Self-Regulatory Organizations; National Association of Securities Dealers, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Extend for an Additional Two-Year Period NASD's Authority Under the Cease and Desist Pilot Program, 36427-36428 [E5-3264]

Agencies

• SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 70, Number 120 (Thursday, June 23, 2005)]
[Notices]
[Pages 36427-36428]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E5-3264]



[[Page 36427]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51860; File No. SR-NASD-2005-061]


Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Notice of Filing and Immediate Effectiveness of Proposed 
Rule Change To Extend for an Additional Two-Year Period NASD's 
Authority Under the Cease and Desist Pilot Program

June 16, 2005.
    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 May 11, 2005, the National Association of Securities Dealers, Inc. 
(``NASD'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the NASD. NASD has 
filed the proposal as a ``non-controversial'' rule change pursuant to 
Section 19(b)(3)(A) of the Act,\3\ and Rule 19b-4(f)(6) thereunder,\4\ 
which renders the proposal effective upon filing with the Commission. 
The Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    NASD is proposing a rule change to extend for an additional two-
year period, to June 23, 2007, NASD's authority under the cease and 
desist pilot program. At this time, NASD is not proposing any 
substantive changes to the rules covered by the pilot program. NASD's 
proposed changes would only extend the pilot's expiration date to June 
23, 2007, and make technical changes to certain cross-references in 
rules covered by the pilot program. Below is the text of the revised 
rule change. Proposed new language is in italics; proposed deletions 
are in [brackets].\5\
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    \5\ NASD represents that the rule language contained in 
parentheses in NASD Rules 9556 and 9800 is, and will continue to be, 
italicized in NASD's manual. However, the existing rule language in 
the parentheses that will not be modified by NASD's proposed rule 
change is not italicized for purposes of this Federal Register 
publication so that it will not appear as proposed new text.
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* * * * *
9556. Failure to Comply with Temporary and Permanent Cease and Desist 
Orders
    (Rule 9556, and amendments adopted by SR-NASD-98-80 to Rule 8310, 
IM-8310-2(d)(1), 9120(x), 9241(c), 9290, 9311(b), 9312(b), 9360 and the 
Rule 9800 Series, shall expire on June 23, [2005] 2007, unless extended 
or permanently adopted by the Association pursuant to SEC approval at 
or before such date.)
* * * * *
9800. Temporary Cease and Desist Orders
    (The entire Rule 9800 Series, and related amendments adopted by SR-
NASD-98-80 to Rule 8310, IM-8310-2(d)(1), 9120(x), 9241(c), 9290, 
9311(b), 9312(b), and 9360, and by SR-NASD-2003-110 to Rule 9556, shall 
expire on June 23, [2005] 2007, unless extended or permanently adopted 
by the Association pursuant to SEC approval at or before such date.)
* * * * *
9860. Violation of Temporary Cease and Desist Orders
    A Respondent who violates a temporary cease and desist order 
imposed under this Rule Series may have its association or membership 
suspended or canceled under [the] Rule 9556 [9510 Series]. The 
President of NASD Regulatory Policy and Oversight or the Executive Vice 
President for NASD Regulatory Policy and Programs must authorize the 
initiation of any such proceeding in writing.
* * * * *

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
    In May 2003, the Commission approved, on a two-year pilot basis, a 
rule change that gave NASD authority to issue temporary cease and 
desist orders (``TCDOs'') and made explicit NASD's ability to impose 
permanent cease and desist orders as a remedy in disciplinary cases.\6\ 
The pilot program also gave NASD authority to enforce cease and desist 
orders. The pilot program expires on June 23, 2005. NASD proposes to 
extend the pilot program for an additional two-year period, to June 23, 
2007. Such an extension would enable NASD to continue to issue and 
enforce temporary and permanent cease and desist orders. NASD's 
authority to issue TCDOs would expire after the additional two-year 
period, unless the pilot program is further extended or adopted on a 
permanent basis with Commission approval.
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    \6\ See Securities Exchange Act Release No. 47925 (May 23, 
2003), 68 FR 33548 (June 4, 2003).
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    NASD currently seeks only to extend the pilot program period and to 
make technical changes to certain cross-references in rules covered by 
the pilot program. NASD is not proposing any substantive changes to the 
rules covered by the pilot program at this time. Since the pilot 
program was first approved in 2003, NASD has issued only one TCDO and 
one permanent cease and desist order (in the same case, which is 
described below). Consequently, NASD believes that additional time is 
needed to make a meaningful determination about whether certain 
specific provisions eventually should be modified and, if so, to what 
extent.
    In the one case initiated under the pilot program, NASD's 
Department of Enforcement (``Enforcement'') alleged that the member in 
question was engaged in widespread fraud that included, among other 
things, making material misrepresentations and omissions in connection 
with the private offering of its own stock, effecting unauthorized 
transactions, and using customer funds improperly. Enforcement showed 
that not only was the member attempting to continue the fraudulent 
offering, it also was funneling money and assets to a non-NASD member 
affiliate. Enforcement alleged, and a hearing panel found, that a TCDO 
was necessary because the member's continuation of the misconduct was 
likely to result in further dissipation or conversion of assets and 
other significant harm to investors before the completion of the 
underlying disciplinary proceeding. After the hearing panel issued a 
permanent cease and desist order following a full disciplinary hearing, 
the parties settled the case, resulting in the expulsion of the member, 
the bar of its owner, and the imposition of almost $12 million in fines 
and restitution.

