Adoption of New Rule of Fair Practice Relating to Permission for Members to Alter Their Methods of Operation Under SEC Rule 15c3-3 (the "Customer Protection Rule")
TO: All NASD Members
The Securities and Exchange Commission has adopted amendments to the NASD Rules of Fair Practice and Code of Procedure which were approved by a membership vote pursuant to Notice to Members 85-43, dated June 12, 1985.
The new rules provide the NASD with an additional regulatory tool in monitoring the financial and operational condition of members that are not designated to another self-regulatory organization for financial responsibility purposes. The new rule provides the NASD with the authority to evaluate, in advance and on a case-by-case basis, a firm's capacity to alter the nature of its business by changing its exempt status under SEC Rule 15c3-3 so as to increase customer financial exposure. The rule is designed to ensure that a member has the necessary capabilities, including adequate net capital and qualified personnel, to conduct the type of business it plans.
The rule requires an existing member to obtain the NASD's prior written approval before altering its method of operations by changing its exempt status under the Customer Protection Rule. This approval is obtained by submitting a written request to the district office in which the firm is located describing the procedures the member has established to effect an orderly transition of its business. Requirements for approval are contained in new Section 39 of Article III of the Rules of Fair Practice.
Amendments to Article V of the NASD Code of Procedure set forth the time frames for action and the appellate rights of members. In general, the district staff is required to notify a member in writing of its decision to approve or disapprove the change within 15 business days of receipt of the application. If approval is denied by the district staff or if approval is granted with modifications, procedures are provided for a member to appeal that decision to the District Business Conduct Committee, the NASD Board of Governors and, ultimately, to the Securities and Exchange Commission. A copy of the text of the new rules, which are effective immediately, is enclosed with this notice.
Any comments or questions regarding this notice or the application of the rule should be directed to Thomas R. Cassella, Director, NASD Financial Responsibility, at (202) 728-8237.
Frank J. Wilson
Executive Vice President and General Counsel
PROPOSED RULE OF FAIR PRACTICE
Proposed Article III, Section 39 of the Rules of Fair Practice
PROPOSED ADDITION TO THE CODE OF PROCEDURE
Procedures Under Article III, Section 39 of the Rules of Fair Practice
Applications for approval of a change in exemptive status under SEC Rule 15c3-3, required pursuant to Article III, Section 39 of the Rules of Fair Practice, shall be made by filing a written request with the District Office in which the member's principal place of business is located. Such request shall address the criteria set forth in Section 39(c) of Article III of the Rules of Fair Practice. Within fifteen (15) business days of the receipt of such application, the District staff shall make a determination and inform the member, in writing, of its decision to approve, deny or amend the member's request as submitted. If the decision is to deny or amend the member's request in any way, the written decision shall set forth the reasons for such action.
Whenever a request under subparagraph (b) of Article III, Section 39 of the Rules of Fair Practice is denied in whole or in part by the District staff, the member may, within five (5) business days of receipt of the District's determination letter, petition the District Business Conduct Committee ("DBCC" or "District Committee") for review of such decision. The member will have the opportunity to be heard and to present the reasons why it believes that the decision by the staff should be set aside or modified. Such hearing shall be held before the DBCC or a designated subcommittee thereof within seven (7) business days of receipt of the petition for review. The member shall be entitled to be represented by counsel and a record shall be kept of the proceeding. Thereafter, the District Committee shall, within five (5) business days of the hearing or within five (5) business days of receipt of the member's petition for review if the member waives a hearing and elects to proceed by written petition, issue a written decision affirming, modifying or setting aside the District staff decision and setting forth the reasons for such action. This written decision shall also provide for an appropriate sanction to be immediately imposed for failure to comply with the Committee's determination.
The written decision issued by the District Committee pursuant to subsection (b) shall be subject to review by the Board of Governors upon application by the member filed within five (5) business days of the date of the decision, or the matter may be called for review by the Board on its own motion within thirty (30) calendar days of the District Committee's decision. In the case of an appeal, the member shall be entitled to a hearing before a subcommittee of the Board within fifteen (15) business days. If called for review by the Board on its own motion, the member shall be entitled to a hearing within thirty (30) business days of such call for review. The member shall be entitled to be represented by counsel. Instituting a review, whether by application or on the action of the Board, shall not act as a stay of the action taken by the DBCC unless otherwise ordered by the Board.
Upon consideration of the record, the Board of Governors shall, in writing, affirm, modify, reverse or dismiss the decision of the DBCC or remand the matter to the District for further proceedings consistent with its instructions. If a hearing is held, a decision, which shall be the final action of the Board, shall be issued within five (5) business days of the hearing. If no hearing is requested, the matter shall be considered based on the record and a decision shall be issued promptly. In its decision, the Board shall set forth the specific grounds upon which its determination is based and shall provide for an appropriate sanction to be immediately imposed for failure to comply with its directives. Board action restricting the member's activity shall become effective immediately upon issuance of its decision and shall remain in effect until the limitation is removed or modified by the DBCC.
In any case where a member is aggrieved by an action taken or approved by the Board of Governors, such member may make application for review to the Securities and Exchange Commission in accordance with Section 19 of the Securities Exchange Act of 1934, as amended. There shall be no stay of the Board's action upon appeal to the Commission unless the Commission determines otherwise.