NASD Notice to Members 96-02 - January 1996

SEC Approves Amendments to Article II, Section 4 of the NASD By-Laws to Include Statutory Disqualification Provisions Adopted by Congress

Full Notice Text

On November 8, 1995, in Rel. No. 34-36466; SR-NASD-95-45, the Securities and Exchange Commission (SEC) approved amendments to Article II, Section 4 of the NASD®By-Laws to conform the NASD's eligibility criteria to changes adopted by Congress in 1990 to the statutory disqualification provisions found in Sections 3(a)(39) and 15(b)(4) of the Securities Exchange Act of 1934 (the Act).

 

Background

 

Section 15(A)(g)(2) of the Act gives the NASD the authority to bar a person from becoming or remaining associated with an NASD member if the person is or becomes subject to a statutory disqualification as defined in Sections 3(a)(39) and 15(b)(4) of the Act. The NASD's eligibility criteria in Article II, Section 4 of the By-Laws have followed the statutory disqualification provisions in the Act. In November 1990, Congress amended the statutory disqualification provisions of the Act to include all felony convictions for 10 years from the date of the conviction and to include various foreign regulatory actions.

 

Description Of Amendments

 

The NASD, in the interest of uniformity and consistency, has amended Article II, Section 4 of the By-Laws to add the changes that were adopted by Congress in 1990. All felony convictions will be statutory disqualifications for 10 years from the date of the conviction. Various foreign regulatory actions will be statutory disqualifications as well. Members are reminded, as was discussed in Notices to Members 90-2, that they cannot employ or have associated with them in any capacity a person subject to a statutory disqualification, unless such employment or association has been approved in advance by the NASD and, where applicable, the SEC.

 

Questions regarding this Notice may be directed to Craig L. Landauer, Associate General Counsel, Office of General Counsel, at (202) 728-8291.

 

Text Of New Rule

 

(Note: New text is shown by xxx; deletions are bracketed.)

 

ARTICLE II QUALIFICATIONS OF MEMBERS AND ASSOCIATED PERSONS

 

Sec. 1 through Sec. 3 No change.

 

Sec. 4. Definition of Disqualification

 

A person is subject to a "disqualification" with respect to membership, or association with a member, if such person:

 

[Commission and Self-Regulatory Organization Disciplinary Sanctions]

 

(a) has been and is expelled or suspended from membership or participation in, or barred or suspended from being associated with a member of, any self-regulatory organization, foreign equivalent of a self-regulatory organization, foreign or international securities exchange, contract market designated pursuant to Section 5 of the Commodity Exchange Act, or foreign equivalent of a contract market designated pursuant to [or futures association, registered under Section 17 of such Act, or] any substantially equivalent foreign statute or regulation, or futures association registered under Section 17 of the Commodity Exchange Act or a foreign equivalent of a futures association designated pursuant to any substantially equivalent foreign statute or regulation, or has been and is denied trading privileges on any such contract market or foreign equivalent;

 

(b) [is subject to an order of the Commission or, other appropriate regulatory agency denying, suspending for a period not exceeding twelve months, or revoking his registration as a broker, dealer, municipal securities dealer (including a bank or department or division of a bank), or government securities broker or dealer or barring or suspending him from being associated with a broker, dealer, or municipal securities dealer (including a bank or department or division of a bank), or is subject to an order of the Commodity Futures Trading Commission denying, suspending, or revoking his registration under the Commodity Exchange Act;]

is subject to

 

(1) an order of the Commission, other appropriate regulatory agency, or foreign financial regulatory authority:

 

(i) denying, suspending for a period not exceeding 12 months, or revoking his registration as a broker, dealer, municipal securities dealer, government securities broker, or government securities dealer or limiting his activities as a foreign person performing a function substantially equivalent to any of the above; or

 

(ii) barring or suspending for a period not exceeding 12 months his being associated with a broker, dealer, municipal securities dealer, government securities broker, government securities dealer, or foreign person performing a function substantially equivalent to any of the above;

 

(2) an order of the Commodity Futures Trading Commission denying, suspending, or revoking his registration under the Commodity Exchange Act (7 U.S.C. 1 et seq.); or

 

(3) an order by a foreign financial regulatory authority denying, suspending, or revoking the person's authority to engage in transactions in contracts of sale of a commodity for future delivery or other instruments traded on or subject to the rules of a contract market, board of trade, or foreign equivalent thereof;

 

(c) by his conduct while associated with a broker, dealer, municipal securities dealer [(including a bank or department or division of a bank)], [or] government securities broker, or government securities dealer, or while associated with an entity or person required to be registered under the Commodity Exchange Act, has been found to be a cause of any effective suspension, expulsion or order of the character described in subsections (a) or (b) of this Section;

