[Federal Register: March 10, 2003 (Volume 68, Number 46)]
[Notices]
[Page 11430-11432]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr10mr03-94]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-47434; File No. SR-NASD-2002-112]
Self-Regulatory Organizations; Order Approving Proposed Rule
Change by the National Association of Securities Dealers, Inc., To
Amend NASD Rule 3070 To Require Members To File Copies of Criminal and
Civil Complaints and Arbitration Claims With NASD
March 3, 2003.
I. Introduction
On August 15, 2002, the National Association of Securities Dealers,
Inc. (``NASD'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission'') a proposed rule change pursuant to Section
19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\ and Rule
19b-4 thereunder \2\ to amend Rule 3070 of its rules to require members
promptly to file copies with NASD of certain criminal and civil
complaints and arbitration claims against a member or a person
associated with a member. NASD amended the proposed rule change on
December 9, 2002.\3\ Notice of the proposed rule change and Amendment
No. 1 thereto was published for comment in the Federal Register on
December 27, 2002.\4\
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See letter from Patrice Gliniecki, Vice President and Deputy
General Counsel, NASD, to Katherine A. England, Assistant Director,
Division of Market Regulation, Commission, dated December 6, 2002,
and enclosures (``Amendment No. 1''). Amendment No. 1 replaced the
original rule filing in its entirety.
\4\ See Securities Exchange Act Release No. 47060 (December 20,
2002), 67 FR 79203.
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The Commission received five comment letters regarding the
proposal.\5\ On February 12, 2003, NASD filed a response to the comment
letters.\6\ This order approves the proposed rule change as amended by
Amendment No. 1.
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\5\ See letter from Kevin L. Palmer, Legal Department, World
Group Securities, Inc. (``World Group''), to Jonathan G. Katz,
Secretary, Commission, dated September 19, 2002 (``World Group
Letter'') (World Group commented on NASD Notice to Members 02-53
concerning the proposed amendment to NASD Rule 3070 prior to the
Commission's publication of the proposed rule filing); letter from
Marc A. Cohn, Assistant Vice President, Metropolitan Life Insurance
Company (``MetLife''), to Jonathan G. Katz, Secretary, Commission,
dated December 27, 2002 (``MetLife Letter''); letter from Stephen G.
Sneeringer, Senior Vice President & Counsel, A.G. Edwards & Sons,
Inc. (``A.G. Edwards''), to Jonathan G. Katz, Secretary, Commission,
dated January 17, 2002 (``A.G. Edwards Letter''), letter from Edward
Turan, Chairman, Arbitration Committee, Securities Industry
Association (``SIA'') and John Polanin, Jr., Chairman, Self-
Regulation and Supervisory Practices Committee, SIA, to Jonathan G.
Katz, Secretary, Commission, dated January 24, 2003 (``SIA
Letter''), and letter from David A. Weintraub, Attorney at Law,
David A. Weintraub, P.A. (``Weintraub''), to Jonathan G. Katz,
Secretary, Commission, dated February 6, 2003 (``Weintraub
Letter''). The comment letters are described in Section III, infra.
\6\ See letter from Philip A. Shaikun, Assistant General
Counsel, NASD, to Katherine A. England, Assistant Director, Division
of Market Regulation, Commission, dated February 11, 2003 (``NASD
Response Letter''). The NASD Response Letter does not respond to the
Weintraub Letter because the Weintraub Letter was received by the
Commission after NASD filed the NASD Response Letter.
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II. Description of the Proposal
The proposed rule change amends NASD Rule 3070 to require members
to file promptly with NASD copies of certain criminal and civil
complaints and arbitration claims against the member or a person
associated with the member. The purpose of the rule proposal is to
improve the quality and flow of information to NASD with respect to
allegations of broker misconduct, so that NASD can enhance investor
protection efforts by promptly taking appropriate regulatory action to
address the specific alleged misconduct and to prevent similar or
related misconduct in the future.
Specifically, the proposed rule change requires members to file
with NASD copies of (1) any criminal complaints filed against the
member or plea agreements entered into by the member that are covered
by the rule; (2) any securities or commodities-related private civil
complaints filed against the member; (3) any arbitration claim against
the member (except those claims that have already been filed with NASD
Dispute Resolution, in which case NASD obtains copies of such claims
directly from NASD Dispute Resolution); and (4) any criminal complaint
or plea agreement, private civil complaint or arbitration claim against
an associated person that is reportable under question 14 on Form U-4,
irrespective of any dollar threshold requirements that question imposes
for notification (except those arbitration claims that have already
been filed with NASD Dispute Resolution). To avoid duplicative filing,
the rule proposal also provides that members need not separately
produce the above-referenced documents if they have already been the
subject of a request by NASD's Registration and Disclosure staff. These
amendments are discussed in greater detail in the Commission's notice
soliciting public comment on this proposal.\7\
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\7\ See supra, note 4.
