Self-Regulatory Organizations; National Association of Securities Dealers, Inc.; Notice of Filing of Proposed Rule Change and Amendments No. 1 and 2 Thereto To Amend NASD's Minor Rule Violation Plan, 40764-40767 [E5-3746]

Download as PDF 40764 Federal Register / Vol. 70, No. 134 / Thursday, July 14, 2005 / Notices securities exchange.8 In particular, the Commission believes that the proposal Interested persons are invited to is consistent with Section 6(b)(5) of the submit written data, views, and Act,9 which requires that the rules of an arguments concerning the foregoing, exchange be designed to promote just including whether the proposed rule and equitable principles of trade, to change, as amended, is consistent with remove impediments and to perfect the the Act. Comments may be submitted by mechanism of a free and open market any of the following methods: and a national market system, and, in Electronic Comments general, to protect investors and the public interest. The Commission also • Use the Commission’s Internet believes that the proposal is consistent comment form (http://www.sec.gov/ with Sections 6(b)(1) and 6(b)(6) of the rules/sro.shtml); or Act 10 which require that the rules of an • Send an e-mail to ruleexchange enforce compliance with, and comments@sec.gov. Please include File Number SR–ISE–2005–21 on the subject provide appropriate discipline for, violations of Commission and Exchange line. rules. In addition, because the existing Paper Comments ISE Rule 1614(c) offers procedural rights to a person fined under the ISE Rule • Send paper comments in triplicate 1614, the Commission believes ISE Rule to Jonathan G. Katz, Secretary, 1614, as amended by this proposal, Securities and Exchange Commission, provides a fair procedure for the Station Place, 100 F Street, NE., disciplining of members and persons Washington, DC 20549–9303. associated with members, consistent All submissions should refer to File with Sections 6(b)(7) and 6(d)(1) of the Number SR–ISE–2005–21. This file Act.11 number should be included on the Finally, the Commission finds that the subject line if e-mail is used. To help the proposal, as amended, is consistent with Commission process and review your the public interest, the protection of comments more efficiently, please use only one method. The Commission will investors, or otherwise in furtherance of post all comments on the Commission’s the purposes of the Act, as required by Rule 19d–1(c)(2) under the Act 12 which Internet Web site (http://www.sec.gov/ governs minor rule violation plans. The rules/sro.shtml). Copies of the Commission believes that the change to submission, all subsequent ISE Rule 1614 would strengthen its amendments, all written statements ability to carry out its oversight and with respect to the proposed rule enforcement responsibilities as a selfchange that are filed with the regulatory organization in cases where Commission, and all written full disciplinary proceedings are communications relating to the unsuitable in view of the minor nature proposed rule change between the Commission and any person, other than of the particular violation. The Commission also notes that ISE’s those that may be withheld from the proposal is similar to a proposal by the public in accordance with the Chicago Board Options Exchange provisions of 5 U.S.C. 552, will be (‘‘CBOE’’) that was previously approved available for inspection and copying in by the Commission.13 the Commission’s Public Reference In approving this proposed rule Room. Copies of such filing will also be change, the Commission in no way available for inspection and copying at minimizes the importance of the principal office of ISE. All compliance with Exchange rules and all comments received will be posted other rules subject to the imposition of without change; the Commission does fines under ISE Rule 1614. The not edit personal identifying Commission believes that the violation information from submissions. You of any self-regulatory organization’s should submit only information that you wish to make available publicly. All rules, as well as Commission rules, is a serious matter. However, ISE Rule 1614 submissions should refer to File Number SR–ISE–2005–21 and should be provides a reasonable means of submitted on or before August 4, 2005. 8 III. Solicitation of Comments IV. Commission’s Findings and Order Granting Accelerated Approval of Proposed Rule Change The Commission finds that the proposed rule change, as amended, is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national VerDate jul<14>2003 18:32 Jul 13, 2005 Jkt 205001 In approving this proposed rule change, the Commission notes that it has considered the proposed rule’s impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). 