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88-31 Proposed Amendments to Article V, Section 1 of the NASD Rules of Fair Practice and Section 12(2) of the Proposed Government Securities Rules: Removal of Fine Limitations

IMPORTANT MAIL VOTE

OFFICERS, PARTNERS, PROPRIETORS

TO: All NASD Members

LAST VOTING DATE IS JUNE 3, 1988

EXECUTIVE SUMMARY

NASD members are invited to vote on a proposed amendment to Article V, Section 1 of the NASD Rules of Fair Practice and Section 12(2) of the proposed Government Securities Rules. The amendments would remove the current limitation of $15,000 that a member or person associated with a member may be fined for each violation of the Rules of Fair Practice or the proposed Government Securities Rules.

The text of the amendments are attached.

BACKGROUND

Article V, Section 1 of the NASD Rules of Fair Practice imposes a limitation on fines that may be assessed in NASD disciplinary proceedings. Currently, a fine of no more than $15,000 per violation may be assessed against a member or a person associated with a member. The NASD Board of Governors has proposed that the current limitation on fines be removed since it inhibits the NASD's ability to adequately redress violations of the NASD's rules. The Board has noted eases in which the number of alleged violations was small but the underlying misconduct was egregious and/or involved substantial sums. In those instances, the NASD's ability to respond appropriately to the gravity of the misconduct was limited because of the current limitation. This restriction undermines the usefulness of fines as a deterrent to future misconduct.

The proposed amendment to Article V, Section 1 of the NASD's Rules of Fair Practice was circulated for member comment in Notice to Members 87-20, dated April 1, 1987. For consistency, the Board of Governors also proposes to make similar amendments to Section 12(2) of the proposed Government Securities Rules. These rules, along with other proposed amendments to the NASD By-Laws and Rules of Fair Practice relating to the NASD's recently expanded jurisdiction over government securities, were published for member vote in Notice to Members 88-1, dated January 4, 1988, and filed with the Securities and Exchange Commission for approval. 1/

PROPOSED AMENDMENTS

The proposed amendments to Article V, Section 1 of the NASD Rules of Fair Practice and Section 12(2) of the proposed Government Securities Rules would eliminate the $15,000 ceiling placed on the amount of the fine that the NASD's District Business Conduct Committees (DBCCs), Market Surveillance Committee (MSC), or Board of Governors may assess for each violation of the Rules of Fair Practice. The amendments would allow a DBCC, the MSC, or the Board to establish the amount of each fine based upon the nature of the violation and other relevant considerations.

SUMMARY OF COMMENTS

The NASD received 35 comments in response to Notice to Members 87-20. Nine generally supported removing the fine limitations and 26 were opposed.

Eight commentators supported the proposal without qualification. Of these, one noted that removing fine limitations would be consistent with the practices of another self-regulatory organization and would provide necessary flexibility to the NASD's DBCCs. One commentator fully supported the proposal but observed that the size of the fine imposed in any individual case should be reasonably related to the degree of misconduct and the net worth of the respondent.

Thirteen commentators opposed the proposal without qualification. Of these, one believed that the proposal would vest too much discretion in DBCCs and feared discrimination against larger institutions; other commentators feared the oppression of smaller firms because of the proposal. Three additional commentators opposed the proposal, but suggested alternative remedies, and 10 opposed the proposal, but favored some increase in the authorized size of the fine which could be imposed for a single violation.

The Board notes recent initiatives that it has taken to promote consistency in imposing remedial sanctions by DBCCs and the MSC pursuant to its oversight role and as an appellate body in the review of disciplinary proceedings. The Board also notes that applications by the New York Stock Exchange and the American Stock Exchange to remove fine limitations in their respective disciplinary rules have recently been approved by the Securities and Exchange Commission.

The NASD Board reviewed the comments and concluded that the amendment to Article V, Section 1 of the NASD Rules of Fair Practice should be adopted. For consistency, the Board also proposes to amend the fine limitations under Section 12(2) of the proposed Government Securities Rules and has added a reference to the NASD's Market Surveillance Committee in both proposals.

The Board of Governors believes that it is important for the NASD to be able to implement the proposed changes in order to enhance the NASD's flexibility in imposing sanctions for serious misconduct. Thus, the Board believes that the proposed amendments are necessary and appropriate and recommends that members vote their approval.

Please mark the attached ballot according to your convictions and return it in the enclosed, stamped envelope to "The Corporation Trust Company." Ballots must be postmarked no later than June 3, 1988.

Questions concerning this notice may be directed to Norman Sue, Jr., Senior Attorney, NASD Office of General Counsel, at (202) 728-8117.

Sincerely,

Frank J. Wilson
Executive Vice President and General Counsel

Attachment

PROPOSED AMENDMENT TO ARTICLE V OF THE NASD RULES OF FAIR PRACTICE*

Penalties

Penalties for Violation of the Rules

Sec. 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 (l) censure any member or person associated with a member and/or (2) impose a fine [not in excess of Fifteen Thousand Dollars ($15,000.00)] 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 of 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 refusal to comply with any orders, directions or decisions issued by any District Business Conduct Committee, Market Surveillance Committee, or by 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 penalty 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 [Section 14] Article III, Section 1 of the Code of Procedure; and provided, further, that all parties to any proceeding resulting in a penalty shall be deemed to have assented to or to have acquiesced in the imposition of such penalty 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.

PROPOSED AMENDMENT TO SECTION 12(2) OF THE PROPOSED GOVERNMENT SECURITIES RULES*

Sanctions for Violation of the Rules

Sec. 12. Any District Business Conduct Committee, Market Surveillance Committee, or the Board of Governors, in the administration and enforcement of the Securities Exchange Act of 1934, the rules and regulations thereunder including the rules of the Treasury Department or these Government Securities 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 [not in excess of Fifteen Thousand Dollars ($15,000.00)] 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 person associated with a member from association with all members; or
(6) impose any other fitting sanction deemed appropriate under the circumstances, for each or any violation of such provisions by a member or person associated with a member or for any neglect or refusal to comply with any orders, directions, or decisions issued by any District Business Conduct Committee or by the Board of Governors in the enforcement of these rules, including any interpretation 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.


1/ See SR-NASD-88-12.

*New language is underlined; deleted language is in brackets.



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