Self-Regulatory Organizations; National Association of Securities Dealers, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change and Amendment No. 1 Thereto Relating to Extension of NASD's Authority Under the Cease and Desist Pilot Program, 30895-30898 [E7-10681]

Download as PDF Federal Register / Vol. 72, No. 106 / Monday, June 4, 2007 / Notices general, 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 B. Self-Regulatory Organization’s Statement on Burden on Competition 1. Purpose The purpose of this proposed rule change is to amend the Exchange’s Constitution and Amended and Restated LLC Agreement to: (i) Remove the requirement that the President of the Exchange also be the Chief Executive Officer of the Exchange; and (ii) change the number of directors from 15 to no less than 15 and no more than 16, so as to allow for the election, at the discretion the Sole LLC Member,3 of a director who was employed by the Exchange at any time during the prior three years, but otherwise meets the definition of a ‘‘Non-Industry Director’’ as provided under the Exchange’s Constitution. Currently, the Exchange’s Constitution requires that the President of the Exchange also be the Chief Executive Officer of the Exchange 4 and that the number of directors on the Board of Directors be fixed at 15.5 The Exchange believes that the proposed modifications would provide the flexibility to structure the Board of Directors in a way that is most effective for attracting and keeping the industry’s most talented people, and in turn provide the flexibility to attract and retain the best possible management team for the Exchange and its members. rwilkins on PROD1PC63 with NOTICES 2. Statutory Basis The basis under the Act for this proposed rule change is the requirement under Section 6(b)(1) 6 that an exchange be so organized as to have the capacity to be able to carry out the purposes of the Act and to comply, and (subject to any rule or order of the Commission pursuant to Section 17(d) 7 or 19(g)(2) 8 of the Act) to enforce compliance by its members and persons associated with its members, with the provisions of the Act, the rules and regulations thereunder, and the rules of the exchange. The Exchange also believes this proposed rule change furthers the objective of Section 6(b)(5) 9 that an exchange have rules that, among other things, are designed to remove impediments to and perfect the mechanism for a free and open market and a national market system, and, in 3 See Article I, Section 1.1 of the ISE, LLC Constitution, which defines the term ‘‘Sole LLC Member’’. 4 Constitution, Section 4.1. 5 Constitution, Section 3.2. 6 15 U.S.C. 78f(g)(1). 7 15 U.S.C. 78q(d). 8 15 U.S.C. 78s(g)(2). 9 15 U.S.C. 78f(b)(5). VerDate Aug<31>2005 20:34 Jun 01, 2007 Jkt 211001 The proposed rule change does not impose 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 The Exchange has not solicited, and does not intend to solicit, comments on this proposed rule change. The Exchange has not received any unsolicited written comments from members or other interested parties. 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 ISE, LLC 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 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 No. SR–ISE–2007–34 on the subject line. Paper comments: • Send paper comments in triplicate to Nancy M. Morris, Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549–1090. All submissions should refer to File Number SR–ISE–2007–34. 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 Commissions PO 00000 Frm 00153 Fmt 4703 Sfmt 4703 30895 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 the ISE. 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–ISE–2007–34 and should be submitted on or before June 25, 2007. For the Commission, by the Division of Market Regulation, pursuant to delegated authority.10 Florence E. Harmon, Deputy Secretary. [FR Doc. E7–10667 Filed 6–1–07; 8:45 am] BILLING CODE 8010–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–55819; File No. SR–NASD– 2007–033] Self-Regulatory Organizations; National Association of Securities Dealers, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change and Amendment No. 1 Thereto Relating to Extension of NASD’s Authority Under the Cease and Desist Pilot Program May 25, 2007. 