9 15 U.S.C. 78f(b)(5). 10 15 U.S.C. 78f(b)(1) and 78f(b)(6). 11 15 U.S.C. 78f(b)(7) and 78f(d)(1). 12 17 CFR 240.19d–1(c)(2). 13 See Securities Exchange Act Release No. 47959 (May 30, 2003), 68 FR 34441 (June 9, 2003) (SR– CBOE–2002–05). PO 00000 Frm 00080 Fmt 4703 Sfmt 4703 addressing rule violations that do not rise to the level of requiring formal disciplinary proceedings, while providing greater flexibility in handling certain violations. The Commission expects that ISE will continue to conduct surveillance with due diligence and make a determination based on its findings, on a case-by-case basis, whether a fine of more or less than the recommended amount is appropriate under ISE Rule 1614 or whether a violation requires formal disciplinary action. The Commission finds good cause, pursuant to Section 19(b)(2) of the Act,14 for approving the proposed rule change, as amended, prior to the thirtieth day after the date of publication of the notice of the filing thereof in the Federal Register. Because the Commission recently approved a substantively similar proposal by CBOE after a full notice-and-comment period and this proposal does not raise any new regulatory issues, the Commission believes that accelerated approval is appropriate. V. Conclusion It is therefore ordered, pursuant to Section 19(b)(2) of the Act 15 and Rule 19d–1(c)(2) thereunder,16 that the proposed rule change, as amended, (SR– ISE–2005–21) be, and hereby is, approved and declared effective. For the Commission, by the Division of Market Regulation, pursuant to delegated authority.17 J. Lynn Taylor, Assistant Secretary. [FR Doc. E5–3747 Filed 7–13–05; 8:45 am] BILLING CODE 8010–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–51994; File No. SR–NASD– 2004–025] Self-Regulatory Organizations; National Association of Securities Dealers, Inc.; Notice of Filing of Proposed Rule Change and Amendments No. 1 and 2 Thereto To Amend NASD’s Minor Rule Violation Plan July 7, 2005. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 14 15 U.S.C. 78s(b)(2). U.S.C. 78s(b)(2). 16 17 CFR 240.19d–1(c)(2). 17 17 CFR 200.30–3(a)(12). 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 15 15 E:\FR\FM\14JYN1.SGM 14JYN1 Federal Register / Vol. 70, No. 134 / Thursday, July 14, 2005 / Notices notice is hereby given that on February 10, 2004, 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 NASD. On March 17, 2005, NASD filed Amendment No. 1 to the proposed rule change.3 On June 27, 2005, NASD filed Amendment No. 2 to the proposed rule change.4 The Commission is publishing this notice to solicit comments on the proposed rule change, as amended, from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change NASD is proposing to amend NASD Interpretative Material 9216 (‘‘IM– 9216’’) (‘‘Violations Appropriate for Disposition Under the Plan Pursuant to SEC Rule 19d–1(c)(2)’’) to expand the list of violations eligible for disposition under NASD’s Minor Rule Violation Plan (‘‘MRVP’’). The text of the rule change is available on NASD’s Web site (http://www.nasd.com), at NASD’s principal office, and at the Commission’s Public Reference Room. 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, as amended, and discussed any comments it received on the proposal. 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 Background In 1984, the Commission adopted amendments to Rule 19d–1(c) under the Act 5 that allow self-regulatory organizations to adopt, with Commission approval, plans for the 3 Amendment No. 1 replaced the original filing in its entirety. 4 Amendment No. 2 replaced Amendment No. 1 in its entirety. 5 17 CFR 240.19d–1(c). VerDate jul<14>2003 18:32 Jul 13, 2005 Jkt 205001 disposition of minor violations of rules.6 In 1993, pursuant to Rule 19d–1(c), NASD established its MRVP.7 In 2001, the Commission approved significant amendments to NASD’s MRVP.8 In addition, in 2004, the Commission approved an amendment to NASD’s MRVP to include failure to timely submit amendments to the Form U5 (‘‘Uniform Termination Notice for Securities Industry Registration’’).9 NASD Rule 9216(b) authorizes NASD to impose a fine of $2,500 or less on any member or associated person of a member for a violation of any of the rules specified in NASD IM–9216. NASD staff reviews the number and seriousness of the violations, as well as the previous disciplinary history of the respondent, to determine if a matter is appropriate for disposition under the MRVP and to determine the amount of the fine. Once NASD has brought an MRVP action against an individual or member firm, NASD may, at its discretion, issue progressively higher fines for all subsequent minor rule violations within the next 24-month period or initiate more formal disciplinary