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92-31 SEC Approval of Amendments Relating to the Contingent Suspension of Members and Associated Persons
Legal & Compliance
On May 13, 1992, the Securities and Exchange Commission (SEC) approved amendments to Article V, Section 1 of the NASD Rules of Fair Practice. The amendments permit suspension of members and associated persons in disciplinary actions to be made contingent on the performance of a particular act. The amendments will become effective July 15, 1992. The text of the amendments follows the discussion below.
BACKGROUND AND DESCRIPTION OF AMENDMENTS
On May 13, 1992, the SEC approved amendments to the Article V, Section 1 of the Rules of Fair Practice relating to the use of contingent suspensions in disciplinary actions involving members and associated persons.
Article V, Section 1 of the NASD Rules of Fair Practice currently sets forth the types of sanctions that may be imposed by the Board of Governors (Board) or any District Business Conduct Committee (DBCC) or Market Surveillance Committee (MSC) (collectively, the "NASD") for rule violations. Among several types of sanctions, Section 1 states that the NASD 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). As a result of this requirement that suspensions be for a definite period, Article V, Section 1 currently precludes the imposition of a suspension that does not state a specific duration.
The NASD has often required, as part of the sanctions imposed, that the respondent in a disciplinary action perform a particular act (e.g., make restitution to the victim(s) or requalify for registration by retaking the appropriate qualification examination). Because of the requirement that suspensions be for a definite period, the NASD believes that imposing a requirement to perform a specific act as part of a sanction of suspension may render the suspension indefinite and, therefore, inconsistent with Article V, Section 1.
Under the new language of Article V, Section 1, the NASD will be permitted to impose a suspension that has a duration contingent on the performance of a specific act by the respondent. Thus, the duration of the suspension is controlled by the respondent. This rule change provides the NASD with the flexibility to fashion sanctions that require respondents to undertake and meet certain obligations before being allowed to continue in their status as members or registered persons.
Examples of such contingent suspensions are the suspension of an individual until he requalifies by examination, the suspension of a firm until it meets the limitations imposed by its restrictive agreement, the suspension of a firm or individual until restitution is made to the victim(s), the suspension of a firm or individual until an arbitration award is paid in full, or the suspension of a firm until it institutes additional supervisory safeguards. In addition, a suspension of a specific duration may be combined with a contingent one. For example, an individual could be suspended until he or she requalifies by examination but in no case less than three months. Or, as another example, a firm could be suspended until it hires a Financial and Operations Principal (FINOP) or for 30 days, provided that when the 30 day suspension is completed, the firm will not conduct a business requiring that the firm have a FINOP.
The NASD believes that placing control over the duration of the suspension with the respondent provides incentives that will further the purposes of the securities laws and the disciplinary program by ensuring that remedial measures are taken. A contingent suspension will be particularly useful in cases involving customer losses, as it would provide an incentive to the respondent to make restitution to its victim(s). Customers who are the beneficiaries of such restitution may thereby be relieved of the necessity of obtaining damages through a separate proceeding in arbitration or in the courts.
Questions regarding this Notice may be directed to P. William Hotchkiss, Director, Surveillance Department, at (202) 728-8221, and Elliott R. Curzon, General Counsel's Office, at (202)728-8451.
ARTICLE V OF THE NASD RULES OF FAIR PRACTICE
(Note: New language is underlined.)
Sanctions for Violations of the Rules
Any District Business Conduct Committee, Market Surveillance Committee, the National Business Conduct Committee, any other committee exercising powers assigned by the Board, or the Board, 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 for a period contingent on the performance of a particular act, 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 person associated with a member from association with all members, and/or (6) impose any other fitting sanction 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 such committee or by the Board in the enforcement of these Rules, including any interpretative ruling made by the Board, as any such committee or the board, in its discretion, may deem to be just; provided, however, that no such sanction imposed by any such committee shall take effect until the period for appeal therefrom or review thereof by the National Business Conduct Committee or the Board, as applicable, has expired and any such appeal or review has been completed in accordance with 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 for review thereof pursuant to the Code of Procedure, within fifteen (15) days after the date of the decision rendered in such proceeding.