Notice To Members 86-23

Request for Comments on Proposed Amendments to the NASD By-Laws and Code of Procedure to Accommodate Extended Hearings

Published Date:

TO: All NASD Members and Other Interested Persons

LAST DATE FOR COMMENT: APRIL 27, 1986

The National Association of Securities Dealers, Inc. (NASD), is publishing for comment by members and other interested persons proposed amendments to the NASD By-Laws and Code of Procedure that would establish procedures for extended hearings in disciplinary actions before the NASD. These amendments would permit the appointment of hearing subcommittees and review panels from among certain individuals who have retired from the securities industry within the preceding five years for hearings anticipated to extend over several days. Former members of NASD District Business Conduct Committees and the Board of Governors would be eligible to serve on district and market surveillance hearing subcommittees, and former members of the Board of Governors would be eligible to serve on Board review panels. The members of extended hearing subcommittees and review panels would be compensated at the same rate prescribed by the Board of Governors for arbitrators appointed under the Code of Arbitration Procedure.

The text of the proposed amendments is attached. A discussion of the background of the amendments and the proposed provisions follows.

BACKGROUND

The NASD anticipates that most disciplinary hearings before District Business Conduct Committees, the Market Surveillance Committee, and the National Business Conduct Committee will continue to be no more than one or two days in length. However, the NASD also considers it prudent to provide for the possibility that future disciplinary actions may require more extensive hearings due to the length of expected testimony, the volume of documentary evidence or the complexity of the issues involved. While lengthy hearings may be necessary in such cases to ensure a full and fair presentation, they may also create difficulties for committee members who are active in the securities industry and must attend to their businesses. To balance these interests, the NASD proposes to authorize the establishment of extended hearing committees composed of recent retirees from the industry.

ANALYSIS OF PROPOSED AMENDMENTS

The proposed amendment to the NASD By-Laws would permit members of extended hearing committees to be compensated for their services. Article X, Section 6 of the By-Laws presently prohibits the receipt of compensation for services by any member of any NASD committee. Because serving on an extended hearing committee can be expected to involve substantial time and effort, it is reasonable to compensate such individuals in addition to reimbursing them for expenses. The amendment would exempt extended hearing committees from the prohibitions of Section 6.

The proposed amendments to the NASD Code of Procedure would authorize the appointment and describe the composition of extended hearing committees at the district and appeal levels. The terms "extended hearing" and "extended hearing committee" would be defined terms under Article I, Section 2. An "extended hearing" would be a hearing so designated by a District Committee, the Market Surveillance Committee, or the National Business Conduct Committee, as applicable. The definition of "committee" in Article I, Section 2(b) would be amended to include "extended hearing committees" so that all procedural provisions applicable to District Committee and Market Surveillance Committee hearings would apply to extended hearings.

The authority to determine that an extended hearing is necessary would be vested in the District Committee or Market Surveillance Committee with respect to initial hearings and in the National Business Conduct Committee with respect to appeals of decisions of those bodies. In making this determination, the respective committee would consider the length of expected testimony, the volume and complexity of documentary evidence and any other factors that it deemed material, such as the nature of the issues presented. Notice of extended hearings would be given to parties pursuant to the existing notice provisions in the Code of Procedure.

To ensure sufficiently recent experience in the industry, only individuals who have retired within the preceding five years would be eligible to serve on extended hearing committees. Further, only persons who served on District Committees or the Board of Governors would be eligible to participate in district-level hearings, and only former members of the Board of Governors would be eligible to hear matters on review. This will ensure that members of extended hearing committees will be familiar with the procedures applicable to the conduct of disciplinary hearings and appeals.

The Code of Procedure amendments would also provide for compensation of extended hearing committee members at the same rate in effect for arbitrators appointed under the Code of Arbitration Procedure. Finally, the term "extended hearing committee" would be added to several provisions of Article III so that extended hearings on review will be subject to the same procedural requirements as matters heard by members of the National Business Conduct Committee.

As presently structured, the proposed amendments provide that extended hearing committees would be composed exclusively of former District Committee or Board members. The NASD invites comments addressing the appropriateness of providing a means to include current members of District Committees or the Board of Governors on extended hearing committees.