proceedings. NASD states that the purpose of the MRVP is to provide a meaningful sanction for the minor or technical violation of a rule when the initiation of a disciplinary proceeding through the formal complaint process would be more costly and time-consuming than would be warranted. NASD further states that the inclusion of a rule in NASD’s MRVP does not mean that it is unimportant; rather, a minor or technical violation of the rule may be appropriate for disposition under the MRVP. Moreover, NASD states that it retains the discretion to bring full disciplinary proceedings if violations of such rule occur. Discussion NASD proposes to amend its MRVP to make the following changes: • Transaction Reporting and Audit Trail Requirements in Equity and Debt Securities. NASD proposes to combine in one entry all of the rule violations eligible for disposition under the MRVP that relate to transaction reporting and audit Securities Exchange Act Release No. 21013 (June 1, 1984), 49 FR 23828 (June 8, 1984). 7 See Securities Exchange Act Release No. 32383 (May 28, 1993), 58 FR 31768 (June 4, 1993) (SR– NASD–93–6). See also NASD Rule 9216(b) and Notice to Members 93–42 (July 1993). 8 See Securities Exchange Act Release No. 44512 (July 3, 2001), 66 FR 36812 (July 13, 2001) (SR– NASD–00–39). 9 See Securities Exchange Act Release No. 50466 (September 24, 2004), 69 FR 58568 (September 30, 2004) (SR–NASD–2004–121). PO 00000 6 See Frm 00081 Fmt 4703 Sfmt 4703 40765 trail requirements in equity and debt securities. As proposed, this entry would include violations of transaction reporting and audit trail requirements related to (1) the Nasdaq Market Center; (2) NASD’s Trade Reporting and Comparison Service (‘‘TRACS’’);10 and (3) Trade Reporting and Compliance Engine (‘‘TRACE’’). To effectuate this, NASD proposes to eliminate the separate minor rule violation pertaining to NASD Rules 6130 and NASD 6170 (transaction reporting to the Automated Confirmation Transaction Service) and add those rules to this consolidated entry. NASD further proposes to add to the MRVP, and this consolidated entry, violations of NASD Rules 4632A, 5430, 6130A, and 6170A, which relate to TRACS requirements.11 Currently, NASD’s MRVP includes transaction reporting for various systems, including the Nasdaq Market Center. NASD believes that including violations of ADF transaction reporting requirements in the MRVP is consistent with the current provisions for minor rule violations of transaction reporting requirements in equity securities. NASD also proposes to eliminate the reference in the MRVP to a violation of the Fixed Income Pricing System (‘‘FIPS’’), NASD Rule 6240, and replace it with a violation of NASD Rule 6230, the TRACE transaction reporting rule.12 In adopting the TRACE rules in 2001, NASD eliminated FIPS, which required members to report trades for 50 highyield debt securities. Because the TRACE system replaced and expanded upon FIPS, NASD proposes to amend its MRVP to replace the FIPS violation with a violation of the TRACE system transaction reporting requirement and also combine it into this single entry. Communications with the Public. NASD proposes to include in its MRVP violations of the standards applicable to member communications with the public. NASD’s advertising rules (NASD Rules 2210, 2211, and 2220, and related Interpretive Materials) contain general and specific standards applicable to all member communications with the public. These standards prohibit incomplete, unbalanced, or unfair 10 TRACS is the trade reporting system for NASD’s Alternative Display Facility (‘‘ADF’’). ADF is a quotation collection, trade comparison, and trade reporting facility developed by NASD in accordance with the Commission’s SuperMontage Approval Order. 11 NASD notes that NASD Rule 5430 governs both TRACS and the Nasdaq Market Center transaction reporting requirements. 12 Prior to July 1, 2002, the NASD Rule 6200 Series pertained to FIPS, and NASD Rule 6240 governed transaction reporting in high-yield fixed income securities. E:\FR\FM\14JYN1.SGM 14JYN1 40766 Federal Register / Vol. 70, No. 134 / Thursday, July 14, 2005 / Notices communications as well as exaggerated, unwarranted, or misleading statements or claims. The rules also enumerate specific standards for certain type of communications, including recommendations, hedge clauses, and projections. In addition, the rules set forth standards for the use and disclosure of the member’s name. Under the current MRVP, NASD may issue minor rule violations only for procedural violations of the advertising rules, such as a failure to have advertisements and sales literature approved by a principal prior to use or a failure to meet specified time limits for filing advertisements. It is NASD’s