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III. Summary of Comments
The Commission received five comment letters on the proposed rule
change.\8\ Although four of the commenters generally supported NASD's
desire to obtain and collect information regarding broker misconduct,
they each contended that the proposal was unduly burdensome for members
and offered alternative suggestions for achieving NASD's stated
objectives.\9\ The fifth comment letter was written in response to the
SIA Letter and in support of the proposed rule change.\10\ World Group
and A.G. Edwards stated that NASD would be unduly burdened by the
volume of documents it would receive compared to the amount of new
relevant information. MetLife and the SIA stated that the proposal was
inconsistent with NASD's rule modernization initiative, which seeks to
streamline NASD rules by maximizing regulatory efficiency while
imposing the least regulatory burden.\11\
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\8\ See supra, note 5.
\9\ See World Group Letter, MetLife Letter, A.G. Edwards Letter
and SIA Letter.
\10\ See Weintraub Letter.
\11\ See Special NASD Notice to Members 01-35.
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In its response to commenters, NASD focused only on comments made
in connection with this proposal. The World Group, MetLife and A.G.
Edwards Letters also addressed a change in NASD's policy regarding
letters NASD issues when a determination is made to close an
investigation without disciplinary action (referred to as ``close-out
letters''). While notice of the policy change with respect to close-out
letters was contained in the same Notice to Members 02-53 that
announced that NASD had filed with the SEC its proposal to amend Rule
3070, that policy change is not part of this rule filing. Accordingly,
this order does not address the policy change with respect to close-out
letters.
NASD disagrees that the proposal would impose duplicative filing
requirements on members or be unduly
[[Page 11431]]
burdensome. NASD notes that members are not required under existing
rules to routinely file with NASD the documents sought under the
proposal. NASD believes that information contained in those complaints
and arbitration claims will enhance its regulatory efforts and better
protect investors through early detection of broker misconduct and
identification of problem trends. As to the burden on NASD, NASD states
that deference must be given to NASD's determination that, on balance,
the value of information it will receive outweighs any additional work
for the organization.
NASD states that the rule proposal minimizes the burden on members,
including duplicative filing requirements: it specifically carves out
any arbitration claims that are originally filed in the NASD Dispute
Resolution forum and those documents that have already been requested
by NASD's Registration and Disclosure staff (provided such documents
are produced to Registration and Disclosure within 30 days of the
request). Moreover, the rule requires only the filing of those
complaints and claims most likely to contain information relevant to
NASD's regulatory mission, excluding, for example, private civil
litigation complaints or arbitration claims that do not involve
securities or commodities-related conduct.
World Group stated that the current reporting system appears to be
an effective means for monitoring the misconduct or alleged misconduct
of brokers and representatives. They noted that NASD has spent
significant resources on the development of Integrated National
Surveillance and Information Technology Enhancements (INSITE) to aid in
more effective firm examinations. World Group stated that it might be
more efficient to amend Rule 3070 to require the reporting of the
additional information required by the proposal in the current
reporting system. NASD responded that it believes that the current
reporting system fails to capture important information that could
improve its regulatory efficacy.
MetLife stated that the proposal required the reporting of
information that is reportable through electronic filings on Forms U-4,
U-5, BD and Rule 3070 reports with certain exclusions for certain
events based on dollar amounts. They stated that the current system is
already fractured, redundant and burdensome in that the same incident
may have to be reported twice on different mediums such as a Form U-4,
U-5 or BD amendment and a Rule 3070 filing. They suggested that NASD
streamline the current reporting system by requiring member firms to
report events to NASD only once through a new electronic medium. NASD
responded that while MetLife's general proposal to develop a new system
is worth long-term consideration, its feasibility is uncertain and, in
any event, it does not now provide a viable alternative to the current
proposal.
A.G. Edwards stated that most of the information required to be
reported in the proposal is already required to be reported by members
on the CRD. A.G. Edwards suggested that NASD assume the responsibility
to report to the CRD any required information based on its review of
the complaints and arbitration claims. They thought this would relieve
members from the regulatory burden of reporting these actions to the
CRD and would relieve some of the questions that they believe have
arisen in regard to the reliability of that reporting. NASD responded
that its does not believe such steps are necessary or appropriate. NASD
explained that the rule proposal requires different information for
different regulatory purposes from that reported to the CRD, and NASD
believes it has reasonably minimized the burden on members under the
proposal.
