[Federal Register: December 27, 2002 (Volume 67, Number 249)]
[Notices]
[Page 79203-79205]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr27de02-163]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-47060; File No. SR-NASD-2002-112]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change and Amendment No. 1 by 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
December 20, 2002.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on August 15, 2002, the National Association of Securities Dealers,
Inc. (``NASD'') filed with the Securities and Exchange Commission
(``Commission'' or ``SEC'') the proposed rule change as described in
Items I, II, and III below, which Items have been prepared by NASD. On
December 9, 2002, NASD filed Amendment No. 1 to the proposed rule
change.\3\ The Commission is publishing this notice to solicit comments
on the proposed rule change, as amended, from interested persons.
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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, SEC, dated December 6, 2002, and
enclosures (``Amendment No. 1''). Amendment No. 1 replaced the
original rule filing in its entirety.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
NASD is proposing 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. Below is the text of the proposed rule change
as amended. Proposed new language is in italics; proposed deletions are
in brackets.
3070. Reporting Requirement
(a) through (c) No change.
(d) Nothing contained in [paragraphs (a), (b) and (c) of] this Rule
shall eliminate, reduce, or otherwise abrogate the responsibilities of
a member or person associated with a member to promptly file with full
disclosure, required amendments to Form BD, Forms U-4 and U-5, or other
required filings, and to respond to [the Association] NASD with respect
to any customer complaint, examination, or inquiry.
[[Page 79204]]
(e) Any member subject to substantially similar reporting
requirements of another self-regulatory organization of which it is a
member is exempt from [the provisions] paragraphs (a), (b) and (c) of
this Rule.
(f) Each member shall promptly file with NASD copies of:
(1) any indictment, information or other criminal complaint or plea
agreement for conduct reportable under paragraph (a)(5) of this Rule;
(2) any complaint in which a member is named as a defendant or
respondent in any securities or commodities-related private civil
litigation;
(3) any securities or commodities-related arbitration claim filed
against a member in any forum other than the NASD Dispute Resolution
forum;
(4) any indictment, information or other criminal complaint, any
plea agreement, or any private civil complaint or arbitration claim
against a person associated with a member that is reportable under
question 14 on Form U-4, irrespective of any dollar thresholds Form U-4
imposes for notification, unless, in the case of an arbitration claim,
the claim has been filed in the NASD Dispute Resolution forum.
(g) Members shall not be required to comply separately with
paragraph (f) in the event that any of the documents required by
paragraph (f) have been the subject of a request by NASD's Registration
and Disclosure staff, provided that the member produces those requested
documents to the Registration and Disclosure staff not later than 30
days after receipt of such request. This paragraph does not supersede
any NASD rule or policy that requires production of documents specified
in paragraph (f) sooner than 30 days after receipt of a request by the
Registration and Disclosure staff.
* * * * *
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, NASD included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. NASD has prepared summaries, set forth in Sections A, B,
and C below, of the most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The proposed rule change would amend 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 would require 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 would provide 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. The
Registration and Disclosure staff sometimes requests these documents to
determine whether members have met Form U-4 and other reporting
requirements and whether an associated person is subject to a statutory
disqualification. However, the rule proposal would require members to
respond not later than 30 days after receiving such a request from
NASD's Registration and Disclosure staff and, further, the rule
proposal would not supersede any other NASD rule or policy that
requires a more prompt response to such a document request.
Rule 3070 currently requires, among other things, that a member
report to NASD when it is a defendant or respondent in felony criminal
proceedings, certain misdemeanor criminal proceedings, or in certain
civil or arbitration actions. As to the latter, Rule 3070(a)(7)
requires that a member report to NASD when the member or a person
associated with the member is a defendant or respondent in securities
or commodities-related civil litigation or arbitration only when the
proceeding has been disposed of by a judgment, award or settlement in
an amount exceeding either $15,000 (if the defendant or respondent is
an associated person) or $25,000 (if defendant or respondent is the
member). No existing rules require a member routinely to file copies
with NASD of complaints filed against it in any legal proceedings.
