Proposed Amendments to Article XIV of the NASD By-Laws and Article V, Sections 1 and 2 of the NASD Rules of Fair Practice Concerning Disciplinary Sanctions
IMPORTANT MAIL VOTE
OFFICERS, PARTNERS AND PROPRIETORS
TO: All NASD Members
LAST VOTING DATE IS MARCH 21, 1987.
EXECUTIVE SUMMARY
Members are invited to vote on amendments to the NASD By-Laws and Rules of Fair Practice that would effect certain technical and conforming changes to reflect the NASD's position on the use of disgorgement as a sanction in disciplinary proceedings. These amendments would include disgorgement orders in the enumeration of available sanctions and would expressly authorize the NASD to invoke summary suspension, expulsion or revocation proceedings for failure to pay a disgorgement order.
Prior to becoming effective, the amendments must be approved by the NASD membership and the Securities and Exchange Commission.
The texts of the proposed amendments are attached as Exhibits 1 and 2.
BACKGROUND
In appropriate cases, the NASD has required respondents in disciplinary actions to disgorge to the NASD monetary gain realized as a consequence of their misconduct. This sanction is premised upon the NASD's position that a respondent should not be permitted to profit from wrongdoing. The NASD's authority to impose an order of disgorgement is based upon Section 15A(b)(7) of the Securities Exchange Act of 1934, which enumerates the sanctions permitted to be imposed by a national securities association. It concludes with the authority to impose "any other fitting sanction." (This language is also found in Article XIV of the NASD By-Laws.)
An order to disgorge ill-gotten gains is a fitting sanction in situations where a member or person associated with a member would otherwise retain profits earned in violation of the rules and regulations governing the securities industry. The NASD Board of Governors has approved amendments to the By-Laws and Rules of Fair Practice for the purpose of incorporating references to disgorgement in the provisions that pertain to the imposition of sanctions.
PROPOSED AMENDMENTS
Article XIV of the NASD By-Laws sets forth the powers of the Board of Governors to prescribe sanctions. Subsection (e) provides that sanctions may be prescribed for failure to "adhere to any ruling, order, direction or decision of, or to pay any penalty, fine or costs, imposed by the Board of Governors or any District Business Conduct Committee." The proposed amendment would add disgorgement orders to the items enumerated in Subsection (e).
Article V, Section 1 of the NASD Rules of Fair Practice sets forth the sanctions that may be imposed by the Board of Governors and the District Business Conduct Committees. It states in part that these bodies may "impose any other fitting penalty deemed appropriate under the circumstances. . . ." (emphasis added) The proposed amendment would substitute the word "sanction" for the word "penalty" to conform the language used in the Rule of Fair Practice to that used in the NASD By-Laws.
Article V, Section 2 of the NASD Rules of Fair Practice sets forth provisions for payment to the NASD of fines imposed and costs assessed by the Board of Governors or a District Business Conduct Committee. It also provides that members may be summarily suspended or expelled and that the registration of a person associated with a member may be revoked, upon seven days' notice, for failure to pay any such fines or costs. The proposed amendment would bring other monetary sanctions, such as disgorgement, expressly within the scope of this section.
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The Board of Governors believes that these clarifying and conforming amendments to the NASD By-Laws and the NASD Rules of Fair Practice 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 March 21, 1987.
Questions regarding this notice may be directed to Jacqueline D. Whelan, Attorney, NASD Office of the General Counsel, at (202) 728-8270.
Sincerely,
Frank J. Wilson
Executive Vice President and General Counsel
Attachments
Exhibit 1
PROPOSED AMENDMENT TO ARTICLE XIV OF THE NASD BY-LAWS
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Powers of Board to Prescribe Sanctions
The Board of Governors is hereby authorized to prescribe appropriate sanctions applicable to members, including censure, fine, suspension or expulsion from membership, suspension or barring from being associated with all members, limitation of activities, functions and operations of a member, or any other fitting sanction, and to prescribe appropriate sanctions applicable to persons associated with members, including censure, fine, suspension or barring a person associated with a member from being associated with all members, limitation of activities, functions and operations of a person associated with a member, or any other fitting sanction, for:
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Exhibit 2
PROPOSED AMENDMENTS TO ARTICLE V OF THE NASD RULES OF FAIR PRACTICE
[New text is underlined; deleted text is in brackets.]
[Penalties] Sanctions for Violation of the Rules
Sec. 1. Any District Business Conduct Committee, or the Board of Governors, in the administration and enforcement of these 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 [penalty] sanction 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 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 sanction imposed by any District Business Conduct Committee shall take effect until the period for appeal therefrom or review has expired, as provided in Section 14 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.
Payment of Fines, Other Monetary Sanctions, or Costs
Sec. 2. All fines and other monetary sanctions shall be paid to the Treasurer of the Corporation and shall be used for the general corporate purposes. Any member who fails promptly to pay any fine or other monetary sanction imposed pursuant to Section 1 of this Article, or any costs imposed pursuant to Section 3 of this Article after such fine, monetary sanction, or costs has become finally due and payable, may after seven (7) days' notice in writing be summarily suspended or expelled from membership in the Corporation. A member may also be summarily suspended or expelled from membership in the Corporation if the member fails to immediately terminate the association of any person who fails promptly to pay any fine or other monetary sanction imposed pursuant to Section 1 of this Article, or any costs imposed pursuant to Section 3 of this Article after such fine, monetary sanction, or costs has become finally due and payable after seven (7) days' notice in writing. The registration of a person associated with a member, if any, may be summarily revoked if such person fails promptly to pay any fine or other monetary sanction imposed pursuant to Section 1 of this Article, or any costs pursuant to Section 3 of this Article after such fine, monetary sanction, or costs has become finally due and payable after seven (7) days' notice in writing.