 

(d) by his conduct while associated with any broker, dealer, municipal securities dealer, government securities broker, government securities dealer, or any other entity engaged in transactions in securities, or while associated with an entity engaged in transactions in contracts of sale of a commodity for future delivery or other instruments traded on or subject to the rules of a contract market, board of trade, or foreign equivalent thereof, has been found to be a cause of any effective suspension, expulsion, or order by a foreign or international securities exchange or foreign financial regulatory authority empowered by a foreign government to administer or enforce its laws relating to financial transactions as described in subsection (a) or (b) of this Section;

[(d)]

 

(e) has associated with him any person who is known, or in the exercise of reasonable care should be known, to him to be a person described in subsections (a), (b), [or] (c), or (d) of this Section;

 

[Misstatements]

 

[(e)]

 

(f) has willfully made or caused to be made in any application for membership in a self-regulatory organization, or to become associated with a member of a self-regulatory organization, or in any report required to be filed with a self-regulatory organization, or in any proceeding before a self-regulatory organization, any statement which was at the time, and in light of the circumstances under which it was made, false or misleading with respect to any material fact, or has omitted to state in any such application, report, or proceeding any material fact which is required to be stated therein;

 

[Convictions]

 

[(f)]

 

(g)

 

(1) has been convicted within ten years preceding the filing of any application for membership in the Corporation, or to become associated with a member of the Corporation, or at any time thereafter, of any felony or misdemeanor or of a substantially equivalent crime by a foreign court of competent jurisdiction which:

 

[(1)]

 

(i) involves the purchase or sale of any security, the taking of a false oath, the making of a false report, bribery, perjury, burglary, any substantially equivalent activity however denominated by the laws of the relevant foreign government, or conspiracy to commit any such offense;

 

[(2)]

 

(ii) arises out of the conduct of the business of a broker, dealer, municipal securities dealer, [or] government securities broker, [or] government securities dealer, investment adviser, bank, insurance company, fiduciary, transfer agent, foreign person performing a function substantially equivalent to any of the above, or any entity or person required to be registered under the Commodity Exchange Act or any substantially equivalent foreign statute or regulation;

 

[(3)]

 

(iii) involves the larceny, theft, robbery, extortion, forgery, counterfeiting, fraudulent concealment, embezzlement, fraudulent conversion, or misappropriation of funds or securities, or substantially equivalent activity however denominated by the laws of the relevant foreign government; or

 

[(4)]

 

(iv) involves the violation of Sections 152, 1341, 1342 or 1343 or Chapters 25 or 47 of Title 18, United States Code[;], or a violation of a substantially equivalent foreign statute;

 

(2) has been convicted within ten years preceeding the filing of any application for membership in the Corporation, or to become associated with a member of the Corporation, or at any time thereafter of any other felony.

 

[Injunctions]

 

[(g)]

 

(h) is permanently or temporarily enjoined by order, judgment, or decree of any court of competent jurisdiction from acting as an investment adviser, underwriter, broker, dealer, [or] municipal securities dealer, government securities broker, [or] government securities dealer, transfer agent, foreign person performing a function substantially equivalent to any of the above, (or) entity or person required to be registered under the Commodity Exchange Act, or any substantially equivalent foreign statute or regulation, [municipal securities dealer (including a bank or department or division of a bank)], or [government securities broker or dealer or] as an affiliated person or employee of any investment company, bank, insurance company, foreign entity substantially equivalent to any of the above, or from engaging in or continuing any conduct or practice in connection with any such activity, or in connection with the purchase or sale of any security.

 

(i) has been found by a foreign financial regulatory authority to have:

 

(1) made or caused to be made in any application for registration or report required to be filed with a foreign financial regulatory authority, or in any proceeding before a foreign financial regulatory authority with respect to registration, any statement that was at the time and in the light of the circumstances under which it was made false or misleading with respect to any material fact, or has omitted to state in any application or report to the foreign financial regulatory authority any material fact that is required to be stated therein;

 

(2) violated any foreign statute or regulation regarding transactions in securities, or contracts of sale of a commodity for future delivery, traded on or subject to the rules of a contract market or any board of trade;

 

(3) aided, abetted, counseled, commanded, induced, or procured the violation by any person of any provision of any statutory provisions enacted by a foreign government, or rules or regulations thereunder, empowering a foreign financial regulatory authority regarding transactions in securities, or contracts of sale of a commodity for future delivery, traded or subject to the rules of a contract market or any board of trade, or has been found, by a foreign financial regulatory authority, to have failed reasonably to supervise, with a view to preventing violations of such statutory provisions, rules, and regulations, another person who commits such a violation, if such other person is subject to his supervision.