Similar to Rule 3070, question 14 on Form U-4 requires notice that
an associated person has been charged or convicted of a felony or
certain misdemeanors. It further requires notice that an associated
person has been named as a respondent or defendant in a consumer-
initiated arbitration or civil litigation involving a sales practice
violation that is pending, resulted in a judgment, settled for $10,000
or more, or contains a claim for compensatory damages of at least
$5,000. However, Form U-4 does not require that the member or
associated person file with NASD as a matter of course a copy of the
complaint that initiates such proceedings or any plea agreements to
resolve reportable criminal charges. The rule proposal would require a
member to file copies of any criminal complaint, plea agreement,
private civil complaint or arbitration claim that is reportable under
question 14 on Form U-4, irrespective of any dollar threshold
requirements that may be specified to trigger reporting on Form U-4
(except those arbitration claims that have already been filed with NASD
Dispute Resolution).
NASD believes the rule proposal would enhance its regulatory
efforts and investor protection mission. Absent the proposed filing
requirements, in many instances, NASD might never learn of the specific
allegations unless they are also voluntarily reported to NASD or,
pursuant to Rule 3070(a)(2), are the subject of a written customer
complaint to the member involving allegations of theft or
misappropriation of funds or securities, or of forgery. Regulation will
be more effective if NASD obtains the detailed allegations at the time
a criminal, civil or arbitration complaint or claim is filed, so that
an inquiry, if
[[Page 79205]]
warranted, can begin promptly. Moreover, the information can be
combined with other sources of regulatory intelligence to identify
patterns and trends at the earliest possible stage, thereby deploying
resources to high risk areas that better protect investors. With
respect to associated persons, 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, as such matters may
also point to trends or otherwise flag conduct where regulatory action
might be warranted.
NASD 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 NASD further believes that the rule
proposal minimizes that burden in that the rule requires only the
filing of those complaints and claims most likely to reveal information
to assist its regulatory mission. For example, members would not be
required to file private civil litigation complaints or arbitration
claims that do not relate to securities or commodities-related conduct.
Moreover, the proposal would not require members to file with NASD any
arbitration claims that are originally filed in the NASD Dispute
Resolution forum. NASD is already incurring the cost to make copies of
those claims and will continue to do so under the proposal. The rule
proposal further carves out 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. As with other complaints and claims that would be required
to be filed under the proposal, the Dispute Resolution arbitration
claims and the documents requested by NASD's Registration and
Disclosure staff would be forwarded after copying to a unit within NASD
that will evaluate the allegations in the documents for possible
regulatory action.
2. Statutory Basis
NASD believes that the proposed rule change is consistent with the
provisions of Section 15A(b)(6) of the Act \4\, which requires, among
other things, that NASD's rules be 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. NASD believes that the proposal will improve its
ability to detect and prevent fraudulent and manipulative conduct and
to develop regulatory responses to problem areas at the earliest
possible time.
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\4\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition
NASD does not believe that the proposed rule change will result in
any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act, as amended.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others
Written comments were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 35 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve such proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposal is
consistent with the Act. Persons making written submissions should file
six copies thereof with the Secretary, Securities and Exchange
Commission, 450 Fifth Street, NW., Washington, DC 20549-0609. Copies of
the submission, all subsequent amendments, all written statements with
respect to the proposed rule change that are filed with the Commission,
and all written communications relating to the proposed rule change
between the Commission and any person, other than those that may be
withheld from the public in accordance with the provisions of 5 U.S.C.
552, will be available for inspection and copying in the Commission's
Public Reference Room. Copies of such filing will also be available for
inspection and copying at the principal office of NASD. All submissions
should refer to file number SR-NASD-2002-112 and should be submitted by
January 17, 2003.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\5\
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\5\ 17 CFR 200.30-(a)(12).
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J. Lynn Taylor,
Assistant Secretary.
[FR Doc. 02-32733 Filed 12-26-02; 8:45 am]
BILLING CODE 8010-01-P