02-5548. Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change and by the National Association of Securities Dealers, Inc. Amending NASD Rule 3070 Concerning the Reporting of Criminal Offenses by Members and Persons Associated With ...

March 1, 2002.

Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”),^[1] and Rule 19b-4 thereunder,^[2] notice is hereby given that on February 21, 2002, the National Association of Securities Dealers, Inc. (“NASD” or “Association”) through its wholly owned subsidiary NASD Regulation, Inc. (“NASD Regulation”) filed with the Securities and Exchange Commission (“Commission”) the proposed rule change as described in Items I, II, and III below, which Items have been prepared by NASD Regulation. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons.

I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change

NASD Regulation proposes to amend NASD Conduct Rule 3070 to limit reporting under this category to any felony, certain types of misdemeanors, and substantially equivalent activity in a domestic or foreign court. According to NASD Regulation, this proposed rule change would conform NASD Rule 3070(a)(5) to a proposed rule change by the New York Stock Exchange (“NYSE”) to amend NYSE Rule 351(a)(5).^[3]

The text of the proposed rule change appears below. New text is in italics; deletions are in brackets.

Rule 3070. Reporting Requirements

(a) Each member shall promptly report to the Association whenever such member or person associated with the member:

(1) through (4) No change.

(5) is indicted, or convicted of, or pleads guilty to, or pleads no contest to, [any criminal offense (other than traffic violations)] any felony; or any misdemeanor that involves the purchase or sale of any security, the taking of a false oath, the making of a false report, bribery, perjury, burglary, larceny, theft, robbery, extortion, forgery, counterfeiting, fraudulent concealment, embezzlement, fraudulent conversion, or misappropriation of funds, or securities, or substantially equivalent activity in a domestic or foreign court.

(6) through (10) No change.

(b) through (e) No change.^[4]

II. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change

In its filing with the Commission, NASD Regulation included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. NASD Regulation has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change

(1) Purpose

NASD Regulation proposes to amend NASD Rule 3070(a)(5) to limit reporting under this category to any felony, certain types of misdemeanors, and substantially equivalent activity in a domestic or foreign court. According to NASD Regulation, this proposed rule change would conform NASD Rule 3070(a)(5) to a proposed amendment by the NYSE to NYSE Rule 351(a)(5).

NASD Rule 3070, adopted in 1995,^[5] requires members to promptly report to the NASD the occurrence of 10 specified events (including criminal indictments and convictions, securities law violations, securities or commodities-related litigation or arbitration resulting in an award or judgment exceeding $15,000, customer claims settled for an amount exceeding $15,000, association with a statutorily disqualified person, and certain disciplinary proceedings) and to file quarterly statistical information concerning customer complaints. According to NASD Regulation, NASD Rule 3070 assists the NASD in the timely identification and investigation of problem members, branch offices, and registered representatives that may pose heightened risks to public investors.

NASD Regulation represents that the reporting requirements under NASD Rule 3070 significantly parallel comparable provisions of NYSE Rule 351 as well as the disclosure requirements of the Uniform Application for Securities Industry Registration or Transfer (“Form U-4”). In this regard, any member subject to substantially similar reporting requirements of another self-regulatory organization of which it is a member is exempt from the provisions of NASD Rule 3070.