experience, however, that, based on the facts and circumstances, certain content-related violations of these rules can warrant more than a Letter of Caution, yet not rise to a level requiring or meriting full disciplinary action. Accordingly, the proposed rule change would allow NASD to address these minor or technical violations of contentrelated advertising rules, which might include, for example only, a technical violation of the provisions on the use and disclosure of members’ names. NASD, therefore, proposes to include in its MRVP violations of the standards applicable to member communications with the public. Contact Information. NASD proposes to expand the MRVP to include, as a general category, a member’s failure to identify to NASD and keep current information regarding any contact person that a member must provide to NASD under any current or future NASD rule. For example, a member’s failure to provide or update emergency contact information under NASD Rule 3520 or failure to provide or update its executive representative designation and contact information as required by NASD Rule 1150 would be eligible for disposition as a minor rule violation under this category.13 Other Changes. In addition, NASD proposes to change ‘‘the Association’’ to ‘‘NASD’’ in the minor rule violation provision relating to NASD Rule 3110 14 and change ‘‘ECN’s’’ to ‘‘ECNs’’ in the 13 See also NASD Rule 1120(a)(7) (requirement to provide continuing education regulatory element contact person). NASD notes that it generally has sought to achieve consistency regarding the frequency with which members must review and update contact information (namely, within 17 business days after the end of each calendar quarter). 14 NASD no longer refers to itself or its subsidiary, NASD Regulation, Inc., using its full corporate name, ‘‘the Association,’’ ‘‘the NASD,’’ or ‘‘NASD Regulation, Inc.’’ Instead, NASD uses ‘‘NASD’’ unless otherwise appropriate for corporate or regulatory reasons. VerDate jul<14>2003 18:32 Jul 13, 2005 Jkt 205001 minor rule violation provision relating to Rule 11Ac1–1(c)(5) under the Act.15 NASD would announce the effective date of the proposed rule change in a Notice to Members to be published no later than 60 days following Commission approval, if the Commission approves this proposal. The effective date would be 30 days following publication of that Notice to Members. 2. Statutory Basis NASD believes that the proposed rule change, as amended, is consistent with the provisions of Section 15A(b)(6) of the Act,16 which requires, among other things, that NASD rules must 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 proposed rule change, as amended, is consistent with Section 15A(b)(7) of the Act 17 in that it works to safeguard adequately the interests of investors while establishing fair and reasonable rules for members and persons associated with members. NASD also believes that the proposed rule change also is consistent with Section 15A(b)(8) of the Act 18 in that it furthers the statutory goals of providing a fair procedure for disciplining members and associated persons. NASD believes that the addition of these violations to the MRVP will provide NASD with the ability to impose a meaningful sanction for violations of the rules discussed herein that warrant more than a Letter of Caution but do not necessarily rise to a level meriting a full disciplinary proceeding. B. Self-Regulatory Organization’s Statement on Burden on Competition NASD does not believe that the proposed rule change, as amended, would result in any burden on competition that is 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 neither solicited nor received any comments. PO 00000 15 17 CFR 240.11Ac1–1(c)(5). U.S.C. 78o–3(b)(6). 17 15 U.S.C. 78o–3(b)(7). 18 15 U.S.C. 78o–3(b)(8). 16 15 Frm 00082 Fmt 4703 Sfmt 4703 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 proposed rule change, as amended, is consistent with the Act. Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission’s Internet comment form (http://www.sec.gov/ rules/sro.shtml); or • Send an e-mail to rulecomments@sec.gov. Please include File Number SR–NASD–2004–025 on the subject line. Paper Comments • Send paper comments in triplicate to Jonathan G. Katz, Secretary, Securities and Exchange Commission, Station Place, 100 F Street, NE, Washington, DC 20549–9303. All submissions should refer to File No. SR–NASD–2004–025. 