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, 2007, 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 substantially prepared by NASD. NASD has filed the proposal as a ‘‘non-controversial’’ rule change pursuant to Section 19(b)(3)(A) of the 10 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 1 15 E:\FR\FM\04JNN1.SGM 04JNN1 30896 Federal Register / Vol. 72, No. 106 / Monday, June 4, 2007 / Notices seven days of service of the notice will result in a suspension or cancellation of membership or a suspension or bar from associating with any member. (b) through (h) No Change. * * * * * I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change NASD is proposing to amend NASD Rules 9556, 9800, 9810, and 9860, to extend for an additional two-year period, to June 23, 2009, 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. The only changes regard extending the pilot’s expiration date to June 23, 2009, and technical changes to the titles of the NASD executives who can authorize the initiation of cease and desist proceedings and certain cross-references in rules covered by the pilot program. Below is the text of the proposed rule change. Proposed new language is in italics; proposed deletions are in [brackets]. * * * * * rwilkins on PROD1PC63 with NOTICES Act 3 and Rule 19b–4(f)(6) thereunder,4 which renders the proposal effective upon filing with the Commission. On May 24, 2007, NASD filed Amendment No. 1 to the proposed rule change. The Commission is publishing this notice to solicit comments on the proposed rule change, as amended, from interested persons. (The entire Rule 9800 Series, and related amendments adopted by SR– NASD–98–80 to Rule 8310, IM–8310– 3(c)(1) (formerly IM–8310–2(d)(1), renumbered by SR–NASD–2003–168), 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, [2007]2009, unless extended or permanently adopted by the Association pursuant to SEC approval at or before such date.) 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– 8310–3(c)(1) (formerly IM–8310–2(d)(1), renumbered by SR–NASD–2003–168), 9120(x), 9241(c), 9290, 9311(b), 9312(b), 9360 and the Rule 9800 Series, shall expire on June 23, [2007]2009, unless extended or permanently adopted by the Association pursuant to SEC approval at or before such date.) (a) Notice of Suspension, Cancellation or Bar If a member, person associated with a member or person subject to NASD’s jurisdiction fails to comply with a temporary or permanent cease and desist order issued under the Rule 9200, 9300 or 9800 Series, NASD staff—after receiving written authorization from NASD’s Chairman and CEO or NASD’s Senior Executive Vice President for Regulatory Policy and Programs [the President of NASD Regulatory Policy and Oversight or the Executive Vice President for NASD Regulatory Policy and Programs]—may issue a notice to such member or person stating that the failure to comply with the temporary or permanent cease and desist order within 3 15 4 17 U.S.C. 78s(b)(3)(A). CFR 240.19b–4(f)(6). VerDate Aug<31>2005 20:34 Jun 01, 2007 Jkt 211001 9800. Temporary Cease and Desist Orders 9810. Initiation of Proceeding (a) Department of Enforcement or Department of Market Regulation With the prior written authorization of NASD’s Chairman and CEO or NASD’s Senior Executive Vice President for Regulatory Policy and Programs [the President of NASD Regulatory Policy and Oversight or the Executive Vice President for NASD Regulatory Policy and Programs], the Department of Enforcement or the Department of Market Regulation may initiate a temporary cease and desist proceeding with respect to alleged violations of Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b–5 thereunder; SEC Rules 15g–1 through 15g–9; NASD Rule 2110 (if the alleged violation is unauthorized trading, or misuse or conversion of customer assets, or based on violations of Section 17(a) of the Securities Act of 1933); NASD Rule 2120; or NASD Rule 2330 (if the alleged violation is misuse or conversion of customer assets). The Department of Enforcement or the Department of Market Regulation shall initiate the proceeding by serving a notice on a member or associated person (hereinafter ‘‘Respondent’’) and filing a copy thereof with the Office of Hearing Officers. The Department of Enforcement or the Department of Market Regulation shall serve the notice by personal service, overnight commercial courier, or facsimile. If service is made by facsimile, the Department of Enforcement or the Department of Market Regulation shall send an additional copy of the notice by overnight commercial courier. The notice shall be effective upon service. (b) through (c) No Change. * * * * * PO 00000 Frm 00154 Fmt 4703 Sfmt 4703 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 Rule 9556. NASD’s Chairman and CEO or NASD’s Senior Executive Vice President for Regulatory Policy and Programs [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.5 The pilot program also gave NASD authority to enforce cease and desist orders. In June 2005, NASD extended the pilot program for an additional two-year period.6 The current two-year pilot expires on June 23, 2007. NASD is proposing a rule change to extend the pilot program for an additional two-year period, to June 23, 2009. Such an extension will enable NASD to continue to issue and enforce temporary and permanent cease and desist orders. NASD’s authority to issue TCDOs will expire after the additional two-year period unless the pilot program is further extended or adopted 5 See Securities Exchange Act Release No. 47925 (May 23, 2003), 68 FR 33548 (June 4, 2003) (SR– NASD–98–80). 