With respect to criminal offenses, NASD Regulation states that both NASD Rule 3070(a)(5) and NSYE Rule 351(a)(5) currently require members to promptly report to the NASD and NYSE, respectively, when such member or person associated with the member is indicted, convicted of, pleads guilty to, or pleads no contest to any criminal offense other than traffic violations. NASD Regulation believes that this requirement is overly broad, in that it requires members and persons associated with members to report information that is not material to NASD Regulation's regulatory program. NASD Regulation states that the proposed rule change would continue to require members and associated persons to report “any felony,” consistent with Question 23A(1) of the Form U-4,^[6] but it would limit the scope of reportable misdemeanor criminal events to the type of business-related offenses that are required to be reported in response to Question 23B(1) of the Form U-4.^[7] NASD Regulation also believes that the proposed rule change would be consistent with a proposed rule change submitted by the NYSE to amend NYSE Rule 351(a)(5), which would limit the reporting of criminal offenses to: “any felony or any misdemeanor that involves the purchase or sale of any security, the taking of a false oath, the making of a false report, bribery, perjury, burglary, larceny, theft, robbery, extortion, forgery, counterfeiting, fraudulent concealment, embezzlement, fraudulent conversion or misappropriation of funds or securities, or substantially equivalent activity in a domestic or foreign court.” ^[8]

(2) Statutory Basis

NASD Regulation believes that the proposed rule change is consistent with the provisions of sections 15A(b)(6) ^[9] of the Act, which requires, among other things, that the Association's rules must be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, and, in general, to protect investors and the public interest. NASD Regulation believes that the proposed rule change is designed to accomplish these ends by conforming NASD Rule 3070(a)(5) to a proposed rule change to NYSE Rule 351(a)(5) and making NASD Rule 3070(a)(5) more consistent with the reporting requirements of Form U-4.

B. Self-Regulatory Organization's Statement on Burden on Competition

NASD Regulation does not believe that the proposed rule change will result in any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others

NASD Regulation neither solicited nor received written comments.

III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action

Within 35 days of the date of publication of this notice in the Federal Register or within such longer period (i) as the Commission may designate up to 90 days of such date if it finds such longer period to be appropriate and publishes its reasons for so finding, or (ii) as to which the NASD consents, the Commission will:

(A) By order approve such proposed rule change; or

(B) Institute proceedings to determine whether the proposed rule change should be disapproved.

IV. Solicitation of Comments

Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Persons making written submissions should file six copies thereof with the Secretary, Securities and Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549-0609. Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for inspection and copying in the Commission's Public Reference Room. Copies of such filings will also be available for inspection and copying at the principal office of the Association. All submissions should refer to File No. SR-NASD-2002-27 and should be submitted by March 29, 2002.

For the Commission, by the Division of Market Regulation, pursuant to delegated authority.^[10]

Jill M. Peterson,

Assistant Secretary.

Footnotes

1.  15 U.S.C. 78s(b)(1).

2.  17 CFR 240.19b-4.

3.  See Securities Exchange Act Release No. 45404 (February 6, 2002), 67 FR 6565 (February 12, 2002).

4.  The initial text of the proposed rule change stated “(a) through (e) No Change.” In fact, NASD Regulation intended to state “(b) through (e) No Change.” The Commission made this correction to the proposed rule text with the agreement of NASD Regulation. Telephone conversation between Shirley H. Weiss, Associate General Counsel, NASD Regulation, and Christopher Solgan, Law Clerk, Division, Commission, on February 28, 2002.

5.  See Securities Exchange Act Release No. 36211 (September 8, 1995), 60 FR 48182 (September 18, 1995).

6.  Question 23A(1) reads as follows:

Have you ever:

(a) been convicted of or pled guilty or nolo contendere (“no contest”) in a domestic, foreign, or military court to any felony?

(b) been charged with any felony?

7.  Question 23B(1) reads as follows:

Have you ever:

(a) been convicted of or pled guilty or nolo contendere (“no contest”) in a domestic or foreign court to a misdemeanor involving: investments or an investment-related business, fraud, false statements or omissions, wrongful taking of property, or bribery, forgery, counterfeiting or extortion, or a conspiracy to commit any of these offenses?

(b) been charged with a misdemeanor specified in 23(B)(1)(a)?

8.  See Securities Exchange Act Release No. 45404 (February 6, 2002), 67 FR 6565 (February 12, 2002).

9.  15 U.S.C. 78 o-3(b)(5).

10.  17 CFR 200.30-3(a)(12).