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 (http://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 such filing also will be available for inspection and copying at the principal office of NASD. E:\FR\FM\14JYN1.SGM 14JYN1 Federal Register / Vol. 70, No. 134 / Thursday, July 14, 2005 / Notices 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 the File Number SR–NASD–2004–025 and should be submitted on or before August 4, 2005. For the Commission, by the Division of Market Regulation, pursuant to delegated authority.19 J. Lynn Taylor, Assistant Secretary. [FR Doc. E5–3746 Filed 7–13–05; 8:45 am] BILLING CODE 8010–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–51980; File No. SR–NYSE– 2005–19] Self-Regulatory Organizations; New York Stock Exchange, Inc.; Notice of Filing of Proposed Rule Change To Require Members That Use Appendix E To Calculate Net Capital To File Supplemental and Alternative Reports July 6, 2005. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 under the Act,2 notice is given that on March 8, 2005, the New York Stock Exchange, Inc. (‘‘NYSE’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule change as described in Items I, II, and III below. These Items have been substantially prepared by the Exchange. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to amend NYSE Rule 418 to require member organizations approved by the Commission to use the alternative method of computing net capital contained in Appendix E to Rule 15c3– 1 under the Act (‘‘Appendix E’’) 3 to file 19 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 17 CFR 240.15c3–1e. The Commission amended Rule 15c3–1 to establish this voluntary, alternative method of computing net capital, which is applicable to firms that qualify for consolidated supervised entity (‘‘CSE’’) treatment. Exchange Act Release No. 49830 (June 8, 2004), 69 FR 34428 (June 21, 2004). 1 15 VerDate jul<14>2003 18:32 Jul 13, 2005 Jkt 205001 40767 supplemental and alternative reports with the Exchange. The text of the proposed rule change is available on the Exchange’s Internet Web site (http://www.nyse.com), at the principal office of the NYSE, and at the Commission’s Public Reference Room. copy of the modified FOCUS report that CSE broker-dealers would have to file with the Exchange under proposed Rule 418.25 is available on the Exchange’s Internet Web site (http:// www.nyse.com). II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the Exchange 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. The Exchange has prepared summaries, set forth in Sections A, B, and C below, of the most significant aspects of such statements. The Exchange believes that the proposed amendment to NYSE Rule 418 is consistent with Section 6(b) of the Act 7 in general, and furthers the objectives of Section 6(b)(5) of the Act 8 in particular, in that it is designed to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in facilitating transactions in securities, and to remove impediments and perfect the mechanism of a free and open market and to protect investors and the public interest. A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose The purpose of this proposal is to provide the Exchange with the authority to require member organizations approved by the Commission to use the alternative method of computing net capital contained in Appendix E (‘‘CSE broker-dealers’’) to file certain supplemental and alternative reports with the Exchange. Rule 17a–5 under the Act 4 contains broker-dealer reporting requirements. Broker-dealers file the monthly and quarterly reports required by Rule 17a– 5 on Form X–17A–5 (the ‘‘FOCUS Report’’).5 Pursuant to Rule 17a– 5(a)(5),6 CSE broker-dealers are required to file certain additional monthly and quarterly reports. The Exchange has created a modified FOCUS Report form for CSE broker-dealers. The form contains new line items to capture the additional required reports. The proposed rule amendment is designed to require CSE broker-dealers to provide the additional reports to the Exchange. Under NYSE Rule 418, the Exchange may at any time require any member or member organization to be audited in accordance with the requirements of Rule 17a–5. The proposed amendment adds NYSE Rule 418.25, which would require member organizations that are CSE broker-dealers to file such supplemental and alternative reports as may be prescribed by the Exchange. A PO 00000 CFR 240.17a–5. CFR 249.617. 6 17 CFR 240.17a–5(a)(5). 2. Statutory Basis B. Self-Regulatory Organization’s Statement on Burden on Competition The Exchange does not believe that the proposal will impose any inappropriate burden on competition. 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 Pursuant to Section 19(b)(2) of the Act,9 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 Exchange 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 proposed rule change, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: 4 17 7 15 5 17 8 15 Frm 00083 Fmt 4703 Sfmt 4703 U.S.C. 78f(b). U.S.C. 78f(b)(5). 9 15 U.S.C. 78f(b)(2). E:\FR\FM\14JYN1.SGM 14JYN1