6 See Securities Exchange Act Release No. 51860 (June 16, 2005), 70 FR 36427 (June 23, 2005) (SR– NASD–2005–061). E:\FR\FM\04JNN1.SGM 04JNN1 rwilkins on PROD1PC63 with NOTICES Federal Register / Vol. 72, No. 106 / Monday, June 4, 2007 / Notices on a permanent basis with Commission approval. NASD currently is seeking only to extend the pilot program period and make technical changes to the titles of the NASD executives who can authorize the initiation of cease and desist proceedings and 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 the program should continue and whether certain specific provisions 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.7 Enforcement showed that not only was the member attempting to continue the fraudulent offering, it also was funneling money and assets to a nonNASD 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. The proposed extension of the pilot program for an additional two years will 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 7 See Securities Exchange Act Release No. 51270 (February 28, 2005) (summarizing NASD’s cease and desist proceedings against former NASD member L.H. Ross & Company). VerDate Aug<31>2005 20:34 Jun 01, 2007 Jkt 211001 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 will 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 two years. The proposed rule change will become effective upon filing, will be operative on June 23, 2007, and will expire on June 23, 2009, 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,8 which requires, among other things, that NASD’s 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. The proposed rule change also is consistent with the provisions of Section 15A(b)(7) of the Act,9 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. 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. B. Self-Regulatory Organization’s Statement on Burden on Competition NASD does not believe that the proposed rule change will 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 Written comments were neither solicited nor received. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Because the foregoing proposed rule change does not: (i) Significantly affect 8 15 9 15 PO 00000 U.S.C. 78o–3(b)(6). U.S.C. 78o–3(b)(7). Frm 00155 Fmt 4703 the protection of investors or the public interest; (ii) impose any significant burden on competition; and (iii) become operative for 30 days from the date on which it was filed, or such shorter time as the Commission may designate, it has become effective pursuant to Section 19(b)(3)(A) of the Act 10 and Rule 19b– 4(f)(6) thereunder.11 At any time within 60 days of the filing of the 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 (http://www.sec.gov/ rules/sro.shtml); or • Send an e-mail to rulecomments@sec.gov. Please include File Number SR–NASD–2007–033 on the subject line. Paper Comments • Send paper comments in triplicate to Nancy M. Morris, Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549–1090. All submissions should refer to File Number SR–NASD–2007–033. 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 10 15 11 17 Sfmt 4703 30897 E:\FR\FM\04JNN1.SGM U.S.C. 78s(b)(3)(A). CFR 240.19b–4(f)(6). 04JNN1 30898 Federal Register / Vol. 72, No. 106 / Monday, June 4, 2007 / Notices Room. Copies of the filing also will be available for inspection and copying at the principal office of 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–2007–033 and should be submitted on or before June 25, 2007. For the Commission, by the Division of Market Regulation, pursuant to delegated authority.12 Florence E. Harmon, Deputy Secretary. [FR Doc. E7–10681 Filed 6–1–07; 8:45 am] BILLING CODE 8010–01–P (‘‘NASD’’), NYSE Regulation will cease to provide an arbitration program, and its existing arbitration department (‘‘NYSE Arbitration’’) will be consolidated with that of NASD Dispute Resolution, Inc. (‘‘NASD DR’’). The proposed amendments provide that the arbitration rules of the Exchange shall apply only to NYSE arbitration cases pending prior to the effective date of the consolidation, and that, thereafter, claims involving member organizations, and/or associated persons, and/or other related parties will be arbitrated under the Codes of Arbitration