The SIA stated that the rule should be limited to copies of retail
customer lawsuits and arbitrations that allege sales practice
violations in accordance with current Form U-4 and U-5 reporting
requirements and dollar thresholds. The SIA stated that such an
approach would be more resource-efficient and would produce more
targeted reviews of complaints by NASD. NASD noted in its response that
the SIA seeks to exclude from the proposal complaints in ``nearly all
class actions; non-retail civil litigation, including product failure,
and operational complaints, and small claims involving relatively small
dollar amounts.'' \12\ The proposal requires a member to file with NASD
any criminal complaint or plea agreement, private civil complaint or
arbitration claim against an associated person that is reportable under
question 14 on Form U-4, irrespective of any dollar threshold
requirements that question imposes for notification (except those
arbitration claims that have already been filed with NASD Dispute
Resolution).
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\12\ See NASD Response Letter at 2, SIA Letter at 2.
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The NASD Response Letter states the following in support of NASD's
belief that the SIA proposal is too narrow in scope and could lead to
confusion.\13\ First, under the SIA formulation to limit the proposal
to retail customer complaints and claims, NASD would not receive
complaints alleging egregious conduct between members (such as
collusive market making) or involving institutional customers (such as
a kickback scheme in the distribution of initial public offerings).
Such allegations of misconduct constitute relevant regulatory
information, so NASD sees no sound policy reason to limit the subject
matter of complaints to those involving retail customers. Since these
and other allegations sometimes first appear in criminal proceedings,
NASD believes it appropriate to maintain the requirement in the
proposal to file copies of such documents.
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\13\ See NASD Response Letter at 2-3.
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Second, limiting the proposal to complaints and claims alleging
sales practice violations would undermine a significant purpose of the
rule proposal, namely to detect securities or commodities-related
patterns of conduct or emerging trends that might warrant regulatory
action. The regulatory intent would be frustrated if members were
permitted to parse the language of a potential filing to determine
whether its substance technically comprised a sales practice violation.
Furthermore, litigation and arbitrations that related to securities or
commodities conduct, but do not amount to a sales practice violation,
nevertheless may prove to correlate to other conduct injurious to the
investors and markets. These determinations can only be reached if NASD
has access to data that has not been filtered by application of nuance
to a legal term of art.
Third, with respect to associated persons, NASD believes it is
important to receive copies of complaints and claims reportable under
question 14 on Form U-4, even when they fall below specified dollar
thresholds, because those actions can highlight patterns of conduct or
emerging trends that might warrant regulatory actions.
The Weintraub Letter was written in response to the SIA Letter with
regard to the reporting of customer complaints. The SIA stated that the
rule should be limited to copies of retail customer lawsuits and
arbitrations that allege sales practice violations in accordance with
current Form U-4 and U-5 reporting requirements. The Weintraub Letter
stated that whether a customer-initiated arbitration is reportable on
the Form U-4 or not has absolutely no connection to the seriousness of
the underlying allegations, or the need for regulatory scrutiny.
[[Page 11432]]
IV. Discussion and Commission Findings
After careful consideration, the Commission finds that the proposed
rule change, as amended by Amendment No. 1, is consistent with the Act
and the rules and regulations promulgated thereunder applicable to a
registered securities association and, in particular, with the
requirements of Section 15A(b)(6).\14\ Specifically, the Commission
finds that approval of the proposed rule change is consistent with
Section 15A(b)(6) of the Act in that it is designed to prevent
fraudulent and manipulative acts and practices, to promote just and
equitable principles of trade, and in general, to protect investors and
the public interest.\15\
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\14\ 15 U.S.C. 78o-3(b)(6).
\15\ In approving this proposed rule change, the Commission has
considered the proposal's impact on efficiency, competition, and
capital formation. 15 U.S.C. 78c(f).
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The Commission believes that the proposed rule change will enhance
NASD's regulatory efforts and investor protection mission. The proposal
should improve NASD's ability to detect and prevent fraudulent and
manipulative conduct and enable it to develop regulatory responses to
problem areas at the earliest possible time. The Commission further
believes the regulatory benefits of the proposed rule change outweigh
the additional burden on members to file with NASD copies of the
specified documents, and that the proposal minimizes that burden in
that the rule requires only the filing of those complaints and claims
most likely to reveal information that should assist NASD's regulatory
mission.
V. Conclusion
For the reasons discussed above, the Commission finds that the
proposal is consistent with the Act and the rules and regulations
thereunder.
It is therefore ordered, pursuant to section 19(b)(2) of the Act,
that the proposed rule change (SR-NASD-2002-112), as amended, be and
hereby is approved.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\16\
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\16\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-5572 Filed 3-7-03; 8:45 am]
BILLING CODE 8010-01-P