Agencies

[Federal Register Volume 70, Number 134 (Thursday, July 14, 2005)]
[Notices]
[Pages 40764-40767]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E5-3746]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51994; File No. SR-NASD-2004-025]


Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Notice of Filing of Proposed Rule Change and Amendments 
No. 1 and 2 Thereto To Amend NASD's Minor Rule Violation Plan

July 7, 2005.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\

[[Page 40765]]

notice is hereby given that on February 10, 2004, 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 NASD. On March 17, 2005, NASD filed Amendment No. 1 to 
the proposed rule change.\3\ On June 27, 2005, NASD filed Amendment No. 
2 to the proposed rule change.\4\ 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\ Amendment No. 1 replaced the original filing in its 
entirety.
    \4\ Amendment No. 2 replaced Amendment No. 1 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 NASD Interpretative Material 9216 (``IM-
9216'') (``Violations Appropriate for Disposition Under the Plan 
Pursuant to SEC Rule 19d-1(c)(2)'') to expand the list of violations 
eligible for disposition under NASD's Minor Rule Violation Plan 
(``MRVP''). The text of the rule change is available on NASD's Web site 
(http://www.nasd.com), at NASD's principal office, and at the 
Commission's Public Reference Room.

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, as 
amended, and discussed any comments it received on the proposal. 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

Background

    In 1984, the Commission adopted amendments to Rule 19d-1(c) under 
the Act \5\ that allow self-regulatory organizations to adopt, with 
Commission approval, plans for the disposition of minor violations of 
rules.\6\ In 1993, pursuant to Rule 19d-1(c), NASD established its 
MRVP.\7\ In 2001, the Commission approved significant amendments to 
NASD's MRVP.\8\ In addition, in 2004, the Commission approved an 
amendment to NASD's MRVP to include failure to timely submit amendments 
to the Form U5 (``Uniform Termination Notice for Securities Industry 
Registration'').\9\
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    \5\ 17 CFR 240.19d-1(c).
    \6\ See Securities Exchange Act Release No. 21013 (June 1, 
1984), 49 FR 23828 (June 8, 1984).
    \7\ See Securities Exchange Act Release No. 32383 (May 28, 
1993), 58 FR 31768 (June 4, 1993) (SR-NASD-93-6). See also NASD Rule 
9216(b) and Notice to Members 93-42 (July 1993).
    \8\ See Securities Exchange Act Release No. 44512 (July 3, 
2001), 66 FR 36812 (July 13, 2001) (SR-NASD-00-39).
    \9\ See Securities Exchange Act Release No. 50466 (September 24, 
2004), 69 FR 58568 (September 30, 2004) (SR-NASD-2004-121).
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    NASD Rule 9216(b) authorizes NASD to impose a fine of $2,500 or 
less on any member or associated person of a member for a violation of 
any of the rules specified in NASD IM-9216. NASD staff reviews the 
number and seriousness of the violations, as well as the previous 
disciplinary history of the respondent, to determine if a matter is 
appropriate for disposition under the MRVP and to determine the amount 
of the fine. Once NASD has brought an MRVP action against an individual 
or member firm, NASD may, at its discretion, issue progressively higher 
fines for all subsequent minor rule violations within the next 24-month 
period or initiate more formal disciplinary proceedings.
    NASD states that the purpose of the MRVP is to provide a meaningful 
sanction for the minor or technical violation of a rule when the 
initiation of a disciplinary proceeding through the formal complaint 
process would be more costly and time-consuming than would be 
warranted. NASD further states that the inclusion of a rule in NASD's 
MRVP does not mean that it is unimportant; rather, a minor or technical 
violation of the rule may be appropriate for disposition under the 
MRVP. Moreover, NASD states that it retains the discretion to bring 
full disciplinary proceedings if violations of such rule occur.