* * * *

The NASD encourages all members and other interested persons to comment on these proposed amendments. Comments should be directed to:

Mr. James M. Cangiano
Secretary
National Association of Securities Dealers, Inc.
1735 K Street, N.W.
Washington, D.C. 20006

Comments must be received no later than April 27, 1986. All comments will be made available for public inspection. Comments received by the indicated date will be considered by the NBCC and the NASD Board of Governors. If the proposed amendments are approved by the Board, they will then be submitted to the membership for a vote. If approved by the membership, the amendments must be filed with and approved by the Securities and Exchange Commission before becoming effective.

Questions concerning this notice may be directed to Andrew McR. Barnes, Associate General Counsel, or Jacqueline D. Whelan, Attorney, Office of the General Counsel, at (202) 728-8294.

Sincerely,

Frank J. Wilson
Executive Vice President and General Counsel

Attachment

EXTENDED DISCIPLINARY HEARINGS PROPOSED NASD BY-LAWS AND CODE OF PROCEDURE AMENDMENTS 1/

NASD BY-LAWS

Article X, Section 6:

No member of the Board of Governors (except the President of the Corporation or the President pro tern), no member of any District Committee and no member of any other committee, other than an Extended Hearing Committee as defined in Article I of the Corporation's Code of Procedure, shall be entitled to receive any compensation from the Corporation for any work done in connection with his duties as a member of the Board of Governors, any District Committee or any other committee. However, such persons shall be entitled to reimbursement for reasonable expenses incurred in connection with the business of the Corporation.

NASD CODE OF PROCEDURE

Article I, Section 2:

(b) The term "Committee" used in the Code of Procedure shall mean either a District Business Conduct Committee, the Market Surveillance Committee, or an Extended Hearing Committee.
(e) An "Extended Hearing" is a hearing under Article II, Section 4 or Article III, Section 2(a) of the Code of Procedure that is so designated by a Committee or the National Business Conduct Committee.
(f) An "Extended Hearing Committee" is a committee constituted as provided in the Code of Procedure to sit as a hearing panel for an Extended Hearing.

Article II, Section 4: 2/

(b) Upon consideration of the length of expected testimony, the volume and complexity of documentary evidence, and other factors it may deem material a Committee may determine that a complaint shall be set for an Extended Hearing. Notice of an Extended Hearing shall be given as provided in Section 4(a).

Article II, Section 6: 3/

(c) In the event of an Extended Hearing, the Committee shall appoint an Extended Hearing Committee of three or more persons, all of whom shall have retired from association with members of the Corporation within the preceding five years and shall also have served as members of a District Business Conduct Committee or the Board of Governors during the period of such association. Members of the Extended Hearing Committee shall be entitled to receive compensation at the rate then in effect for arbitrators appointed under the Code of Arbitration Procedure.

Article III, Section 2: 4/

(b) Upon consideration of the length of expected testimony, the volume and complexity of documentary evidence, and other factors it may deem material, the National Business Conduct Committee may determine that a matter shall be set for an Extended Hearing. Notice of an Extended Hearing shall be given as provided in Section 2(a).
(d) All Extended Hearings shall be held before an Extended Hearing Committee appointed by the National Business Conduct Committee consisting of two or more persons, all of whom shall have retired from association with members of the Corporation within the preceding five years and shall also have served as members of the Board of Governors during the period of such association. Members of the Extended Hearing Committee shall be entitled to receive compensation at the rate then in effect for arbitrators appointed under the Code of Arbitration Procedure.

In addition, the words "or Extended Hearing Committee" would be inserted after the words "hearing panel" in Article III, Sections 2(c) and 3(c). These are technical changes to bring Extended Hearing Committees within the coverage of the procedural provisions relating to NBCC hearings.

1/ New language is underlined.

2/ Existing text would become subsection (a).

3/ Present subsections (c) through (e) would be redesignated subsections (d) through (f).

4/ Present subsection (b) would be redesignated (c), and subsections (c) and (d) would be redesignated (e) and (f).