[Federal Register Volume 62, Number 81 (Monday, April 28, 1997)]
[Notices]
[Pages 22986-22988]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-10882]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38537; File No. SR-NASD-97-11]
Self-Regulatory Organizations; Order Approving Proposed Rule
Change and Amendment No. 1 by National Association of Securities
Dealers, Inc., Relating to the Release of Disciplinary Information
April 22, 1997.
I. Introduction
On February 11, 1997, the NASD Regulation, Inc. (NASD Regulation'')
filed with the Securities and Exchange Commission (``SEC'' or
``Commission'') pursuant to Section 19(b)(1) of the Securities Exchange
Act of 1934 (``Exchange Act''),\1\ a proposed rule change consisting of
an Interpretation on the Release of Disciplinary Information in IM-
8310-2 of the Rules of the National Association of Securities Dealer's,
Inc. (``NASD''). On March 10, 1997, NASD Regulation filed with the
Commission Amendment No. 1. The proposed rule change and Amendment No.
1 were published for comment in the Federal Register.\2\ One comment
letter was received.\3\ For the reasons discussed below, the Commission
is approving the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1) (1988).
\2\ See Securities Exchange Act Release No. 38380 (March 10,
1997), 62 FR 12866 (March 18, 1997).
\3\ See letter from Steven Alan Bennett, Senior Vice President
and General Counsel, Bank One Corporation, to Mr. Jonathan G. Katz,
Secretary, Securities and Exchange Commission, dated April 7, 1997,
supporting the proposed rule change and Amendment No. 1.
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II. Description of the Proposal
The NASD's Public Disclosure Program (``Program'') currently
provides through the Central Registration Depository (``CRD'') a
synopsis of all pending NASD disciplinary information regarding members
and associated persons, including information on disciplinary
complaints \4\ when they are issued by the Association and disciplinary
decisions when they are issued by any Committee or Board of the
Association. Recently, the Commission approved an amendment that
requires the Association to provide copies of disciplinary complaints
and decisions upon request.\5\
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\4\ This rule filing relates to ``disciplinary complaints,'' and
does not address ``customer complaints.''
\5\ See, Securities Exchange Act Release No. 37797 (October 9,
1996); 61 FR 53984 (October 16, 1996).
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The Interpretation on the Release of Disciplinary Information
(``Interpretation''), contained in IM-8310-2,\6\ currently permits the
Association to issue information regarding certain specified
significant disciplinary decisions when they become final.\7\ The
specified decisions are limited to those that impose sanctions of a
suspension, bar or fine of $10,000 or more.
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\6\ The Interpretation was previously cited as ``Resolution of
the Board of Governors--Notice to Membership and Press of
Suspensions, Expulsions, Revocations, and Monetary Sanctions and
Release of Certain Information Regarding Disciplinary History of
Members and Their Associated Persons'' and appeared after paragraph
2301 of the NASD Manual, following Article V, Section 1 of the Rules
of Fair Practice.
\7\ The publication of information is normally done through a
monthly press release containing information about significant
disciplinary actions that have become final during the preceding
month. In addition, a more detailed press release may be issued on a
more expedited basis about a case of particular importance.
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The Program has expanded to now provide a synopsis of all pending
NASD disciplinary information regarding members and associated persons,
including information on the filing of disciplinary complaints. While
the information is available through CRD, concerns have been raised
because there is a disparity in accessability of the information. The
NASD does not publish, to the membership or the press, the issuance of
a significant complaint regarding a member or associated person with
whom the individual does
[[Page 22987]]
business. Moreover, the current provisions of IM-8310-2 do not permit
the Association to be pro-active in providing notification to the
membership and the press of non-final disciplinary decisions and does
not permit the Association to publicize other (final or non-final)
disciplinary decisions that do not meet the current publication
criteria, but that nonetheless involve a significant policy or
enforcement issue that should be brought to the attention of the
public.
In considering this issue, NASD Regulation believes that the
interests of the public in obtaining improved access to information
concerning significant disciplinary matters must be balanced against
the legitimate interests of respondents not to be subject to unfair
publicity concerning unadjudicated allegations of violations (i.e.,
complaints) and non-final determinations of violations (i.e., non-final
decisions). Proposed Interpretation IM-8310-2 seeks to balance these
interests by authorizing the Association to release information on
disciplinary matters that could most significantly affect investors'
interest and by enhancing the disclosure accompanying the release of
disciplinary information.
The Association would be authorized to release information on those
disciplinary complaints that present the most significant investor
protection issues, i.e. violations of anti-fraud, anti-manipulation,
and sales practices rules that affect investors. In addition, the
Association would be authorized to release to the public information
the President of NASD Regulation determines should be publicized in the
public interest as well as information on any NASD-initiated \8\
disciplinary complaint that contains an allegation of a violation of a
specifically identified statute, rule or regulation of the SEC, NASD,
or Municipal Securities Rulemaking Board (``MSRB'') \9\ that is
determined by the NASD Regulation Board of Directors to involve serious
misconduct that affects investors (``Designated Rules'').\10\ The
Association would also be authorized to release information on final
and non-final disciplinary matters that: (1) Meet the current criteria
for significant disciplinary decisions; (2) meet the specific criteria
proposed for disciplinary complaints, or (3) the President of NASD
Regulation determines should be publicized in the public interest.
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\8\ With respect to the methodology for the release of
information on complaints and decisions, it is anticipated that
information will be released through an omnibus press release (that
is subsequently included in an NASD Notice to Members), a press
release on an individual matter, or through the NASD Regulation
WebSite.
\9\ NASD Regulation maintains the authority and responsibility
to enforce compliance with MSRB rules with respect to member firms.
\10\ NASD Regulation proposed a list of Designated Rules that
included those SEC, NASD, and MSRB rules that prohibit significant
fraudulent activity or egregious conduct. The list of Designated
Rules was published in Securities Exchange Act Release No. 38380
(March 10, 1997), 62 FR 12866 (March 18, 1997). In addition, the
list of Designated Rules will be published in the Notice to Members
announcing the approval of this rule proposal. In the future, any
changes to the list will be filed with the Commission as a proposed
rule change in accordance with Rule 19b-4(e)(1). In addition, the
changes to the list will be published by the Association in a Notice
to Members.
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The proposal also provides for, in limited circumstances, the
release of information on disciplinary complaints that contain
allegations of violations of other rules and regulations not included
on the list of Designated Rules, but nonetheless involve serious
misconduct that could affect investors. Proposed Interpretation IM-
8310-2 would authorize the President of NASD Regulation to issue
information on any complaint or group of complaints that involve a
significant policy or enforcement determination where the release of
the information is deemed to be in the public interest.
In order to ensure that the appropriate disclosures accompany
information on any disciplinary complaint, NASD Regulation proposed to
require that any disciplinary complaint be accompanied by a disclosure
regarding the status of the complaint. The Interpretation currently
requires disclosure that ``the issuance of a disciplinary complaint
represents the initiation of a formal proceeding by the Association in
which findings as to the allegations in the complaint have not been
made and does not represent a decision as to any of the allegations
contained in the complaint.'' The proposed amendment would expand this
disclosure to include the following statement: ``Because this complaint
is unadjudicated, you may wish to contact the respondent before drawing
any conclusions regarding the allegations in the complaint.'' NASD
Regulation believes that this disclosure will help to enable recipients
of the information to view it in an appropriate context and, thereby,
provide appropriate protections to the respondent.\11\
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\11\ While the Association receives request for disciplinary
information from either telephonic inquiries or written inquiries,
the requested information is released in written form and will be
accompanied by the disclosure.
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With respect to non-final disciplinary decisions, NASD Regulation
proposed to amend the Interpretation to require that the current
significance test for release of information on final decisions also be
applied to the release of information on non-final decisions--with the
additional requirement that non-final decisions be accompanied by
appropriate disclosures as to the status of the case.\12\ As a result
of these changes, the Association would be authorized to release
information on non-final disciplinary decisions that impose monetary
sanctions of $10,000 or more, penalties of expulsion, revocation,
suspension, or a bar from being associated with member firms.
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\12\ As proposed, paragraph (c) of Interpretation IM-8310-2
would be redesignated as subparagraph (d)(1) and the provisions that
currently prevent the Association from releasing information on non-
final disciplinary decisions would be deleted.
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Association would be authorized to release information on non-final
disciplinary decisions that impose monetary sanctions of $10,000 or
more, penalties of expulsion, revocation, suspension, or a bar from
being associated with member firms.
In addition, the proposal would require the release of information
on all non-final and final decisions that contain allegations of a
Designated Rule violation, regardless of the extent to the sanction or
whether any sanction had, in fact, been imposed. NASD Regulation
believes that where information on a disciplinary complaint is released
because it includes an allegation of a violation of one or more
Designated Rules, information on the decision involving the same matter
should also be released based on the same public policy interests that
justify the release of compliant information--regardless of whether the
decision results in the finding of a violation and the imposition of
sanction, a dismissal of the allegation, or a reversal of earlier
findings.
NASD Regulation also proposed amending the provision regarding
waiving the release of information in a particular case where the
release of the information would be deemed to violate fundamental
notions of fairness or work an injustice. The proposed amendment
transfers the authority to grant exceptions from the Board of Governors
of the NASD to the National Business Conduct Committee (``NBCC''), in
order to facilitate consideration of any application for an exception
pursuant to the standard NBCC review procedures for motions by
respondents.
III. Discussion
The Commission believes the proposed rule change is consistent with
the Exchange Act and the rules and regulations thereunder applicable to
the NASD. In particular, Section 15A(b)(6)
[[Page 22988]]
of the Exchange Act \13\ requires that the rules of a national
securities association be designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, to foster cooperation and coordination with
persons engaged in regulating, clearing, settling and processing
information with respect to, and facilitating transactions in
securities, to remove impediments to and perfect the mechanism of a
free and open market and a national market system and in general to
protect investors and the public interest. The Commission believes that
the NASD Regulation's proposal to expand the Association's authority to
release information on significant disciplinary complaints and
significant final and non-final disciplinary decisions is consistent
with the Association's obligations to protect investors and the public
interest.
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\13\ 15 U.S.C. Sec. 78o-3.
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The Commission believes investor confidence in NASD members will be
enhanced because more information will be available to the public under
the proposed Interpretation. Moreover, the Commission believes that
providing the public with more complete information on the disciplinary
history of NASD members will aid investors in making informed decisions
with respect to choosing a broker.
IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Exchange Act that the proposed rule change and Amendment No. 1 (SR-
NASD-97-11) be and hereby is approved. The Interpretation IM-8310-2
should become effective 30 days after the date a Notice to Members is
issued announcing adoption of the proposed rule change and containing
the list of Designated Rules. The Notice to Members shall be issued
within 45 days of publication of this approval order in the Federal
Register.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\14\
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\14\ 17 CFR 200.30-3(a)(12) (1989).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-10882 Filed 4-25-97; 8:45 am]
BILLING CODE 8010-01-M