Discussion

    NASD proposes to amend its MRVP to make the following changes:
     Transaction Reporting and Audit Trail Requirements in 
Equity and Debt Securities.
    NASD proposes to combine in one entry all of the rule violations 
eligible for disposition under the MRVP that relate to transaction 
reporting and audit trail requirements in equity and debt securities. 
As proposed, this entry would include violations of transaction 
reporting and audit trail requirements related to (1) the Nasdaq Market 
Center; (2) NASD's Trade Reporting and Comparison Service 
(``TRACS'');\10\ and (3) Trade Reporting and Compliance Engine 
(``TRACE'').
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    \10\ TRACS is the trade reporting system for NASD's Alternative 
Display Facility (``ADF''). ADF is a quotation collection, trade 
comparison, and trade reporting facility developed by NASD in 
accordance with the Commission's SuperMontage Approval Order.
---------------------------------------------------------------------------

    To effectuate this, NASD proposes to eliminate the separate minor 
rule violation pertaining to NASD Rules 6130 and NASD 6170 (transaction 
reporting to the Automated Confirmation Transaction Service) and add 
those rules to this consolidated entry. NASD further proposes to add to 
the MRVP, and this consolidated entry, violations of NASD Rules 4632A, 
5430, 6130A, and 6170A, which relate to TRACS requirements.\11\ 
Currently, NASD's MRVP includes transaction reporting for various 
systems, including the Nasdaq Market Center. NASD believes that 
including violations of ADF transaction reporting requirements in the 
MRVP is consistent with the current provisions for minor rule 
violations of transaction reporting requirements in equity securities.
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    \11\ NASD notes that NASD Rule 5430 governs both TRACS and the 
Nasdaq Market Center transaction reporting requirements.
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    NASD also proposes to eliminate the reference in the MRVP to a 
violation of the Fixed Income Pricing System (``FIPS''), NASD Rule 
6240, and replace it with a violation of NASD Rule 6230, the TRACE 
transaction reporting rule.\12\ In adopting the TRACE rules in 2001, 
NASD eliminated FIPS, which required members to report trades for 50 
high-yield debt securities. Because the TRACE system replaced and 
expanded upon FIPS, NASD proposes to amend its MRVP to replace the FIPS 
violation with a violation of the TRACE system transaction reporting 
requirement and also combine it into this single entry.
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    \12\ Prior to July 1, 2002, the NASD Rule 6200 Series pertained 
to FIPS, and NASD Rule 6240 governed transaction reporting in high-
yield fixed income securities.
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    Communications with the Public. NASD proposes to include in its 
MRVP violations of the standards applicable to member communications 
with the public. NASD's advertising rules (NASD Rules 2210, 2211, and 
2220, and related Interpretive Materials) contain general and specific 
standards applicable to all member communications with the public. 
These standards prohibit incomplete, unbalanced, or unfair

