of the Corporation shall continue to be subject to the filing of a complaint under the Code of Procedure based upon conduct which commenced prior to the termination or upon such person's failure, while subject to the Corporation's jurisdiction as provided herein, to provide information requested by the Corporation pursuant to Article IV, Section 5 of the NASD Rules of Fair Practice, but any such complaint shall be filed within one (1) year after the effective date of termination of registration pursuant to Section 3 above or, in the case of an unregistered person, within one (l) year after the date upon which such person ceased to be associated with the member. In the event that the Corporation shall determine pursuant to Section 3 above that the termination of a person's association with a member shall not take effect, such person shall continue to be subject to the filing of a complaint as provided herein until, and for one (1) year following, the Corporation's determination to permit the termination to take effect.

Exhibit 2

PROPOSED AMENDMENT TO NASD RULES OF FAIR PRACTICE*

ARTICLE IV



Reports and Inspection of Books for Purpose of Investigating Complaints

Sec. 5. For the purpose of any investigation, or determination as to filing of a complaint or any hearing of any complaint against any member of the Corporation or any person associated with a member made or held in accordance with the Code of Procedure, any Local Business Conduct Committee, any District Business Conduct Committee, or the Board of Governors, or any duly authorized member or members of any such Committee or Board or any duly authorized agent or agents of any such Committee or Board shall have the right (1) to require any member of the Corporation, [or] person associated with a member, or person no longer associated with a member where such person is subject to the Corporation's jurisdiction pursuant to Article IV, Section 4 of the By-Laws, to report orally or in writing with regard to any matter involved in any such investigation or hearing, and (2) to investigate the books, records and accounts of any such member with relation to any matter involved in any such investigation or hearing. No member, [or] person associated with a member, or person no longer associated with a member, where such person is subject to the Corporation's jurisdiction pursuant to Article IV, Section 4 of the By-Laws, shall [refuse] fail to make any report as required in this Section, or [refuse] fail to permit any inspection of books, records and accounts as may be validly called for under this Section. Any notice requiring an oral or written report or calling for an inspection of books, records and accounts pursuant to this Section shall be deemed to have been received by the member or person to whom it is directed by the mailing thereof to the last known address of such member or person as reflected on the Corporation's records.


* New text is underlined.

* New text is underlined; deleted text is bracketed.



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