Procedure of NASD DR. The text of the proposed rule is set forth below. Proposed new language is underlined. * * * * * Rule 600 * SECURITIES AND EXCHANGE COMMISSION Self-Regulatory Organizations; New York Stock Exchange LLC; Notice of Filing of Proposed Rule Change Relating to Proposed Amendments to Rule 600 to Provide Guidance Regarding New and Pending Arbitration Claims in Light of the Consolidation of NYSE Regulation into NASD DR May 25, 2007. rwilkins on PROD1PC63 with NOTICES Pursuant to Section 19(b)(1) 1 of the Securities Exchange Act of 1934 (the ‘‘Act’’) 2 and Rule 19b–4 thereunder,3 notice is hereby given that on May 23, 2007, the New York Stock Exchange LLC (‘‘NYSE’’ or the ‘‘Exchange’’) 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 substantially prepared by the NYSE. 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 NYSE proposes to amend current Rule 600 and adopt a new Rule 600A. As part of the consolidation of the member firm regulation function of NYSE Regulation, Inc. (‘‘NYSE Regulation’’) with the National Association of Securities Dealers, Inc. CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 15 U.S.C. 78a. 3 17 CFR 240.19b–4. 1 15 VerDate Aug<31>2005 20:34 Jun 01, 2007 Jkt 211001 * * * * Supplementary Material [Release No. 34–55818; File No. SR–NYSE– 2007–48] 12 17 Arbitration Rules 600 through 639, with the exception of Rule 600A, apply only to arbitrations commenced prior to [insert effective date of the consolidation] and are otherwise of no force or effect. Notwithstanding the foregoing, arbitrations filed with NYSE Arca on or prior to January 31, 2007 continue to be governed by the NYSE Arca Rule 12 in effect on or prior to January 31, 2007, and arbitrations filed with NYSE Arca Equities on or prior to January 31, 2007 continue to be governed by the NYSE Arca Equities Rule 12 in effect on or prior to January 31, 2007. On and after [insert effective date of the consolidation] all such arbitrations shall, until concluded, be administered by NASD Dispute Resolution, Inc. (‘‘NASD DR’’) pursuant to a Regulatory Services Agreement with the Exchange. * * * * * Rule 600A (a) Duty to Arbitrate. (i) Any dispute, claim or controversy between a member organization and another member organization shall be arbitrated pursuant to the Codes of Arbitration Procedure of NASD DR; and, (ii) any dispute, claim or controversy between a customer or non-member and a member organization and/or associated person and/or other related party, or between an associated person and a member organization and/or an associated person arising in connection with the business of such member organization and/or associated person in connection with his or her activities as an associated person, shall be arbitrated pursuant to NASD DR Codes of Arbitration Procedure as provided by any duly executed and enforceable PO 00000 Frm 00156 Fmt 4703 Sfmt 4703 written agreement, or upon the demand of the customer or non-member. However, such obligation to arbitrate shall not extend to any controversy that is not permitted to be arbitrated under NASD DR Codes of Arbitration Procedure. (b) Referrals. The Exchange may receive, investigate and take disciplinary action with respect to any referral it receives from an NASD DR arbitrator of any matter which comes to the attention of such arbitrator during and in connection with the arbitrator’s participation in a proceeding, either from the record of the proceeding or from material or communications related to the proceeding, that the arbitrator has reason to believe may constitute a violation of the Exchange’s Rules or the federal securities laws. (c) Failure to Arbitrate or to Pay an Arbitration Award. Any member organization or associated person who fails to submit to arbitration a matter required to be arbitrated pursuant to this Rule, or that fails to honor an arbitration award made pursuant to the Codes of Arbitration Procedure of NASD DR, or made under the auspices of any other self-regulatory organization, shall be subject to disciplinary proceedings in accordance with Exchange Rule 476. (d) Other Actions. The submission of any matter to arbitration as provided for under this Rule shall in no way limit or preclude any right, action or determination by the Exchange that it would otherwise be authorized to adopt, administer or enforce. * * * * * 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 NYSE 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 NYSE 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 The purpose of the proposed rule change is to provide guidance regarding both new and pending arbitration claims in light of the consolidation of NYSE Regulation into NASD DR. NYSE E:\FR\FM\04JNN1.SGM 04JNN1

