Proposed Amendment to Article V, Section 1 of the NASD Rules of Fair Practice Regarding the Suspension of the Membership of Any Member or of the Registration Of a Person Associated With a Member for a Definite Period Assessed as a Sanction For a
Members are invited to vote on a proposed amendment to Article V, Section 1 of the NASD Rules of Fair Practice. The amendment would exclude from the rule the requirement that suspensions of membership or suspensions of the registration of associated persons be for a specific length of time. The amendment would allow the NASD to impose, as a sanction for a rule violation, a suspension either of membership or of the registration of an associated person effective until such person or member proves he or she has undertaken a certain activity required by the NASD as part of the sanction imposed. The text of the proposed amendment follows this notice.
Section 15A(b)(7) of the Securities Exchange Act of 1934 provides in part that, in order for an association to be registered as a national securities association, its rules must provide that its members and persons associated with its members will be appropriately disciplined by expulsion, suspension, limitation of activities, or other fitting sanctions. Article V, Section 1 of the NASD Rules of Fair Practice sets forth the sanctions that may be imposed by the NASD Board of Governors ("Board") or any District Business Conduct Committee (DBCC) or Market Surveillance Committee (MSC) (collectively, the "Committees") for rule violations. It states, in part, that the Committees or the Board may "suspend the membership of any member or suspend the registration of a person associated with a member, if any, for a definite period ..." (emphasis added). The proposed amendment would delete the words "for a definite period," thereby allowing the Board and any DBCC or MSC to impose a suspension without specifying a definite period for the duration of the suspension.
Currently, Article V, Section 1 limits the imposition of suspensions in that it requires that all suspensions imposed by any DBCC, MSC, or the Board specify the term of the suspension. The requirement effectively precludes the imposition of a suspension that is of indefinite duration, such as suspensions ordered to remain effective until an arbitration award is paid or until the respondent proves restitution, among others. The termination of a suspension of this type is contingent on the completion by the associated person or member of an additional requirement imposed by the Board or the Committees. Such suspensions are useful, particularly in cases involving customer losses.
In appeals of NASD disciplinary actions, the Securities and Exchange Commission has rejected suspensions imposed under similar circumstances, stating that the suspensions violated Article V, Section 1 in that their lengths were indefinite. The proposed amendment seeks to eliminate the self-imposed prohibition and provide the Board and the DBCCs and MSCs with greater leeway in crafting sanctions.
A significant number of disciplinary actions brought by the DBCCs or MSCs involve scenarios in which, as part of the sanction imposed, the DBCC or MSC seeks to require that the member or associated person perform a particular act. Suspensions contingent on receipt of proof that the member or associated person has performed the act is an alternative that will allow the Committees and the Board to formulate sanctions that meet the Association's diverse needs.
The amendment will enable the Committees and the Board to ensure that the penalties imposed in disciplinary actions afford a measure of customer protection and preclude registered individuals from associating with NASD members, and members from acting in their registered capacities, unless and until they perform the required activity.
An amendment identical to the version published for vote here was published for comment in Notice to Members 90-74 (November 1990). The NASD received nine comments on the proposed amendment, three generally in favor and six generally opposed. Of the six entities that expressed opposition to the amendment, most were concerned with the complications that may arise through the NASD's use of an indefinite suspension as a means of requiring restitution of customer losses. A number of the comments suggested alternatives to the rule change, and one comment expressed concern about broadening the NASD's authority.
After consideration of these comments, the Board of Governors felt that the requirement that suspensions be imposed for definite periods should be eliminated in order to enable the Board and Committees to fashion sanctions that meet the individual requirements of each disciplinary matter. The Board believes that the amendment will provide the Committees and the Board with needed flexibility in determining penalties and allow them the opportunity to require that registered persons or members undertake certain activities before being allowed to continue in their status as members or registered persons. The Board does not believe that the amendment grants the Association unlimited power in fashioning sanctions, and it believes that the amendment will better enable the NASD to meet its regulatory responsibilities successfully.
SUMMARY OF PROPOSED AMENDMENTS
The NASD is proposing to amend Article V, Section 1 of the Rules of Fair Practice to provide the NASD with the ability to impose suspensions of membership and of the registration of associated persons until the member or associated person proves that he or she has completed an additional requirement included as part of the sanction. The change would be accomplished by deleting from the rule the requirement that all suspensions imposed by the Board or any DBCC or MSC be for a definite period of time. The NASD believes it is essential that the Committees and the Board have the ability to require, as part of a disciplinary penalty, that disciplinary respondents undertake certain activities before being allowed to continue as associated persons or registered NASD members.
REQUEST FOR VOTE
The NASD Board of Governors therefore believes that this change to the Rules of Fair Practice is necessary and appropriate and recommends that members vote their approval. Please mark the enclosed 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 May 3, 1991.
Questions concerning this notice may be directed to Carla J. Carloni, Attorney, Office of General Counsel, at (202) 728-8019.
PROPOSED AMENDMENT TO NASD RULES OF FAIR PRACTICE
Article V, Section 1
(Note: Deleted text is in brackets.)
Penalties for Violations of the Rules
Section 1. Any District Business Conduct Committee, Market Surveillance 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 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 a person associated with a member from association with all members, or (6) impose any other fitting penalty 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, Market Surveillance 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 or Market Surveillance Committee shall take effect until the period for appeal therefrom or review has expired, as provided in Article III, Section 1 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.