[[Page 36428]]

    The proposed extension of the pilot program for an additional two 
years would provide NASD with a mechanism to continue to take 
appropriate remedial action against a member or an associated person 
who has engaged (or is engaging) in violative conduct that could cause 
continuing harm to the investing public if not addressed expeditiously. 
At the same time, the pilot program continues to contain numerous 
procedural checks and safeguards to ensure that cease and desist 
proceedings are used prudently, sparingly and fairly. In addition, the 
extension of the pilot program would allow NASD to analyze more 
thoroughly the pilot program's overall effectiveness. Accordingly, NASD 
believes it is appropriate to extend the pilot period regarding cease 
and desist orders for another two years.
    The proposed rule change is effective upon filing, would be 
operative on June 23, 2005, and would expire on June 23, 2007, unless 
extended or permanently adopted by NASD pursuant to Commission approval 
at or before such date.
2. Statutory Basis
    NASD believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\7\ 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 also believes that the proposed rule change is 
consistent with the provisions of Section 15A(b)(7) of the Act,\8\ 
which provides that NASD members, or persons associated with its 
members, are appropriately disciplined for violations of any provisions 
of the Act or NASD's rules. NASD believes that the extension of the 
pilot program is consistent with NASD's obligations under the Act 
because cease and desist orders are designed to stop violative conduct 
that is likely to cause dissipation or conversion of assets or other 
significant harm to investors.
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    \7\ 15 U.S.C. 78o-3(b)(6).
    \8\ 15 U.S.C. 78o-3(b)(7).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    NASD does not believe that the proposed rule change will impose any 
burden on competition not necessary or appropriate in furtherance of 
the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    NASD has neither solicited nor received comments on the proposed 
rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Because the foregoing rule change: (1) Does not significantly 
affect the protection of investors or the public interest; (2) does not 
impose any significant burden on competition; and (3) does not become 
operative for 30 days from the date on which it was filed, or such 
shorter time as the Commission may designate if consistent with the 
protection of investors and the public interest, the proposed rule 
change has become effective pursuant to Section 19(b)(3)(A) of the Act 
\9\ and Rule 19b-4(f)(6) thereunder.\10\
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    \9\ 15 U.S.C. 78s(b)(3)(A).
    \10\ 17 CFR 240.19b-4(f)(6).
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    In accordance with Rule 19b-4,\11\ NASD submitted written notice of 
its intent to file the proposed rule change extending the pilot, along 
with a brief description and text of the proposal, at least five 
business days prior to the date of filing. NASD proposes to make the 
proposed rule change operative on June 23, 2005. The rule change would 
expire on June 23, 2007, unless extended or permanently adopted by NASD 
pursuant to Commission approval at or before such date.
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    \11\ 17 CFR 240.19b-4.
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    At any time within 60 days of the filing of such proposed rule 
change, the Commission may summarily abrogate such rule change if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protection of investors, or otherwise 
in furtherance of the purposes of the Act.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (https://
www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-NASD-2005-061 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-9303.
    All submissions should refer to File Number SR-NASD-2005-061. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (https://www.sec.gov/
rules/sro.shtml). 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 the 
filing also will be available for inspection and copying at the 
principal offices of the NASD. All comments received will be posted 
without change; the Commission does not edit personal identifying 
information from submissions. You should submit only information that 
you wish to make available publicly. All submissions should refer to 
File Number SR-NASD-2005-061 and should be submitted on or before July 
14, 2005.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5-3264 Filed 6-22-05; 8:45 am]
BILLING CODE 8010-01-P