Agencies

[Federal Register Volume 72, Number 106 (Monday, June 4, 2007)]
[Notices]
[Pages 30895-30898]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E7-10681]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-55819; File No. SR-NASD-2007-033]


Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Notice of Filing and Immediate Effectiveness of Proposed 
Rule Change and Amendment No. 1 Thereto Relating to Extension of NASD's 
Authority Under the Cease and Desist Pilot Program

May 25, 2007.
    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, 2007, 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 substantially prepared by NASD. 
NASD has filed the proposal as a ``non-controversial'' rule change 
pursuant to Section 19(b)(3)(A) of the

[[Page 30896]]

Act \3\ and Rule 19b-4(f)(6) thereunder,\4\ which renders the proposal 
effective upon filing with the Commission. On May 24, 2007, NASD filed 
Amendment No. 1 to the proposed rule change. The Commission is 
publishing this notice to solicit comments on the proposed rule change, 
as amended, from interested persons.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    NASD is proposing to amend NASD Rules 9556, 9800, 9810, and 9860, 
to extend for an additional two-year period, to June 23, 2009, 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. The only changes regard extending the pilot's expiration 
date to June 23, 2009, and technical changes to the titles of the NASD 
executives who can authorize the initiation of cease and desist 
proceedings and certain cross-references in rules covered by the pilot 
program.
    Below is the text of the proposed rule change. Proposed new 
language is in italics; proposed deletions are in [brackets].
* * * * *
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-8310-3(c)(1) (formerly IM-8310-2(d)(1), renumbered by SR-NASD-2003-
168), 9120(x), 9241(c), 9290, 9311(b), 9312(b), 9360 and the Rule 9800 
Series, shall expire on June 23, [2007]2009, unless extended or 
permanently adopted by the Association pursuant to SEC approval at or 
before such date.)
    (a) Notice of Suspension, Cancellation or Bar
    If a member, person associated with a member or person subject to 
NASD's jurisdiction fails to comply with a temporary or permanent cease 
and desist order issued under the Rule 9200, 9300 or 9800 Series, NASD 
staff--after receiving written authorization from NASD's Chairman and 
CEO or NASD's Senior Executive Vice President for Regulatory Policy and 
Programs [the President of NASD Regulatory Policy and Oversight or the 
Executive Vice President for NASD Regulatory Policy and Programs]--may 
issue a notice to such member or person stating that the failure to 
comply with the temporary or permanent cease and desist order within 
seven days of service of the notice will result in a suspension or 
cancellation of membership or a suspension or bar from associating with 
any member.
    (b) through (h) No Change.
* * * * *
9800. Temporary Cease and Desist Orders
    (The entire Rule 9800 Series, and related amendments adopted by SR-
NASD-98-80 to Rule 8310, IM-8310-3(c)(1) (formerly IM-8310-2(d)(1), 
renumbered by SR-NASD-2003-168), 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, [2007]2009, unless extended or permanently adopted by the 
Association pursuant to SEC approval at or before such date.)
9810. Initiation of Proceeding
    (a) Department of Enforcement or Department of Market Regulation
    With the prior written authorization of NASD's Chairman and CEO or 
NASD's Senior Executive Vice President for Regulatory Policy and 
Programs [the President of NASD Regulatory Policy and Oversight or the 
Executive Vice President for NASD Regulatory Policy and Programs], the 
Department of Enforcement or the Department of Market Regulation may 
initiate a temporary cease and desist proceeding with respect to 
alleged violations of Section 10(b) of the Securities Exchange Act of 
1934 and SEC Rule 10b-5 thereunder; SEC Rules 15g-1 through 15g-9; NASD 
Rule 2110 (if the alleged violation is unauthorized trading, or misuse 
or conversion of customer assets, or based on violations of Section 
17(a) of the Securities Act of 1933); NASD Rule 2120; or NASD Rule 2330 
(if the alleged violation is misuse or conversion of customer assets). 
The Department of Enforcement or the Department of Market Regulation 
shall initiate the proceeding by serving a notice on a member or 
associated person (hereinafter ``Respondent'') and filing a copy 
thereof with the Office of Hearing Officers. The Department of 
Enforcement or the Department of Market Regulation shall serve the 
notice by personal service, overnight commercial courier, or facsimile. 
If service is made by facsimile, the Department of Enforcement or the 
Department of Market Regulation shall send an additional copy of the 
notice by overnight commercial courier. The notice shall be effective 
upon service.
    (b) through (c) No Change.
* * * * *
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 Rule 9556. NASD's Chairman and CEO or 
NASD's Senior Executive Vice President for Regulatory Policy and 
Programs [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.\5\ 
The pilot program also gave NASD authority to enforce cease and desist 
orders. In June 2005, NASD extended the pilot program for an additional 
two-year period.\6\ The current two-year pilot expires on June 23, 
2007. NASD is proposing a rule change to extend the pilot program for 
an additional two-year period, to June 23, 2009. Such an extension will 
enable NASD to continue to issue and enforce temporary and permanent 
cease and desist orders. NASD's authority to issue TCDOs will expire 
after the additional two-year period unless the pilot program is 
further extended or adopted

