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94-95 NASD Requests Comment On Proposed Customer Complaint Rules
Comment Period Expires January 31, 1995
The National Association of Securities Dealers, Inc. (NASD) requests comments on a proposed amendment to Article III of the Rules of Fair Practice (Rules) to require members to report to the NASD the occurrence of specified events and quarterly summary statistics concerning customer complaints. The proposed rule would provide important new regulatory information that will assist the NASD in the timely identification of problem members, branch offices, and registered representatives in order to more aggressively detect and investigate sale practice violations. If adopted, the proposed rule would significantly parallel comparable provisions of existing Rule 351 of the New York Stock Exchange (NYSE). The text of the proposed rule follows this Notice.
In view of increasing concerns about sales practice abuses of some registered representatives associated with broker/dealers, the NASD's regulation program for 1994 required each District Office to identify and conduct intense sales practice examinations of main offices, branch offices, and individuals associated with such offices who may pose certain regulatory concerns due to, among other things, past misconduct related to abusive sales and trading practices.
In this regard, the NASD has developed an interim automated system that draws on the Central Registration Depository (CRD) and NASD internal regulatory systems to profile and analyze the current registered representative population. When incorporated with NASD regulatory systems that contain, for example, information about all examinations, District Business Conduct Committee (DBCC) disciplinary actions, customer complaints, and terminations for cause, the NASD has the capacity to more precisely and expeditiously profile registered representatives that pose regulatory risks to public investors.
Over the past several years, the NASD has taken a number of actions to increase sanctions for sales practice violations, to emphasize improving the hiring and termination practices of member firms, and to commit additional resources to sales practice cases. Member supervisory systems, practices, and procedures also remain the subject of increased scrutiny. Members employing individuals with a history of compliance or disciplinary problems have also been made aware of their heightened standard of supervisory responsibility that demands that special supervisory practices be designed to address the particular problems of those individuals.
In furtherance of its varied initiatives to address sales practice abuses and supervisory concerns, the NASD is proposing an amendment to Article III of the Rules that will significantly strengthen the NASD's regulatory and surveillance efforts by requiring member firms to report to the NASD the occurrence of certain specified events and summary statistics concerning customer complaints. If adopted, the proposed NASD rule would significantly parallel comparable provisions of NYSE Rule 351.
Critical material information identified in the proposed rule, such as reports on statutory disqualifications, internal disciplinary actions, and quarterly statistical data regarding customer complaints received by a member is not required by Form U-4 or other required filings made with the NASD. As such, this information is not available to the NASD staff on a routine, systematic, or timely basis. In this regard, the NASD believes that the affirmative obligation of members to provide the NASD with notice of certain events concerning member firms or their associated persons will significantly enhance the NASD's ability to quickly identify problem representatives and appropriately respond in a timely manner.
The Securities and Exchange Commission (SEC) supported the NASD adoption of a customer complaint reporting rule similar to NYSE Rule 351 in its Large Firm Project Report issued in conjunction with a cooperative effort involving the NASD, SEC, and NYSE that examined the hiring and retention practices of nine of the largest broker/dealers in the United States. Similarly, the General Accounting Office (GAO) in its report titled Securities Markets: Actions Needed to Better Protect Investors Against Unscrupulous Brokers, recommended that member firms' customer complaint information be computer captured and utilized as an additional tool by regulators for identifying potentially problem firms.
Summary Of The Proposed Amendments
As proposed, Subsection (a) of the rule requires member firms to file a report with the NASD when any of 10 different specified events occurs. These 10 events vary significantly, ranging from situations where a court, government agency, or self-regulatory organization (SRO) has determined there has been a violation of the securities laws, to circumstances where a firm has received a written customer complaint alleging theft or misappropriation of funds or securities, or forgery. Subsection (b) of the proposed rule requires each person associated with an NASD member to properly report to the member the existence of any of the 10 conditions set forth in Subsection (a) of the proposed rule.
Subsection (c) of the rule further requires members to report to the NASD statistical and summary information regarding written customer complaints received by the member firm or relating to the firm or any of its associated persons. Importantly, Subsection (e) of the proposed rule eliminates the possibility of unnecessary regulatory duplication by providing an exemption from filing with the NASD for members already subject to similar reporting requirements of another SRO. NYSE Rule 351 is the only such rule in place at this time.
Recision Of Schedule C, Part V
Currently, Part V of Schedule C to the NASD By-Laws requires members to promptly notify the NASD in writing of any disciplinary action that the member takes against any of its associated persons involving suspension, termination, the withholding of commissions or imposition of fines in excess of $2,500, or any other significant limitation on activities. As this existing disclosure requirement is incorporated into the proposed rule in Subsection (a)(10), the NASD proposes to rescind this part of Schedule C with the adoption of the new rule.
Request For Comment
The NASD asks members and other interested persons to comment on the proposed amendment to the Rules of Fair Practice. Comments should be directed to:
Ms. Joan Conley
National Association of Securities Dealers, Inc.
1735 K Street, NW
Washington, DC 20006-1500.
Comments must be received no later than January 31, 1995. Comments received by this date will be considered by the Board. Before becoming effective, the rule must be adopted by the Board and the membership and then filed with the SEC for its approval.
Text Of Proposed Rule
(Note: New language is underlined.)