Notice To Members 90-81

Amendments to the Code of Procedure to Change the Disciplinary Process and Provide That Decisions of the National Business Conduct Committee Are Final Actions of the NASD

Published Date:

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EXECUTIVE SUMMARY

The Securities and Exchange Commission (SEC) has approved amendments to the NASD Code of Procedure that make two changes in the Code to the disciplinary process that reduce the burden that this process imposes on the National Business Conduct Committee (NBCC) and the Board of Governors. The amendments provide that the decisions of the NBCC are the final decisions of the NASD in disciplinary cases and do not require action of the full Board to become effective. The amendments also provide that hearings panels (unless the parties otherwise agree) consist exclusively of current or former Governors associated with members, and they eliminate the requirements that a current Governor serve on every hearing panel.

The text of the amendments follows this notice.

BACKGROUND

The amendments were approved for solicitation of member comment by the NASD Board of Governors (Board) at its meeting on March 16, 1990. The proposed amendments were published for comment as part of Notice to Members 90-19 on April 1, 1990. After consideration of member comment, the Board at its meeting May 14, 1990, adopted the proposed amendments and authorized their filing with the SEC.

The SEC approved the amendments on October 18, 1990. The amendments make two substantive changes to the Code: NASD National Business Conduct Committee (NBCC) hearing panels can consist exclusively of current or former Governors associated with members. Decisions of the NBCC will be final decisions of the NASD, unless called for review by the Board, at the request of one or more Governors. Miscellaneous amendments to Articles I, II, III, IV, IX, and X to the Code of Procedure are also included.

SUMMARY OF AMENDMENTS

The NBCC, a committee of the Board composed solely of Governors, is responsible for reviewing actions of the District Business Conduct Committees (DBCCs) and the Market Surveillance Committee (MSC), developing enforcement policy and recommending to the Board the adoption or amendment of rules relating to the business conduct of NASD members.

As amended, Article III, Section 2(d) of the NASD Code of Procedure requires that hearing panels (unless the parties otherwise agree) consist exclusively of current or former Governors associated with members, and eliminates the requirement that a current Governor serve on every hearing panel. This will permit the NBCC, in the cases it deems appropriate, to appoint hearing panels consisting of a current Governor and a former Governor and to appoint hearing panels consisting exclusively of former Governors. Panels so constituted would continue to provide respondents a hearing before experienced and respected members of the industry. All cases before the NBCC, regardless of the composition of the hearing panel, would continue to be reviewed by the full NBCC.

As amended, Article III, Sections 6 and 7 provides that the decisions of the NBCC are the final decisions of the NASD in disciplinary cases and do not require action of the full Board to become effective. Under this amendment, the Board will review only those specific decisions of the NBCC that it calls for review on the request of one or more Governors1. This limits the time commitment required from all Governors with respect to decisions by the NBCC without limiting the right of the Board to review an NBCC decision when one or more Governors believe such review is appropriate.

This change reflects the importance of the NBCC and recognizes the quality and consistency of its decision making. It makes appeals to the SEC the sole recourse of respondents seeking to challenge a decision of the NBCC unless one or more Governors request review by the Board.

MISCELLANEOUS CHANGES

Article I, Section 2 of the Code of Procedure (which defines terms used in the Code) has been amended by adding definitions of "Extended Proceedings" and "Extended Proceeding Committee" to conform to definitional changes made to Article III, Section 2 that were previously approved by the Commission. Minor amendments have been made to Sections 2(c), (e), and (f) of Article III of the Code of Procedure to clarify that NBCC review includes written briefs, if submitted. The text of the amendments contains further miscellaneous technical changes that the NASD encourages members to review.

Questions regarding this notice may be directed to Norman Sue, Jr., Assistant General Counsel, Office of General Counsel, at (202) 728-8117.

AMENDMENTS TO THE CODE OF PROCEDURE

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

ARTICLE I

Application and Purpose of Code Definitions

Sec. 2. (a) Unless otherwise provided, terms used in the Code of Procedure shall have the meaning as defined in Article I of the By-Laws and Article II, Section 1. [I] of the Rules of Fair Practice.

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(c) The term "Market Surveillance Committee" means the [is a standing] committee of the Corporation or Board [of Governors] which is responsible for handling alleged violations of applicable rules of the Corporation concerning trading of securities, including applicable rules involving quotations, transaction execution and reporting, trading practices and insider trading as well as other such matters assigned [delegated] to it by the Board [of Governors].
(d) The term "National Business Conduct Committee" means the [is a standing] committee of the Board [of Governors] which is authorized to exercise powers assigned [delegated] to it by the Board in connection with disciplinary and other matters.
(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 District Business Conduct Committee[,] or the Market Surveillance Committee[,]. An "Extended Proceeding" is a proceeding under Article III, Sections 2(h) and (i) of the Code of Procedure that is so designated by [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. An "Extended Proceeding Committee" is a committee constituted as provided in the Code of Procedure to sit as a panel for an Extended Proceeding.
(g) The term "NASDAQ Hearing Review Committee" means the committee of the Corporation or the Board which is responsible for handling matters regarding persons aggrieved by the operations of the NASDAQ System, NASDAQ qualifications and related issues.

ARTICLE II

Disciplinary Actions by the District Business Conduct Committees, the Market Surveillance Committee and Others Venue

Sec. 5. (c) In the event the Committee considering a complaint is changed, the complaint shall be processed to completion by the Committee to which the complaint was transferred. In the event the boundaries [of one or more] or number of districts should be changed, any complaint pending in a district shall be processed to completion by the District Business Conduct Committee for the newly constituted district which would have had jurisdiction had the complaint been filed subsequent to the effective date of the number or boundary changes.

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Acceptance, Waiver and Consent and Summary Complaint Procedures

Sec. 10. A Committee may, prior to issuance of a complaint under Section 1 of this Article, impose disciplinary penalties pursuant to the procedures set forth under this Section 10.

Acceptance, Waiver and Consent of the Respondent

(a) If the Committee has reason to believe a violation has occurred and the member or associated person does not dispute the violation, the Committee may suggest that the member or associated person submit a letter containing an acceptance of a finding of violations, a waiver of all rights of appeal to the National Business Conduct Committee (and any review thereof by the Board of Governors), the Securities and Exchange Commission and the courts or to otherwise challenge or contest the validity of the Order issued if the letter is accepted, and a consent to the imposition of sanctions. The letter shall describe the act or practice engaged in or omitted; the rule, regulation or statutory provision violated; and the sanction to be imposed therefore. If the Committee then concludes that the Letter of Acceptance, Waiver and Consent is appropriate and should be accepted, it shall be submitted to the National Business Conduct Committee. If the letter is accepted by the National Business Conduct Committee, it shall become final and shall constitute the complaint, answer and decision in the matter. If the letter is rejected by [either] the Committee or the National Business Conduct Committee, any acceptances, waivers and consents contained therein shall not be considered in any further complaint action which may be taken against the member or associated person.

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Summary Complaint Procedure

(b)
(4) Acceptance by a respondent of an offer as described above shall constitute the respondent's admission of the violations, acceptance of the sanction and a waiver of all rights of appeal to the National Business Conduct Committee (and any review thereof by the Board of Governors), the Securities and Exchange Commission and the courts or to otherwise challenge or contest the validity of the decision, and the complaint and related documents shall constitute the Committee's decision and the record in the case. Receipt of respondent's acceptance by the Committee shall conclude the proceedings as of the date the acceptance is received, without further notice to the respondent, under the conditions stated in the offer, subject to paragraphs (5) and (6).

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Settlement Procedure

Sec. 11. (c) Every Offer of Settlement shall be in writing and shall contain in reasonable detail:

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(5) a waiver of all rights of appeal to the National Business Conduct Committee (and any review thereof by the Board of Governors), the Securities and Exchange Commission and the courts or to otherwise challenge or contest the validity of the Order issued if the Offer of Settlement is accepted.

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Complaints Directed by the Board [of Governors] or the National Business Conduct Committee

Sec. 12. The National Business Conduct Committee and the Board [of Governors] shall each have the authority when (on the basis of information and belief) [it is] of the opinion that any act, practice or omission of any member of the Corporation or of any person associated with a member of the Corporation is in violation of any rule, regulation or statutory provision, to file a complaint with a Committee against such member or such person associated with a member or to instruct any Committee to do so, and any such complaint shall be handled in accordance with this Article.

ARTICLE III

Review of Disciplinary Actions [and Proceedings Before] by the National Business Conduct Committee and the Board [of Governors]

Sec. 1.(a) If a Committee shall take any disciplinary action against any member, or shall dismiss any complaint, as herein provided, such action or dismissal shall be subject to review by the National Business Conduct Committee [Board of Governors] on its own motion within 45 calendar days after the date of the decision. Any such action or dismissal shall also be subject to review upon application by any person aggrieved thereby, filed within 15 calendar days after the date of the decision. Application to the National Business Conduct Committee [Board of Governors] for review, or the institution of review by the National Business Conduct Committee [Board of Governors] on its own motion, shall operate as a stay of any such action or dismissal, until a decision is rendered by the National Business Conduct Committee pursuant to Section 6 of this Article or by the Board in cases of discretionary review pursuant to Section 7 of this Article [of Governors upon such review as hereinafter provided].

(b) If a respondent or any aggrieved person who has made application to the National Business Conduct Committee [Board of Governors] for a review shall withdraw the appeal without a determination by the National Business Conduct Committee [Board of Governors] on the merits there of, the National Business Conduct Committee [Board of Governors] shall have an additional period of 45 calendar days subsequent to the withdrawal in which to determine whether it shall review the matter on its own motion.

Proceedings [Before the Board]

Sec. 2.(a) In the case of an appeal or call for review, the party seeking review may request a hearing. If a 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 fifteen (15) calendar days of notification of the call for review. If a request is made, a hearing shall be granted, subject to the limitations of Section 2(f) below. In the absence of a request for a hearing, the National Business Conduct Committee [Board of Governors] may have any matter set down for a hearing.

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(c) If a hearing is not held, the matter shall be considered on the basis of the record before the Committee, and written briefs, if submitted [as applicable]. For purposes of this section, the record before the Committee shall include the complaint, respondent's answer, the transcript of the Committee hearing, any exhibits reviewed by the Committee, and the Committee decision.
(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 current or former Governors associated with members of the Corporation[, at least one of whom shall also be a current or former member of the Board of Governors].
(e) A hearing on review by the National Business Conduct Committee [Board] shall consist of oral arguments limited to a total period of thirty (30) minutes each for argument and response by respondent and for argument and response by complainant, unless extended by the hearing panel in its discretion for good cause shown. The National Business Conduct Committee's [Board's] review shall be limited to consideration of oral arguments, written briefs, if submitted [as applicable], and the record before the Committee. A record of the hearing shall be kept in all cases.
(f) Any application for review of a matter in which the party seeking review did not participate in the proceedings before the Committee but shows good cause for the failure to participate, shall normally be dismissed by the National Business Conduct Committee [Board] and remanded to the Committee for further proceedings. If the party seeking review did not participate in the proceedings before the Committee and does not show good cause for failure to participate, the matter shall be considered by the National Business Conduct Committee [Board] on the basis of the record before the Committee, including written briefs if submitted to the National Business Conduct Committee [Board, as applicable]. 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 pursuant to Article II, Section 4 of this Code. A party seeking review who failed to request a hearing before a Committee pursuant to Article II, Section 4 of this Code, shall be permitted to have a hearing on review as provided in this section.
(g) Any application for review as to which the party seeking review fails to advise the National Business Conduct Committee [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 and the decision of the Committee shall become the final disciplinary action of the Corporation for purposes of Section 8 of this Article [Association action].

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(j[l]) 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 in National Business Conduct Committee Proceedings

Sec. 3.(a) A party to the National Business Conduct Committee's [Board's] review may apply to the National Business Conduct Committee [Board] for leave to adduce additional evidence. If the party provides notice of the intention to introduce such evidence no later than ten (10) 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 National Business Conduct Committee [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 subject to whatever conditions the National Business Conduct Committee [Board] considers appropriate. On its own motion, the National Business Conduct Committee [Board] may direct that the record on review be supplemented with such additional evidence as it may deem relevant.

(b) 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 National Business Conduct Committee [Board] hearing or review panel and to the parties all documentary evidence which was not part of the record before the Committee no later than five (5) business days before the hearing.

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Powers of the National Business Conduct Committee [Board] on Review

Sec. 4. In any proceeding to review any disciplinary action taken or dismissed by a Committee, the National Business Conduct Committee [Board of Governors] may affirm, dismiss, modify or reverse dismissals with respect to each of the Committee findings or remand the matter with appropriate instructions to the Committee. The National Business Conduct Committee [Board of Governors] may affirm, increase, or reduce any sanction, or impose any other fitting sanction.

Decision of the National Business Conduct Committee [Board]

Sec. 5.(a) In any proceeding to review any disciplinary action taken by a Committee or a dismissal by a Committee if the National Business Conduct Committee [Board of Governors] determines that a violation alleged in the complaint has occurred, it shall issue a written decision which shall set forth:

(1) the act or practice which the respondent has been found to have engaged in or omitted;
(2) the rule, regulation, or statutory provision which such act or omission to act is deemed to violate;
(3) the basis upon which the findings are made; and
(4) the sanction imposed and the reason there for.

Notification of Decision; Final Disciplinary Action

Sec. 6. Unless a matter is called for discretionary review by the Board pursuant to Section 7 of this Article, the decision of the National Business Conduct Committee shall constitute final disciplinary action for purposes of Section 8 of this Article, and t[T]he complainant, the respondent and the member of the Corporation with whom the respondent is presently an associated person shall be promptly notified and sent a copy of any written decision rendered by the National Business Conduct Committee [Board of Governors]. In the event of discretionary review by the Board, the decision of the Board shall constitute final disciplinary action for purposes of Section 8 of this Article, and the complainant, the respondent and the member of the Corporation with whom the respondent is presently an associated person shall be promptly notified and sent a copy of any written decision rendered by the Board.

Discretionary Review by the Board

Sec. 7. Determinations of the National Business Conduct Committee may be reviewed by the Board solely upon the request of one or more Governors. Such review, which may be undertaken solely at the discretion of the Board, shall be in accordance with resolutions of the Board governing the review of National Business Conduct Committee determinations. In reviewing any determination of the National Business Conduct Committee, the Board may affirm, dismiss, modify or reverse dismissals with respect to each of the National Business Conduct Committee determinations or remand the matter with appropriate instructions to the National Business Conduct Committee or any Committee. The Board may affirm, increase, or reduce any sanction, or impose any other fitting sanction. Discretionary review by the Board shall operate as a stay of any action or dismissal by the Committee and any determinations of the National Business Conduct Committee, until a decision is rendered by the Board.

Application to SEC for Review

Sec. 8[7]. In any case where either the complainant or the respondent feels aggrieved by any final disciplinary action taken by the National Business Conduct Committee or Board [of Governors], such person may make application for review to the Securities and Exchange Commission in accordance with the Securities Exchange Act of 1934, as amended. The member of the Corporation with whom the respondent is presently an associated person shall be notified promptly of any application for review to the Securities and Exchange Commission.

ARTICLE IV

Imposition of Sanctions and Costs Sanctions

Sec. 1. In any proceeding relating to disciplinary actions involving members and associated persons, a Committee, the National Business Conduct Committee or the Board of Governors may impose any sanction it deems appropriate as set forth in Article V, Section 1, of the Rules of Fair Practice or in the applicable By-Law or rule of the Corporation which was the subject of the complaint.

Costs of Proceedings

Sec. 2. In any disciplinary action, the member or associated person shall bear such part of the costs of the proceedings as the Committee, the National Business Conduct Committee or Board of Governors deems fair and appropriate under the circumstances.

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ARTICLE IX

Procedures on Grievances Concerning the Automated Systems Review by the NASDAQ Hearing Review Committee [Board]

Sec. 6. The decision shall be subject to review by the NASDAQ Hearing Review Committee [Board of Governors] on its own motion within 45 calendar days after issuance of the written decision. Any such decision shall also be subject to review upon application of any person aggrieved thereby, filed within 15 calendar days after issuance. The institution of a review, whether on application or on the initiative of the NASDAQ Hearing Review Committee [Board], shall not operate as a stay of the decision.

Findings of the NASDAQ Hearing Review Committee [Board] on Review

Sec. 7. Upon consideration of the record, and after such further hearings as it shall order, the NASDAQ Hearing Review Committee [Board] shall affirm, modify, reverse, dismiss, or remand the decision. The NASDAQ Hearing Review Committee [Board] shall set forth specific grounds upon which its determination is based.

Discretionary Review by the Board

Sec. 8. Determinations of the NASDAQ Hearing Review Committee may be reviewed by the Board solely upon the request of one or more Governors. Such review, which may be undertaken solely at the discretion of the Board, shall be in accordance with resolutions of the Board governing the review of NASDAQ Hearing Review Committee determinations. The Board shall affirm, modify or reverse the determinations of the NASDAQ Hearing Review Committee or remand the matter to the NASDAQ Hearing Review Committee with appropriate instructions. The institution of discretionary review by the Board shall not operate as a stay of the decision.

Application to Commission for Review

Sec. 9[8]. In any case where a person feels aggrieved by any decision [of the Board of Governors taken] issued pursuant to Section 7 or Section 8 of this Article, the person may make application for review to the Securities and Exchange Commission in accordance with the Securities Exchange Act of 1934, as amended.

ARTICLE X

Miscellaneous

Grounds of Disqualification to Participate in Proceedings

Sec. 1. No member of the Board [of Governors], National Business Conduct Committee, any Committee or [any] other committee or subcommittee governed by this Code shall in any manner, directly or indirectly, participate in the determination of any matter substantially affecting his interest or the interests of any person in whom he is directly or indirectly interested. In any such case the particular member shall disqualify himself, or shall be disqualified by the Chairman of the [any such] Board, National Business Conduct Committee, or any such Committee or other committee or subcommittee governed by this Code.

Reports and Examination of Books and Records

Sec. 2. For the purpose of any examination[,] or determination as to any proceeding pursuant to this Code, any hearing panel, Committee, other committee or subcommittee governed by this Code, the National Business Conduct Committee or the Board [of Governors], and [or] any duly authorized agent or agents thereof [of any such hearing panel, Committee or Board], shall have the right to require any member, [or] person associated with a member, or person no longer associated with a member when such person is subject to the Corporation's jurisdiction, to report, either informally or on the record, orally or in writing with regard to any examination, determination or hearing, and to examine the books and records of any such member or person [associated with a member].

Rulings on Procedural Matters

Sec. 3. Except as otherwise provided by this Code, the Board, National Business Conduct Committee or any hearing panel, Committee or [Board] other committee or subcommittee governed by this Code shall have discretion to make rulings on all motions and other matters arising during the course of its proceedings (including without limitation, the presence of witnesses after completion of their testimony and of other persons not parties to the proceeding) which require resolution during the proceeding.

1The amendments make parallel amendments to Article IX with respect to the decisions of the Nasdaq Hearing Review Committee.