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92-19 Retention of Jurisdiction; SEC Approval of Amendments to Article III, Section 5 and Article IV, Sections 3 and 4 of the Association's By-Laws, and Article IV, Section V Of the Association's Rules of Fair Practice
On March 23, 1992, the Securities and Exchange Commission (SEC) approved amendments to Article III, Section 5 and Article IV, Sections 3 and 4 of the Association's By-Laws and Article IV, Section 5 of the Association's Rules of Fair Practice. The amendments permit the Association to bring disciplinary actions against member firms who have resigned their membership and associated persons who have terminated their registration, or whose membership or registration has been canceled or revoked, up to two years following the resignation, termination, cancellation, or revocation of their membership or registration. The amendments also clarify that associated persons are required to provide information to the Association pursuant to Article IV, Section 5 of the Rules of Fair Practice so long as the Association retains jurisdiction to file a complaint. The amendments became effective April 15, 1992. The text of the amendments follows the discussion below.
BACKGROUND AND DESCRIPTION OF AMENDMENTS
The SEC has approved amendments to the Association's By-Laws to extend the jurisdiction of the Association to bring disciplinary actions against member firms and associated persons to two years following the resignation, termination, cancellation, or revocation of their membership or registration.
Under the current provisions of the By-Laws, the Association 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 prior to the resignation by the member or termination by the associated person. Under the procedures currently employed by the NASD in processing terminations of associated persons and resignations of member firms, the Association "holds" the effectiveness of the resignation of the membership of a member firm or the termination of the registration of an associated person if the Association is aware of or is investigating potential violations of the NASD's rules or the federal securities laws by the firm or person.
The Association also retroactively holds resignations of membership or terminations of registration if it becomes aware of matters that would have resulted in a hold after the termination has been allowed to take effect. If the Association is not aware of misconduct by an associated person at the time a termination takes effect, the time period for filing a complaint could run out before action is taken. The current procedure to hold and retroactively hold resignation of memberships and terminations of registration is based on the language of the By-Laws, which allows the Association to declare a termination or resignation effective at its discretion.
The NASD has amended Articles III and IV to the NASD By-Laws to extend the current one-year jurisdictional period, which runs from the time the Association permits the resignation or termination to take effect, to a fixed two years from the date a resignation or termination is filed or from the date of the Association's revocation or cancellation of a member or associated person. The amendments eliminate the current provisions of the By-Laws that permit the NASD to hold the effectiveness of the resignation of a member or the termination of an associated person.
The amendments to the By-Laws also provide that the Association will retain jurisdiction over member firms whose membership was canceled or revoked and associated persons whose registration was revoked. The changes correct the situation under the current provisions where the Association retains jurisdiction over a member who resigned or an associated person who terminated his registration but loses jurisdiction over members whose membership was canceled or revoked and associated persons whose registration was revoked.
The amendments also provide that the two-year period commences from the date of the filing of the last amendment to a person's Form U-5 that is filed within the two-year period. This provides for the situation where a routine Form U-5 is filed at the time of termination but a subsequent amendment discloses potential violations that would require an investigation. Starting the two-year period at the time the last Form U-5 amendment is filed will prevent a person from avoiding potential disciplinary action through his own active concealment or the dilatory conduct of others. Moreover, because members are required to send any amended Form U-5 to the terminated person, he or she will have notice of the time from which the two-year period will run. The two-year limit is also consistent with current rules that permit a person to become associated with another member without the need to requalify by examination up to two years from his date of termination.
With respect to members and persons whose registration terminations have not been allowed to take effect pursuant to the hold and retroactive hold procedures currently employed, their terminations are considered effective April 15, 1992, the effective date of the amendments. Therefore, the Association will have two years from that date to file a complaint pursuant to the provisions of the amendments.
The amendments also state that associated persons are required to provide information to the Association pursuant to Article IV, Section 5 of the Rules of Fair Practice so long as they remain subject to the Association's jurisdiction (i.e., two years). In addition, the By-Laws have been amended to provide that the Association may bring a disciplinary action against any associated person who fails to provide information pursuant to Article IV, Section 5 of the Rules of Fair Practice while that person remains subject to the Association's jurisdiction. Thus, associated persons are required to provide information to the Association and may be subject to disciplinary action for failing to respond to a request for information even though the registration has been terminated, canceled or revoked.
Finally, Article IV, Section 5 of the Rules of Fair Practice has been amended to provide that any request for information shall be deemed to have been received by the member or person at their last known address as reflected on the Association's records. This requirement is consistent with the obligations of members and associated persons to update Form BD and Form U-4 to keep the information in those forms current. The ability of members and associated persons to receive proper notice of requests for information will depend on the member's and associated person's compliance with their obligations to update the information on file with the Association.3
The amendments are effective on April 15, 1992. Questions concerning this Notice may be directed to Elliott R. Curzon, Office of General Counsel at (202) 728-8451.
1 A member is required to advise the Association of its resignation of membership on a Form BDW.
2 A member is required to advise the Association of a termination of, or resignation by an associated person, on Form U-5.
3 Article IV, Section 2(a)(3)(c) of the Association's By-Laws states that "[e]very application for registration filed with the Corporation shall be kept current at all times by supplementary amendments to the original application." In addition, the Form U-4 specifically states "[a]n applicant is under a continuing obligation to update information required by Form U-4 as changes occur." Because of the amendments to Article IV, Section 5, announced here, members and associated persons may wish to advise the Association of any changes to the information on file that occur after resignation or termination until such time as the Association no longer has jurisdiction to file a complaint or request information.
AMENDMENTS TO NASD BY-LAWS
(Note: New language is underlined; deleted language is in brackets.)
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Resignation of Members
Sec. 5[(a)] 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. 5(b)] 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.
Current Sections 6-9 renumbered as Sections 7-10, respectively.
Registered Representatives and Associated Persons
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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:
AMENDMENTS TO NASD RULES OF FAIR PRACTICE
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Reports and Inspection of Books for Purposes of Investigating Complaints
Sec. 5. For the purpose of any investigation, or determination as to filing of a complaint or any hearing of any complaint against any member of the Corporation or any person associated with a member made or held in accordance with the Code of Procedure, any Local Business Conduct Committee, any District Business Conduct Committee, or the Board of Governors, or any duly authorized member or members of any such Committees or Board or any duly authorized agent or agents of any such Committee or Board shall have the right (1) to require any member of the Corporation, [or] person associated with a member, or person no longer associated with a member when such person is subject to the Corporation's jurisdiction to report, either informally or on the record, orally or in writing with regard to any matter involved in any such investigation or hearing, and (2) to investigate the books, records and accounts of any such member or person with relation to any matter involved in any such investigation or hearing. No such member or person [associated with a member,] shall [refuse] fail to make any report as required in this Section, or [refuse] fail to permit any inspection of books, records and accounts as may be validly called for under this Section. Any notice requiring an oral or written report or calling for an inspection of books, records and accounts pursuant to this Section shall be deemed to have been received by the member or person to whom it is directed by the mailing thereof to the last known address of such member or person as reflected on the Corporation's records: