[Federal Register Volume 61, Number 162 (Tuesday, August 20, 1996)]
[Notices]
[Pages 43107-43109]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-21110]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37561; File No. SR-NASD-96-14]
Self-Regulatory Organizations; National Association of Securities
Dealers, Inc.; Order Approving Proposed Rule Change Relating to the
Requirement That Members Provide Information to Other Regulators for
Regulatory Purposes
August 13, 1996.
I. Introduction
On April 4, 1996, the National Association of Securities Dealers,
Inc. (``NASD'' or ``Association'') submitted to the Securities and
Exchange Commission (``SEC'' or ``Commission''), pursuant to Section
19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\ and Rule
19b-4 thereunder,\2\ a proposed rule change to amend NASD Rules 8210
and 8220.\3\ The proposed rule change was published for comment in the
Federal Register on May 6, 1996.\4\ The Commission received two comment
letters opposing the proposal.\5\ The NASD submitted two letters
supporting its proposal and responding to the Banc One Letter and the
SCG Letter.\6\
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\1\ 15 U.S.C. Sec. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ On April 19, 1996, the NASD filed Amendment No. 1 to the
proposed rule change. Letter from Suzanne E. Rothwell, Associate
General Counsel, NASD, to Mark P. Barracca, Special Counsel,
Division of Market Regulation, SEC, dated April 19, 1996.
\4\ See Securities Exchange Act Release No. 37150 (Apr. 29,
1996), 61 FR 20299 (May 6, 1996) (notice of File No. SR-NASD-96-14).
\5\ See Letter from Steven Alan Bennett, Senior Vice President
and General Counsel, Banc One Corporation, to Jonathan G. Katz,
Secretary, SEC, dated May 28, 1996 (``Banc One Letter''), and Letter
from Joseph W. Mays, Jr., President, Securities Consulting Group,
Inc. (``SCG'') to Jonathan G. Katz, Secretary, SEC, dated June 27,
1996 (``SCG Letter'').
\6\ See Letter from John Ramsay, Deputy General Counsel, NASD
Regulation, Inc. (``NASDR''), to Katherine England, Assistant
Director, Division of Market Regulation, SEC, dated July 2, 1996,
and Letter from John Ramsay, Deputy General Counsel, NASDR, to
Katherine England, Assistant Director, Division of Market
Regulation, SEC, dated July 19, 1996.
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II. Background
Currently, Rule 8210 of the NASD's Procedural Rules provides that
the NASD's District Business Conduct Committees (``DBCC''), Board of
Governors (``Board''), or any duly authorized members or agents of the
Committees or Board may require members and associated persons to
provide information, and may investigate a member's books and records,
in connection with investigations or proceedings conducted by the NASD.
The NASD periodically receives requests from other regulatory
organizations with whom the NASD has entered into agreements to share
regulatory information, including self-regulatory organizations
(``SROs'') who participate in the Intermarket Surveillance Group
(``ISG''),\7\ for information from NASD members in connection with
investigations being conducted by these regulators. Rule 8210, however,
does not expressly permit the NASD to require members to provide
information in connection with investigations being conducted by other
regulatory organizations, or to bring disciplinary action against a
member that refuses to cooperate.
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\7\ The ISG is an organization of securities industry self-
regulatory organizations (``ISG/SROs'') formed in 1983 to coordinate
and develop intermarket surveillance programs designed to identify
and combat fraudulent and manipulative acts and practices. In order
to promote its purposes, members agree to exchange such information
as is necessary for ISG members to perform their self-regulatory and
market surveillance functions. The NASD has been a member of the ISG
since its formation.
The ISG's self-regulatory organization members (ISG/SROs)
include all of the registered securities exchanges and associations:
American Stock Exchange (AMEX), Boston Stock Exchange (BSE), Chicago
Board Options Exchange (CBOE), Chicago Stock Exchange (CHX),
Cincinnati Stock Exchange (CSE), National Association of Securities
Dealers, Inc. (NASD), New York Stock Exchange (NYSE), Pacific Stock
Exchange (PSE), and Philadelphia Stock Exchange (PHLX). In addition,
other domestic contract markets and foreign SROs have been granted
``affiliate'' membership in the ISG: Alberta Stock Exchange (ASE),
Amsterdam Stock Exchange (AMSE), Australian Stock Exchange (ASX),
Chicago Board of Trade (CBOT), Chicago Mercantile Exchange (CME),
London International Financial Futures and Options Exchange (LIFFE),
London Stock Exchange (LSE), Montreal Exchange (ME), New York
Futures Exchange (NYFE), Securities and Futures Authority (SFA),
Toronto Stock Exchange (TSE), and the Vancouver Stock Exchange
(VSE). ISG/SROs and ISG affiliates are referred to herein as ``ISG
participants.''
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III. Description of Proposal
The NASD proposes to amend NASD Rules 8210 and 8220. The NASD is
proposing to amend Rule 8210 to require that members or persons
associated with a member \8\ provide information and access to their
books, records, and accounts to any DBCC, the Market Surveillance
Committee (``MSC''), or the Board, or any duly authorized members or
agents of the Committees or Board for certain purposes. Specifically,
the proposal would require the member or persons associated with a
member to provide information to the above-mentioned Committees, Board,
and members and agents thereof 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 Association or any person
associated with a member made or held by another domestic or foreign
SRO, association, securities or contract market or regulator of these
markets, with whom the Association has entered into an agreement
providing for the exchange of information and other forms of material
assistance for market surveillance, investigative, enforcement or other
regulatory purposes. By amending Rule 8210, the NASD also will have a
clear basis to discipline members and associated persons who fail to
provide information to other domestic or foreign SROs, associations,
securities or contract markets or regulators of such markets with whom
the NASD has information sharing agreements. The NASD also proposes to
amend Rule 8220 to authorize any Market Surveillance Committee to
require any
[[Page 43108]]
member to submit a report in writing with regard to any matter
connected with such member's business or business practices, and to
inspect the books, records and accounts of any member.\9\
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\8\ The term ``persons associated with a member'' includes
persons no longer associated with a member when the persons are
subject to the Association's jurisdiction to report information.
\9\ See Amendment No. 1, supra note 3.
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IV. Summary of Comments
The Commission received two negative comment letters regarding the
proposal to amend Rules 8210 and 8220.\10\ The issues raised therein,
together with responses by the NASD are discussed below.
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\10\ See supra note 5.
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In the Banc One Letter, Banc One objects to the proposed rule
change as being overly broad and as subjecting members to jurisdictions
that might not otherwise have authority over such members. Banc One
states that while the NASD has the authority to require its members to
produce books, records and other information, it has the responsibility
to protect its members from unwarranted investigations that are costly
and time consuming and should be undertaken through the proper
authorities at the NASD. Banc One states that the NASD already has
examination, surveillance, and enforcement authority over its members
and that to extend this authority to other self-regulatory
organizations or governmental agencies is unnecessary. Banc One also
objects to the proposed rule as being potentially costly and stated
that the proposed rule seems to tip the balance between the efficient
operation of broker-dealers without regulatory interference and the
fight against manipulative and fraudulent activities in favor of the
latter and to the detriment of the former. Lastly, Banc One states that
the proposed rule has no provision to protect confidential or
proprietary information provided to other regulators and that members
should not be required to provide the information without receiving the
protections provided by the NASD.
In response to the Banc One Letter, the NASD states that the NASD
is not subjecting, and does not have the authority to subject, members
and their associated persons to the jurisdictions of regulatory
authorities beyond the limits that currently apply under existing legal
standards. The NASD states that it is making explicit that under its
own jurisdiction the NASD has the authority, through the Board, the MSC
or any DBCC, to require members to respond orally or in writing and to
investigate the books and records of the member with regard to
investigations and other regulatory actions by other regulators with
whom the NASD has entered into information sharing agreements.
According to the NASD, these entities would direct their requests to
the NASD, which will serve as the intermediary between the member and
the requesting entity. Moreover, the NASD states that all requests by
these entities would be subject to the NASD's rules and regulations.
Therefore, members or associated persons required to provide
information under the proposed rule would continue to have the same
rights and procedural protections that they would have if the NASD had
initiated the request for information.
The NASD states that it recognizes that the imposition of any rule
or regulation may result in certain administrative, compliance or
enforcement costs, however, the NASD does not believe that the proposed
rule will impose excessive regulatory interference at the expense of
broker-dealer efficiency. Moreover, the NASD states that the authority
provided under the proposed rule is discretionary, and, therefore, it
may refuse another entity's request for information if, for example,
the purpose of the request falls outside the purposes of the proposed
rule.
Finally, the NASD states that, as a member of the ISG, it is bound
by certain restrictions on information obtained under the ISG
agreement. Among these restrictions, is the requirement that a
recipient of the information obtain written consent of the party
furnishing the information prior to making the information available to
its non-regulatory departments or any subsidiary or affiliated entity.
In the SCG Letter, the SCG objects to the NASD's proposal as being
unconstitutional. The SCG argues that the proposed rule violates NASD
members' right of due process and the right of privacy as it does not
require clients of members to give their permission for their
confidential files to be released. The SCG also inquires whether a
client of a NASD member could have a meritorious claim against the NASD
or the NASD member if a NASD member released private and confidential
information.
In response to the SCG Letter, the NASD states that constitutional
safeguards against the deprivation of certain rights do not apply to
the NASD because the NASD is not a governmental entity. Nevertheless,
the NASD states that any information provided under the proposed rule
may be used only for legitimate regulatory and enforcement purposes.
The NASD states that ISG participants are bound by certain restrictions
on information obtained from other ISG participants for regulatory and
enforcement purposes. Under the ISG agreement, information obtained by
ISG participants may not be made available by the recipient to its non-
regulatory departments or any subsidiary or affiliated entity without
the written consent of the party furnishing the information, and may
only be provided to the SEC or Commodity Futures Trading Commission
(``CFTC''), or pursuant to an order of the court or other lawful
process, or as is necessary for conducting any investigation or
disciplinary proceeding.
