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89-40 Proposed Amendment to Code of Procedure Re: Summary Remedial Proceedings; Last Date for Comments: June 1, 1989

SUGGESTED ROUTING*

Senior Management
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 the Code of Procedure that would create a new procedure by which the NASD could take appropriate remedial actions against an NASD member or an associated person if such member or person had engaged and there was a reasonable likelihood that the member or person would again engage in securities-law violations.The text of the proposed amendment follows this notice.

BACKGROUND

The Board of Governors is concerned because the NASD has been confronted on several occasions recently with instances of members that have violated various SEC and NASD rules and regulations and, when advised to cease such activities, have evidenced an intent to continue the violative conduct. The NASD, under the present Code of Procedure, has no expeditious method specifically designed to handle such situations. In order to address these situations, the Board of Governors is requesting comment on an amend ment to the Code of Procedure that would allow the NASD to take appropriate action.

EXPLANATION

The proposed amendment would permit the NASD to deny membership to, or condition the membership of a broker-dealer, or bar or condition a person's association with a broker-dealer if the broker-dealer or person has engaged and there is a reasonable likelihood the broker-dealer or person will again engage in acts or practices inconsistent with just and equitable principles of trade. The amendment provides the NASD with a wide range of actions it could take against a member or associated person for ongoing violations, including imposing limitations or conditions on or the cancellation or revocation of the firm's membership or the person's registration. This range of permissible actions would allow the NASD to tailor the action taken to meet the needs of the situation. The firm or person that is the subject of such a proceeding would have the right to a hearing prior to the NASD taking any action and, once the Board acts, that decision could be appealed to the SEC.

The Board of Governors believes that Sections 15A(g)(3)(A) and (B) of the Securities Exchange Act of 1934 ("Act") authorize the NASD to take such action and that the proposed procedure meets the hearing requirement of Section 15A(h)(l)of the Act.

Under the proposed amendment, the NASD Executive Committee would be required to authorize the initiation of such a proceeding only after a finding by that Committee that the proceeding was needed to protect the public interest. The NASD would notify the member and/or associated person of the time and place of the hearing. The matter would be considered by a District Committee hearing panel consisting of at least three persons, and this panel would render its decision within five days of the hearing.

Any party aggrieved by the decision or the Board itself could ask that this decision be reviewed by a committee of the Board of Governors. Any such request would not operate as a stay of the District panel's decision. Upon any application for review, a hearing before a Special Hearing Committee of the Board would be held within five days. Any decision rendered by the Special Hearing Committee would be a final action of the NASD and could be appealed to the SEC. All decisions rendered would be in writing, and any member or person would have the right to appear in person, submit any relevant evidence, and be represented by counsel.

The NASD encourages all members and other interested persons to comment on the proposed amendment. Comments should be directed to: Mr. Lynn Nellius, Secretary, National Association of Securities Dealers, Inc., 1735 K Street, NW, Washington, DC 20006-1506.

Comments must be received no later than June 1, 1989. Comments received by this date will be considered by the NASD National Business Conduct Committee and the Board of Governors. Any changes to the NASD Code of Procedure must be approved by the Board and filed with, and approved by, the Securities and Exchange Commission before becoming effective.

Questions concerning this notice may be directed to Craig L. Landauer, Senior Attorney, NASD Office of General Counsel, at (202) 728-8291.

PROPOSED AMENDMENT TO CODE OF PROCEDURE

(Note: All of the proposed text is new language, and therefore is underlined.)

ARTICLE

Summary Remedial Proceedings Purpose

Sec. 1. This Article provides procedures, in addition to those contained for summary suspension or revocation pursuant to Article VIII or VI of this Code of Procedure, for the Corporation to condition, or suspend the membership of a member or to suspend a person from being associated with a member. Such actions would be instituted pursuant to the authority of the Corporation under Section 15(g)(3)(A) and (B) of the Securities Exchange Act of 1934 to deny membership to, or condition the membership of, a broker or dealer or to bar a person from being associated with a member or condition such person's association, if the broker or dealer or person has engaged, and there is a reasonable likelihood the broker or dealer or person will again engage, in acts or practices inconsistent with just and equitable principles of trade.

Commencement of Summary Remedial Proceedings

Sec. 2. Should the Corporation determine to commence a summary remedial proceeding pursuant to Section 1, the Corporation shall give notice thereof to the member or person associated with a member. Such notification shall contain a statement of the specific grounds on which such action is taken and shall be issued only after approval of the Executive Committee of the Board of Governors, which shall conclude that proceeding is in the public interest. The date and location of the hearing shall be sent to the member or person at least five (5) business days prior to the hearing. The matter shall be presented to a hearing panel designated by the District Business Conduct Committee, and the panel shall have at least three members.

District Committee Decision

Sec. 3. A written decision shall be issued by the District Committee hearing panel within five calendar days of the date of the hearing, and a copy shall be sent to the party against whom the Corporation has taken summary action and, in the case of a person associated with a member, the member with which the party is presently an associated person. The decision shall contain the reasons supporting the action taken. The duration of any condition or restriction imposed will be set forth in the decision and limited to a period no longer than that required to protect the public interest.

Review by Board

Sec. 4. The District Committee decision shall be subject to review by the Board of Governors on its own motion within five calendar days after issuance of the written decision. Any such decision shall also be subject to review upon application of any person aggrieved thereby if filed within five days after issuance. The institution of review, whether on application or on the initiative of the Board, shall not operate as a stay of the decision. Upon receipt of an application for review, a hearing will be held within five calendar days after receipt of such application.

Findings of Board on Review

Sec. 5. Upon consideration of the record, and after such further hearings as it shall order, the Board <- :1 affirm, modify, reverse, dismiss, or remand the decision. The Board shall set forth specific grounds upon which its determination is based ' « hearing is held, a decision rendered by a special three-member hearing panel designated by the Board shall constitute final action by the Corporation.

Hearings

Sec. 6. At any hearing held under this Article, a record shall be kept and the member or person associated with a member, and the Corporation shall be entitled to be heard in person and berepresented by counsel and to submit any relevant evidence.

Decisions

Sec. 7. Following any hearing held under this Article, a written decision shall be issued setting forth the findings made and the grounds upon which that determination is based. Any decision conditioning or suspending a member or person associated with a member under this Article shall specify the time period, not to exceed one year, for which the conditions or suspension shall remain in effect and the conditions, if any, which must be fulfilled during the specified time period in order to have the conditions or suspension removed. Any conditions or suspension imposed pursuant to this Article shall be reviewable on the motion of any party 90 days after the date of the decision.

Other Action Not Foreclosed

Sec. 8. Action by the Corporation under this Article shall not foreclose action by the Corporation under any other provisions of this Code or the Rules of Fair Practice where a violation of the Rules of the Corporation may be involved.

Application to Commission for Review

Sec. 9. Any party against whom summary action has been taken by the Board of Governors may make application for review to the Securities and Exchange Commission in accordance with Section 19 of the Securities Exchange Act of 1934, as amended. There shall be no stay of the Board's action upon appeal unless the Commission determines otherwise.


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