[[Page 40766]]

communications as well as exaggerated, unwarranted, or misleading 
statements or claims. The rules also enumerate specific standards for 
certain type of communications, including recommendations, hedge 
clauses, and projections. In addition, the rules set forth standards 
for the use and disclosure of the member's name.
    Under the current MRVP, NASD may issue minor rule violations only 
for procedural violations of the advertising rules, such as a failure 
to have advertisements and sales literature approved by a principal 
prior to use or a failure to meet specified time limits for filing 
advertisements. It is NASD's experience, however, that, based on the 
facts and circumstances, certain content-related violations of these 
rules can warrant more than a Letter of Caution, yet not rise to a 
level requiring or meriting full disciplinary action. Accordingly, the 
proposed rule change would allow NASD to address these minor or 
technical violations of content-related advertising rules, which might 
include, for example only, a technical violation of the provisions on 
the use and disclosure of members' names. NASD, therefore, proposes to 
include in its MRVP violations of the standards applicable to member 
communications with the public.
    Contact Information. NASD proposes to expand the MRVP to include, 
as a general category, a member's failure to identify to NASD and keep 
current information regarding any contact person that a member must 
provide to NASD under any current or future NASD rule. For example, a 
member's failure to provide or update emergency contact information 
under NASD Rule 3520 or failure to provide or update its executive 
representative designation and contact information as required by NASD 
Rule 1150 would be eligible for disposition as a minor rule violation 
under this category.\13\
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    \13\ See also NASD Rule 1120(a)(7) (requirement to provide 
continuing education regulatory element contact person). NASD notes 
that it generally has sought to achieve consistency regarding the 
frequency with which members must review and update contact 
information (namely, within 17 business days after the end of each 
calendar quarter).
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    Other Changes. In addition, NASD proposes to change ``the 
Association'' to ``NASD'' in the minor rule violation provision 
relating to NASD Rule 3110 \14\ and change ``ECN's'' to ``ECNs'' in the 
minor rule violation provision relating to Rule 11Ac1-1(c)(5) under the 
Act.\15\
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    \14\ NASD no longer refers to itself or its subsidiary, NASD 
Regulation, Inc., using its full corporate name, ``the 
Association,'' ``the NASD,'' or ``NASD Regulation, Inc.'' Instead, 
NASD uses ``NASD'' unless otherwise appropriate for corporate or 
regulatory reasons.
    \15\ 17 CFR 240.11Ac1-1(c)(5).
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    NASD would announce the effective date of the proposed rule change 
in a Notice to Members to be published no later than 60 days following 
Commission approval, if the Commission approves this proposal. The 
effective date would be 30 days following publication of that Notice to 
Members.
2. Statutory Basis
    NASD believes that the proposed rule change, as amended, is 
consistent with the provisions of Section 15A(b)(6) of the Act,\16\ 
which requires, among other things, that NASD rules must 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 proposed rule 
change, as amended, is consistent with Section 15A(b)(7) of the Act 
\17\ in that it works to safeguard adequately the interests of 
investors while establishing fair and reasonable rules for members and 
persons associated with members. NASD also believes that the proposed 
rule change also is consistent with Section 15A(b)(8) of the Act \18\ 
in that it furthers the statutory goals of providing a fair procedure 
for disciplining members and associated persons. NASD believes that the 
addition of these violations to the MRVP will provide NASD with the 
ability to impose a meaningful sanction for violations of the rules 
discussed herein that warrant more than a Letter of Caution but do not 
necessarily rise to a level meriting a full disciplinary proceeding.
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    \16\ 15 U.S.C. 78o-3(b)(6).
    \17\ 15 U.S.C. 78o-3(b)(7).
    \18\ 15 U.S.C. 78o-3(b)(8).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    NASD does not believe that the proposed rule change, as amended, 
would result in any burden on competition that is 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 neither solicited nor received any comments.

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 proposed rule 
change, as amended, is consistent with the Act. Comments may be 
submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://
www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-NASD-2004-025 on the subject line.
Paper Comments
     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, Station Place, 100 F 
Street, NE, Washington, DC 20549-9303.
    All submissions should refer to File No. SR-NASD-2004-025. 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 (http://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 such 
filing also will be available for inspection and copying at the 
principal office of NASD.

[[Page 40767]]

    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 the File Number SR-NASD-2004-
025 and should be submitted on or before August 4, 2005.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\19\
J. Lynn Taylor,
Assistant Secretary.
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    \19\ 17 CFR 200.30-3(a)(12).
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[FR Doc. E5-3746 Filed 7-13-05; 8:45 am]
BILLING CODE 8010-01-P