V. Discussion
After careful consideration of the comments and the NASD's
responses thereto, the Commission has determined to approve the
proposed rule change. The Commission finds that the proposed rule
change is consistent with the requirements of the Act and the rules and
regulations thereunder applicable to the Association, and, in
particular, with the requirements of Section 15A(b)(6) of the Act,\11\
which require, among other things, that the rules of the Association be
designed to foster cooperation and coordination with persons engaged in
regulating securities transactions. The proposed rule change is
consistent with these objectives in that it clarifies the Association's
authority to require members and persons associated with a member to
provide information to any DBCC, the MSC, or the Board, or any duly
authorized members or agents of the Committees or Board for regulatory
purposes and to discipline those members or persons associated with
members who fail or refuse to provide such information. The Commission
notes that most of the other ISG participants have amended their rules
to clarify their investigatory and information sharing authority.\12\
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\11\ 15 U.S.C. Sec. 78o-3.
\12\ The CBOE recently amended Rule 15.9(b) to require its
members and associated persons, at the request of the CBOE, to
furnish testimony, documentary evidence or other information in
connection with any inquiry by a domestic or foreign self-regulatory
organization, association, contract market, or regulator of such
market with whom the CBOE has entered into an agreement providing
for the exchange of information and other forms of mutual assistance
for market surveillance, investigative, enforcement and regulatory
purposes. Securities Exchange Act Release No. 35403 (Feb. 22, 1995),
60 FR 10884 (Feb. 28, 1995) (order approving File No. SR-CBOE-94-
39). The PSE recently amended Rule 10.2(d) to require PSE members,
member organizations, persons associated with a member or member
organization, and other persons or entities over whom the PSE has
jurisdiction pursuant to Rule 10.1(b) to testify before another SRO
and to furnish information in connection with a regulatory inquiry,
investigation, examination, or disciplinary proceeding resulting
from an agreement entered into by the PSE pursuant to Rule 14.1.
Securities Exchange Act Release No. 35646 (Apr. 25, 1995), 60 FR
21227 (May 1, 1995) (order approving File No. SR-PSE-95-02). The
NYSE recently amended Rules 27, 476(a)(11), and 477 to require
persons under Exchange jurisdiction to comply with information
requests from domestic commodities markets and associations and
foreign self-regulatory organizations and associations as well as
from domestic securities markets. Securities Exchange Act Release
No. 37476 (July 24, 1996) (order approving File No. SR-NYSE-95-43).
Currently, Art. V, Sec. 4(a) of the AMEX Rules facilitates
examinations being conducted by another exchange.
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[[Page 43109]]
The Commission believes that the amendment to Rule 8210, requiring
members and associated persons to provide information to the NASD for
the purpose of investigations made by another domestic or foreign SRO,
association, securities or contract market or regulator of the markets,
for market surveillance, investigative, enforcement or other regulatory
purposes is appropriate. As previously in effect, Rule 8210 may have
limited the NASD by not clearly providing the NASD's Committees and
Board with the authority to require members to provide such
information. Moreover, Rule 8210 did not provide the MSC with any
authority to require members and associated persons to provide
information. By adding the MSC to the list of entities, which may
require members and associated persons to provide information and
expanding the circumstances under which these entities may require
information, the amendment furthers the interest of the public and
provides for the protection of investors by allowing the Association to
assist other regulators to conduct prompt inquiries into possible
trading violations and other possible misconduct.
The Commission also believes that the amendment to Rule 8210
provides the Association with a basis on which to initiate a
disciplinary proceeding when those under its jurisdiction fail to
cooperate with requests for information, and, therefore, furthers the
interest of the public and provides for the protection of investors by
allowing the Association to appropriately discipline those members that
engaged in misconduct.
The Commission also believes that the amendment to Rule 8220,
expanding the NASD's authority to require a member or persons
associated with a member to comply with any requests to report, orally
or in writing, submit books, records, or accounts, for the purpose of
any investigation initiated by the NASD or another entity will further
the interest of the public and provides for the protection of investors
by allowing certain organizations and associations to acquire
information necessary to ensure that NASD members are conducting
business in conformance with applicable laws and regulations.
Finally, the Commission believes that the proposed rule change
achieves a reasonable balance between the need for regulatory
cooperation and protection of the procedural rights of NASD members and
others from who information or testimony is requested. The rule
provides the Association with the authority to seek cooperation by
certain persons with respect to inquiries and investigations resulting
from regulatory agreements between the Association and other SROs and
associations while providing any person or entity required to furnish
information or testimony pursuant to the rule with the same procedural
rights that they would have as if the request were pursuant to an NASD
initiated inquiry or investigation.
VI. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\13\ that the proposed rule change (SR-NASD-96-14) is approved.
\13\15 U.S.C. Sec. 78s(b)(2).
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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).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-21110 Filed 8-19-96; 8:45 am]
BILLING CODE 8010-01-M