[[Page 30897]]

on a permanent basis with Commission approval.
---------------------------------------------------------------------------

    \5\ See Securities Exchange Act Release No. 47925 (May 23, 
2003), 68 FR 33548 (June 4, 2003) (SR-NASD-98-80).
    \6\ See Securities Exchange Act Release No. 51860 (June 16, 
2005), 70 FR 36427 (June 23, 2005) (SR-NASD-2005-061).
---------------------------------------------------------------------------

    NASD currently is seeking only to extend the pilot program period 
and make technical changes to the titles of the NASD executives who can 
authorize the initiation of cease and desist proceedings and 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 the program should continue and whether 
certain specific provisions 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.\7\ 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.
---------------------------------------------------------------------------

    \7\ See Securities Exchange Act Release No. 51270 (February 28, 
2005) (summarizing NASD's cease and desist proceedings against 
former NASD member L.H. Ross & Company).
---------------------------------------------------------------------------

    The proposed extension of the pilot program for an additional two 
years will 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 will 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 two years.
    The proposed rule change will become effective upon filing, will be 
operative on June 23, 2007, and will expire on June 23, 2009, 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,\8\ which requires, among 
other things, that NASD's 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. The proposed rule change also is consistent with the 
provisions of Section 15A(b)(7) of the Act,\9\ 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. 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.
---------------------------------------------------------------------------

    \8\ 15 U.S.C. 78o-3(b)(6).
    \9\ 15 U.S.C. 78o-3(b)(7).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    NASD does not believe that the proposed rule change will 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

    Written comments were neither solicited nor received.

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

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A) of the Act \10\ and Rule 19b-
4(f)(6) thereunder.\11 \
---------------------------------------------------------------------------

    \10\ 15 U.S.C. 78s(b)(3)(A).
    \11\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------

    At any time within 60 days of the filing of the 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 (http://
www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-NASD-2007-033 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.
    All submissions should refer to File Number SR-NASD-2007-033. 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

[[Page 30898]]

Room. Copies of the filing also will be available for inspection and 
copying at the principal office of 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-2007-033 and should be submitted on 
or before June 25, 2007.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
---------------------------------------------------------------------------

    \12\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E7-10681 Filed 6-1-07; 8:45 am]
BILLING CODE 8010-01-P