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91-60 Proposed Amendments to Article III, Section 5 and Article IV, Sections 3 and 4 of The NASD By-Laws Regarding Retention of Jurisdiction; Last Voting Date: November 19, 1991
The NASD invites members to vote on proposed amendments to Article HI, Sections 5 and 6 and Article IV, Sections 3 and 4 of the NASD By-Laws relating to retaining jurisdiction over member firms that resign their memberships and associated persons who terminate their registrations, or whose memberships or registrations have been canceled or revoked. The proposed amendments would extend the NASD's jurisdiction over such members and associated persons to two years following the resignation, termination, cancellation, or revocation of their memberships or registrations.
The text of the proposed amendments follows this notice.
In October 1990, after approval by the Board of Governors and the membership, the NASD submitted rule filing SR-NASD-90-53 to the Securities and Exchange Commission (SEC) proposing amendments to the NASD By-Laws and Rules of Fair Practice. The filing proposed, among other things, codifying procedures currently employed by the NASD in processing terminations of associated persons and cancellations and revocations of member firms. The most significant aspect of current NASD procedures is the practice of "holding" the effectiveness of the member's resignation or the associated person's termination if the NASD is aware of or is investigating potential violations of the NASD's rules or the federal securities laws by the firm or person. The NASD also retroactively holds member resignations or registration terminations if it becomes aware of matters that would have resulted in a hold after the termination had been allowed to take effect.
The rule filing also proposed amending the By-Laws to provide that the NASD would continue to retain jurisdiction over firms whose memberships were canceled or revoked and associated persons whose registrations were revoked. This amendment would correct the situation under the current provisions where the NASD retains jurisdiction over a member who resigned or an associated person who terminated his or her registration, but loses jurisdiction over firms that had their membership canceled or revoked and associated persons whose registrations were revoked.
The SEC expressed concern that the proposal permits the NASD to hold indefinitely a member resignation or registration termination pending the outcome of an investigation. In response to the SEC concerns, the Board has reconsidered the proposed amendments to the By-Laws relating to retention of jurisdiction.
SUMMARY OF PROPOSED AMENDMENTS
Under the current provisions of the By-Laws, the NASD has one year from the effective date of the filing of a resignation of membership1 or a termination of registration2 to file a complaint for any actionable misconduct that occurred before the member's resignation or the associated person's termination. If the NASD is not aware of misconduct by an associated person when a termination takes effect, the time period for filing a complaint could expire before action is taken. This is the reason for the use of the hold and retroactive hold procedure.
The Board believes that to maintain the fairness and effectiveness of the NASD's disciplinary system, the NASD should extend its current one-year time period for retaining jurisdiction to file a complaint to a fixed two years from the date a resignation or termination is filed or from the date the NASD revokes or cancels a member or associated person. This proposed amendment will eliminate the need for the NASD to hold the effectiveness of resignations and terminations and to issue letter notices. The Board believes a fixed two-year time limit will be less intrusive than the current indefinite and potentially unlimited "hold" process and will allow sufficient time to bring virtually all disciplinary actions.
For associated persons, the Board is proposing that the two-year period recommence on the filing date of the last amendment to a Form U-5 filed within the original two-year period. This would provide for the situation in which a routine Form U-5 is filed at the time of termination but a subsequent amendment discloses potential violations requiring an investigation. Running the two-year period from the date of the last Form U-5 amendment would prevent persons from avoiding disciplinary action through their own active concealment or the dilatory conduct of others. Moreover, because members have to send any amended Form U-5s to the terminated person, he or she would know when the two-year period recommences. The Board also notes that the two-year limit would be consistent with current rules that permit a person to become associated with another member without requalifing by examination up to two years from the date of termination.
The Board believes that these amendments to the NASD By-Laws are necessary and appropriate and recommends that members vote their approval.
Please mark the attached ballot according to your convictions and return it in the enclosed, stamped envelope to the Corporation Trust Company. Ballots must be postmarked no later than November 19, 1991.
Because the rule language mirrors the rule change pending at the SEC, the text is written as if the amendments had been adopted. Prior to becoming effective, the proposed amendments also must be approved by the SEC.
Questions concerning this notice may be directed to the Office of General Counsel at (202) 728-8294.
TEXT OF PROPOSED AMENDMENTS TO NASD BY-LAWS3
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Resignation of Members
(Note: New text is underlined; deleted text is in brackets.)
Sec. 5 Membership in the Association may be voluntarily terminated only by formal resignation. Resignations of members must be in writing and addressed to the Corporation which shall immediately notify the appropriate District Committee. Any member may resign from the Corporation at any time. Such resignation shall not take effect until thirty (30) days after receipt thereof by the Corporation and until all indebtedness due the Corporation from such member shall have been paid in full and so long as any complaint or action is pending against the member [and so long as any examination of such member is in process] under the Code of Procedure. The Corporation, however, may in its discretion declare a resignation effective at any time.
Retention of Jurisdiction
Sec. 6 A resigned member or a member that has had its membership canceled or revoked shall continue to be subject to the filing of a complaint under the Code of Procedure based upon conduct which commenced prior to the effective date of the member's resignation from the Corporation or the cancellation or revocation of its membership. Any such complaint, however, shall be filed within [one] two (2) years after the effective date of the resignation, cancellation or revocation.
Registered Representatives and Associated Person
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Notification by Member to Corporation and Associated Person of Termination; Amendments to Notification
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 or a person whose registration has been revoked 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 revocation 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, within one (1) year after the effective date of revocation of registration pursuant to Article V, Section 2 of the Association's Rules of Fair Practice or, in the case of an unregistered person, within one (1) 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.]
1 A member must advise the NASD of its resignation of membership on a Form BDW.
2 A member must advise the NASD of a termination of or resignation by an associated person on Form U-5.
3 The rule language is the text of the rule change pending at the SEC as if the amendments proposed in that rule change had been adopted. Additions proposed herein to the amended version are underlined, deletions are in brackets.