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90-74 Proposed Amendment to Article IV, Section 1 of the NASD Rules of Fair Practice Re: the Suspension of the Membership of Any Member or of the Registration of a Person Associated With a Member for a Definite Period Assessed As a Penalty For a Rule Violation;

SUGGESTED ROUTING*

Senior Management
Internal Audit
Legal & Compliance
Registration
Trading
Training

*These are suggested departments only. Others may be appropriate for your firm.

REQUEST FOR COMMENTS

EXECUTIVE SUMMARY

The NASD requests comments on a proposed amendment to Article IV, Section 1 of the NASD Rules of Fair Practice. The amendment to Section 1 would exclude from the rule the requirement that suspensions of membership or suspensions of the registration of associated persons be for a specific length of time. The amendment would allow the NASD to impose, as a penalty for a rule violation involving losses to customers, a suspension, either of membership or of the registration of an associated person. The suspension would remain effective until such person or member proves he or she has made restitution to the customer. The text of the proposed amendment follows this notice.

BACKGROUND

Section 15A(b)(7) of the Securities Exchange Act of 1934 provides in part that, in order for an association to be registered as a national securities association, its rules must provide that its members and persons associated with its members will be appropriately disciplined by expulsion, suspension, limitation of activities, or other fitting sanctions. Article V, Section 1 of the NASD Rules of Fair Practice sets forth the penalties that may be imposed by the NASD Board of Governors ("Board") or any District Business Conduct Committee (DBCC) or Market Surveillance Committee (MSC) for rule violations. It states in part that the Committees or the Board may "suspend the membership of any member or suspend the registration of a person associated with a member, if any, for a definite period ..." (emphasis added). The proposed amendment would delete the words "for a definite period," thereby allowing the Board and any DBCC or MSC to impose a suspension without specifying a definite period for the duration of the suspension.

Currently, Article V, Section 1 limits the imposition of suspensions in that it requires that all suspensions imposed by any DBCC, MSC, or the Board specify the term of the suspension. The requirement effectively precludes the imposition of a suspension that is of indefinite duration, such as a suspension ordered to remain effective until the respondent proves restitution or a suspension for a definite period that will continue if restitution is not made within that period. In appeals of NASD disciplinary actions, the SEC has rejected suspensions imposed under similar circumstances, stating that the suspensions violated Article V, Section 1 in that their lengths were indefinite.

A significant number of disciplinary actions brought by the DBCCs or MSCs involve losses to customers. Often, the customer whose funds have been misused is readily identifiable and sometimes involved as a witness in the disciplinary action. In imposing penalties, the Committees have sought to ensure that the wronged individual is made whole frequently through the imposition of bars and the requirement of restitution. The Board is interested in providing the NASD with an opportunity to require the respondents in disciplinary actions to refund the client's money in cases where a bar is not considered an appropriate sanction. A suspension contingent upon proof of restitution is a sanction alternative that would allow the Committees and the Board to require customer remuneration under such circumstances. In order to provide the flexibility needed to include restitution as part of the penalty imposed on respondents, this rule revision is necessary.

The proposed amendment seeks to eliminate the self-imposed prohibition and provide the Board and the DBCCs and MSCs with greater leeway in crafting sanctions, in appropriate cases, that assist customers in the recovery of their losses.

SUMMARY OF PROPOSED AMENDMENTS

ARTICLE III, SECTION 1 OF THE NASD RULES OF FAIR PRACTICE

The NASD is proposing to amend Article III, Section 1 of the Rules of Fair Practice to provide the NASD with the ability to impose suspensions of membership and of the registration of associated persons until the member or associated person proves restitution. The change would be accomplished by deleting from the rule the requirement that all sanctions imposed by the Board of Governors or any District Business Conduct Committee or Market Surveillance Committee be for a definite period of time. The NASD believes it is essential that the Committees and the Board have the ability to require, as part of a disciplinary penalty, that the respondent refund his or her customer's money or otherwise make the customer financially whole.

The NASD encourages all members and other interested persons to comment on the proposed amendment to Article V, Section 1 of the Rules of Fair Practice. Comments should be directed to:

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

Comments must be received no later than December 5, 1990. All comments will be made available for public inspection. Comments received by this date will be considered by the NASD Board of Governors. If approved by the Board, the amendment must be submitted for member vote and filed with and approved by the Securities and Exchange Commission before becoming effective.

Questions concerning this Notice to Members may be directed to Carla J. Carloni, Attorney, Office of General Counsel, at (202) 728-8019.

PROPOSED AMENDMENT TO NASD RULES OF FAIR PRACTICE

(Note: Deleted text is in brackets.)

ARTICLE V

Penalties

Penalties for Violations of the Rules

Section 1. Any District Business Conduct Committee, Market Surveillance Committee or the Board of Governors, in the administration and enforcement of these Rules, and after compliance with the Code of Procedure, may (1) censure any member or person associated with a member and/or (2) impose a fine upon any member or person associated with a member and/or (3) suspend the membership of any member or suspend the registration of a person associated with a member, if any, [for a definite period,] and/or (4) expel any member or revoke the registration of any person associated with a member, if any, and/or (5) suspend or bar a member or a person associated with a member from association with all members, or (6) impose any other fitting penalty deemed appropriate under the circumstances, for each or any violation of any of these Rules by a member or person associated with a member or for any neglect or any refusal to comply with any orders, directions or decisions issued by any District Conduct Committee, Market Surveillance Committee or the Board of Governors in the enforcement of these Rules, including any interpretative ruling made by the Board of Governors, as any such Committee or Board, in its discretion, may deem to be just; provided, however, that no such sanction imposed by any District Business Conduct Committee or Market Surveillance Committee shall take effect until the period for appeal therefrom or review has expired, as provided in Article III, Section 1 of the Code of Procedure; and provided, further, that all parties to any proceeding resulting in a sanction shall be deemed to have assented to or to have acquiesced in the imposition of such sanction unless any party aggrieved thereby shall have made application to the Board of Governors for review pursuant to the Code of Procedure, within fifteen (15) days after the date of such notice.


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