Notice To Members 89-33

Proposed Amendments to Article III, NASD Code of Procedure Re: Board of Governors' Reviews of Disciplinary Actions; Last Date for Comments: May 1, 1989

Published Date:
Last Date for Comments: May 1, 1989

SUGGESTED ROUTING*

Senior Management
Legal & Compliance

*These are suggested departments only. Others may be appropriate for your firm.

REQUEST FOR COMMENTS

EXECUTIVE SUMMARY

The NASD requests comments on proposed amendments to Article III of the NASD Code of Procedure concerning Board of Governors' reviews of disciplinary actions taken by District Business Conduct Committees (DBCC) and the Market Surveillance Committee (MSC).

The proposed amendments would (i) establish procedures for hearings in connection with such reviews, (ii) convert such reviews into truly appellate-type proceedings, (iii) limit the duration of oral argument at such hearings to 15 minutes, with hearing panels empowered to extend that time, (iv) codify practices as to matters reviewed on the basis of the written record, (v) prohibit the introduction of new evidence before Board review panels, (vi) provide for a remand to the District Business Conduct Committee or Market Surveillance Committee in any appeal where the appealing party did not participate in the DBCC or MSC proceedings but shows good cause for such failure to participate, (vii) provide for review by the Board panel on the basis of the written record when the appealing party did not participate in the DBCC or MSC proceedings or offer a valid explanation for such failure to participate, unless the appealing party seeks and obtains leave to introduce evidence before the Board review panel, and (viii) provide for the dismissal of appeals that are not pursued by the appealing party.

BACKGROUND

Under Article III of the NASD Code of Procedure, respondents in disciplinary actions taken by the DBCC and the MSC may appeal those actions to the NASD Board of Governors, or the Board may call a matter for review. In either case, current code provisions permit the respondents to elect to attend or waive a hearing before a hearing panel of the Board and to submit new evidence, provided that (i) the evidence has been made available to the NASD within a reasonable time before the hearing or on-the-record review or (ii) if a hearing is held, the hearing panel determines to permit the presentation of evidence submitted for the first time at the hearing. The Board review procedure is based on the presumption that the respondent participated in and produced evidence at the proceedings before the DBCC or MSC, and that each matter has, therefore, received a full review by a Committee below.

The proposed amendments are in response to the NASD's recent observations that:

(1) a significant amount of additional evidence, both testimonial and documentary, is presented at the Board level that should properly have been considered first by the DBCC or MSC;
(2) a number of appeals have been received from persons who did not participate in the proceedings before the DBCC or MSC; and
(3) an increasing number of appellants fail to respond to staff inquiries or otherwise pursue their appeals to the Board beyond filing of the initial notice of appeal.

PROPOSED AMENDMENTS

As a result of these observations, the National Business Conduct Committee (NBCC) and the Board of Governors have discussed possible amendments to Article HI of the Code of Procedure in an attempt to address these concerns while maintaining the integrity of the Board review process. These discussions have resulted in proposals that would amend Article III in several respects.

First, the amendments would provide for the dismissal of appeals when the respondent fails, following the initial notice of appeal, to pursue the appeal by responding to staff requests for information required to proceed with the appeal. In response to each notice of appeal, the staff sends a letter acknowledging the appeal, requesting certain additional information, and specifying a time period for a response. Under the proposed amendments, if no response is received by the specified date, the appeal would be deemed abandoned and would be dismissed. The Board believes that this is appropriate because it is an unnecessary expenditure of NASD resources to devote time to appeals that the appealing party fails to pursue.

In addition, it is the Board's intent to convert the Board-level proceedings to truly appellate-type proceedings in which the introduction of evidence is not permitted and oral argument is made on the law as applied to the facts developed below. The proposed amendments would provide a limitation on the length of a respondent's presentation to 15 minutes. Hearing panels would be empowered to extend this time period for good cause. The Board believes this period is sufficient for the majority of matters, and will allow panels to grant more time for matters that require more detailed arguments. A District staff representative or regional counsel also would be permitted to make oral argument on behalf of the District Committee.

As to the introduction of additional evidence in Board proceedings, if the party seeking to introduce the evidence demonstrates good cause for failing to do so before the DBCC or MSC, the Board would have the authority to rule in favor of admissibility. As noted above, there are now almost no restrictions on the ability to introduce new evidence in Board proceedings. The Board of Governors believes that parties to NASD disciplinary proceedings should introduce all relevant evidence before the DBCC or MSC so that those committees have the benefit of a complete record. The Board also believes, however, that provision should be made for the introduction of new evidence under certain limited circumstances when, for example, evidence was unavailable or not reasonably discoverable at the time of the DBCC or MSC proceedings. The Board committee would be authorized to admit new evidence in such circumstances, but it would be unlikely to permit the introduction of additional evidence unless the respondent can sustain the burden of showing good cause for failing to introduce the evidence below. The materiality of the evidence also would be a factor in that decision. This standard would be similar to that used by certain other self-regulatory organizations and to the standard applied in SEC Rule 19d-3(e), which governs the admissibility of new evidence in Commission review of NASD disciplinary actions. This provision will be administered strictly with a presumption against admissibility at the Board level.

The proposed amendments would also provide for a remand to the DBCC or MSC, without Board consideration, of appeals in which the appealing party did not participate in the DBCC or MSC proceedings and shows good cause for such failure to participate.1 This amendment is consistent with the Board's view that the integrity of the two-level disciplinary process must be preserved and that a full proceeding below should precede Board review. If, however, the appealing party did not participate in the DBCC or MSC proceedings and does not show good cause for such failure, then the matter generally will be considered by the Board on the basis of the written record developed by the DBCC or MSC. In any event, the introduction of evidence at the Board-level hearing would be severely restricted.

In addition, the Board of Governors has determined to incorporate into the amendments language that clarifies the procedures for seeking a hearing in connection with an appeal or call for review and codifies certain existing practices with respect to matters considered on the basis of the written record. These amendments are reflected in Sections 2(a) and 2(c)-(f) of the proposed amendments.

Finally, the Board has also determined to propose amendments to Article II, Sections 7(a) and (b) of the Code of Procedure to provide that the NASD staff (or complainant if other than a DBCC or the MSC) and the respondent shall make available to one another on a timely basis the names of proposed witnesses in addition to proposed documentary evidence. The Board also invites comments concerning the desirability of amending Article II, Section 7(c) to place restrictions, similar to those set forth in the proposed amendment to Article III, on the ability to introduce documentary and testimonial evidence at the DBCC or MSC hearing that has not been provided in advance as set forth in Sections (a) and (b).

The Board of Governors believes that the proposed amendments will further the objective of encouraging a full and complete presentation to the DBCC or MSC without impinging upon the important function of Board review.

The NASD encourages all members and interested parties to comment on the proposed amendments. Comments should be directed to:

Mr. Lynn Nellius, Secretary
National Association of Securities Dealers, Inc.
1735 K Street, NW
Washington, DC 20006

Questions concerning this notice can be directed to Dennis C. Hensley, Vice President and Deputy General Counsel, at (202) 728-8245 or T. Grant Callery, Associate General Counsel, at (202) 728-8285.

Comments must be received no later than May 1, 1989. Comments received by this date will be considered by the NBCC and the Board of Governors. Changes to the Code of Procedure must be approved by the Board of Governors and filed with, and approved by, the SEC before becoming effective.

PROPOSED AMENDMENTS TO CODE OF PROCEDURE

(Note: New text is underlined; deleted text is in brackets.)

ARTICLE II

Sec. 1-Sec. 6 No change.

Evidence and Procedure in Committee Hearings

Sec. 7.(a) The Committee staff, or the complainant, if other than a Committee, shall upon request make available to respondents and their counsel any documentary evidence and the names of any witnesses the staff intends to present no later than five business days prior to [at the hearing within a reasonable time before] the hearing.

(b) Respondents shall submit to the Committee staff or the complainant, any documentary evidence and the names of any witnesses respondents intend to present at the hearing no later than five business days prior to [within a reasonable time before] the hearing.
(c) If a hearing is held, both the complainant and the respondent shall be entitled to be heard in per son and by counsel. Formal rules of evidence shall not be applicable. Notwithstanding paragraphs (a) or (b), the parties may submit any additional documentary evidence at the hearing as the hearing panel, in its discretion, determines may be relevant and necessary for a complete record. A record of the hearing shall be kept in all cases.

Sec. 8-Sec. 13 No change.

ARTICLE III

Review of Disciplinary Actions and [Hearings] Proceedings Before the Board of Governors

Sec. 1. No change.

[Hearings] Proceedings Before the Board

Sec.2. (a) In the case of an appeal or call for review, the [complainant, if other than the Committee, or the respondent] party seeking review may request a hearing. If the party desires a hearing, it should be requested in his application for review. A party subject to a call for review may request a hearing within 15 calendar days of notification of the call for review. [may request a hearing before a hearing panel of the Board of Governors.] If a request is made, subject to the limitations of Section 2(j) below, a hearing shall be granted. In the absence of a request for a hearing, the Board of Governors may have any matter set down for a hearing.

(b) If a hearing is held, a [A] notice stating the date, time and place of the hearing shall be mailed to the complainant and respondent at least 10 calendar days before the hearing. The notice period may be waived in writing by the respondent or a shorter notice given where extraordinary circumstances require.
(c) If a hearing is not held, the matter shall be considered on the basis of the written record.
[(c)] (d) Unless otherwise consented to by the parties, all hearings shall be held before a hearing panel, and all on-the-record reviews shall be conducted by a review panel, appointed by the National Business Conduct Committee consisting of two or more persons, all of whom are associated with members of the Corporation, at least one of whom shall also be a current member of the Board of Governors.
[(e) If a hearing is held, the hearing panel shall consider the record before the Committee and any new material submitted by the complainant and the respondents. If respondent waived a hearing and the Board does not order a hearing on its own motion, the panel shall consider the matter on the record, which may include new evidence as long as all parties have previously been tendered the new evidence.]
(g) A hearing on review by the Board shall consist of oral arguments limited to a period of 15 minutes each for argument and responses by appellant or respondent where cases were called for review and responses by a representative of the District Committee unless extended by the hearing panel in its discretion for good cause shown. The Board's review shall include consideration of written briefs, as applicable, and shall be limited to consideration of the record before the Committee, including the complaint, respondent's(') answer(s), the transcript of the Committee hearing, any exhibits reviewed by the Committee, and the Committee decision.
(h) Notwithstanding paragraph (g) above, a party to the Board's review may apply to the Board for leave to adduce additional evidence. If the party provides notice of the intention to introduce such evidence no later than 10 business days prior to the date of the hearing, identifies and describes the evidence, and satisfies the burden of demonstrating that there was good cause for failing to adduce it before the Committee and that the evidence is material to the proceeding, the Board may, in its discretion, permit the evidence to be introduced into the record on review or may remand the case to the Committee for further proceedings in whatever manner and on whatever conditions the Board considers appropriate. On its own motion, the Board may direct that the record on review be supplemented with such additional evidence as it may deem relevant.
(i) Any application for review as to which the party seeking review fails to advise the Board of the basis for seeking review, or otherwise fails to provide information or submit a written brief in response to a request, may be dismissed as abandoned.
(j) Any application for review of a matter in which the party seeking review did not participate in the proceedings before the Committee and shows good cause for failure to participate, shall be dismissed and the matter shall be remanded to the Committee for further proceedings. If the party seeking review did not participate in the proceeding before the Committee and does not show good cause for the failure to participate, the matter shall be considered on the basis of the written record. For purposes of this paragraph, failure to participate shall mean failure to file an answer or otherwise respond to a complaint or failure to appear at a hearing which has been scheduled and shall not include failure to request a hearing pursuant to Article II, Section 4 of this Code. In the latter case, the appeal shall be limited to the evidence before the District Committee.
[(f)](k) The hearing or on-the-record review panel shall present its recommended findings and sanctions to the National Business Conduct Committee. The National Business Conduct Committee shall make its recommended findings and sanctions to the Board of Governors which shall make the final determination.

Evidence and Procedure in Board Hearings

Sec. 3. (a) [Upon request] Where leave to adduce additional evidence is granted, the Corporation staff or the complainant, if other than a Committee, and the respondent shall make available to the Board hearing or review panel and to the parties all [such] documentary evidence which was not part of the record before the Committee within a reasonable time,] no later than 10 business days before the hearing.

[(b) Respondents shall also make available to the Corporation staff or the complainant, any documentary evidence, which was not part of the record before the Committee, within a reasonable time before the hearing.]
[(c)] (b) If a hearing is held both the complainant and respondent shall be entitled to be heard in person and by counsel. Formal rules of evidence shall not be applicable. [Notwithstanding paragraphs (a) or (b), the parties may submit any additional documentary evidence at the hearing as the hearing panel, in its discretion, determines may be relevant and necessary for a complete record.] A record of the hearing shall be kept in all cases.

Sec. 4 - Sec. 7 No change.

1Failure to participate means the failure to file an answer or otherwise respond to the complaint or the failure to appear at the hearing when a hearing has been scheduled. It does not include a waiver of the right to a hearing pursuant to Article II of the Code of Procedure.