STATISTICS OF INSPECTIONS AND DISCIPLINARY ACTIONS

The NASD's complaint and inspection statistics for the last three calendar years are summarized in the following table:

1 It should be noted that in 1964 many complaints arose out of misconduct which occurred during the "hot issue"-"boiler room era of the early 1960's referred to in Chairman Cohen's testimony of March 9, 1967, before the House Interstate and Foreign Commerce Committee (at p. 489).

2 The inspection statistics include both regular examinations, which are comprehensive in scope, and special examinations, which usually take place when the association becomes aware of a particular problem involving the member or one or more of its employees and cover only the specific problem. However, the large majority (about 90 percent) of examinations in each of the years shown were regular examinations.

The statistics do not include the nearly 1,000 sales offices of New York Stock Exchange (NYSE) members examined by the NYSE in 1966. The large majority of NYSA branch offices are affiliated with NASD members.

A summary of the more serious disciplinary sanctions, such as expulsion or suspension from membership and revocation or suspension of registered representative registration, imposed by the NASD during the last three calendar years is shown in the following table:

In addition, in each of these years a large number of firms and individuals received lesser penalties such as fines and/or censures.

THE COMMISSION'S FORMAL REVIEW POWER

Under Section 15A (g) of the Securities Exchange Act of 1934 the Commission is empowered to review NASD disciplinary actions upon application of an aggrieved party, or upon its own motion in appropriate cases. Under the statute, however, the Commission has not authority to increase the NASD's sanctions. to make findings in areas not covered by the NASD complaint, or to find violations where the NASD has dismissed allegations contained in its complaint.

If a disciplinary action is appealed, the Commission generally considers the matter, often after hearing oral argument from the NASD and the respondent, upon the basis of the record before the NASD. Through the process of appellate review, the Commission determines not only whether the evidence in individual cases supports the NASD's findings and whether the severity of the penalty imposed is appropriate, but observes generally the workings of the disciplinary processes of the NASD.

Of the 69 NASD disciplinary actions brought before the Commission for review during the five fiscal years July 1, 1961-June 30, 1966, the Commission found it appropriate in 19 of these cases to modify the NASD's disciplinary action in one or more respects. In the remaining cases the Commission affirmed the NASD's findings and sanctions. Summaries of those cases where NASD disciplinary action was modified are set forth chronologically in the attached memorandum.

INFORMAL REVIEW BY THE COMMISSION'S STAFF

Most disciplinary actions of the NASD are not formally reviewed by the Commission, because no appeal is taken. However, under an arrangement with the Commission) in effect now for many years, the NASD submits to the Division

of Trading and Markets on an informal basis copies of every decision în diseiplinary matters. This is done shortly after the decision has become final within the NASD. In fiscal 1966 the Division received copies of 144 decisions in formal NASD disciplinary proceedings and an additional 43 decisions in summary complaint cases."

As NASD disciplinary decisions are received by the Division, they are circulated among interested Commission staff members and regional offices and are reviewed for the purpose of evaluating the effectiveness and fairness of the NASD's dis ciplinary process and to determine whether further investigatory or enforcement action by the Commission is warranted. In addition, the decisions are summarized bimonthly in a report distributed to members of the Commission, all of its regional offices and interested members of the staff.

ENFORCEMENT ACTION AFTER REVIEW

In some cases, review of the NASD proceeding or action has led to further staff investigations or the institution of proceedings by the Commission. For example, in 1963 a large national broker-dealer firm was suspended from NASD membership for 5 days based upon findings of violations in several of the firms branch offices. The registration of certain branch office personnel also were revoked. The NASD, however, dismissed some of the alleged violations charged in the complaint as well as dismissing the charges as to certain other branch office personnel. Following the Division's further investigation into the matter, the Commission upon the staff's recommendation ordered the institution of private administrative proceedings against the firm, certain branch office personnel including several as to whom the NASD had dismissed its charges and members of the firm's executive committee, none of whom had been made respondents in the NASD's proceeding. The Commission ultimately found more extensive violations than those found by the NASD and imposed sanctions against the members of the executive committee, whom the Commission concluded bore responsibility for such violations by virtue of their failure to supervise properly. The Commission also ordered that various branch office personnel be disqualified from continuing in, or re-entering the securities business.

The Commission's staff is also currently conducting investigations into activities of other broker-dealers which had been subjects of earlier NASD disciplinary action and as to which there was concern about the disposition accorded the cases by the NASD. For example, in reviewing informally one final decision where the charges were dismissed by the NASD, it appeared that contrary to the NASD findings, there may have been serious breaches of fiduciary obligation by a registered broker-dealer and investment adviser; and in another case, also dismissed by the NASD as to the member, there were questions as to the propriety of the broker-dealer's manner of handling retail customers orders in securities in which the firm was also making wholesale (i.e., inter-dealer) markets. The staffs investigations of these matters are still in progress.

In adition, in cases where the institution of formal broker-dealer proceedings or other Commission action does not appear warranted, but where the staff is nevertheless concerned about the NASD's findings, penalties, or other aspects of the case, the Commission's staff will advise the NASD of the problems it may have. Thus, in a recent case involving the fairness of markups charged retail customers in principal trades in over-the-counter securities, the Division expressed disagreement with the manner in which the markups were computed by the NASD district business conduct committee and which resulted in the dismissal of a number of the alleged markup violations contained in the complaint. Since it appeared that the penalty imposed was not materially inadequate, even assuming that the NASD had found the respondent guilty as to the questioned charges. no futher remedial action was recommended by the Division.

3 A summary complaint constitutes an offer of a proposed penalty which may be accepted by the respondents thus avoiding the time an inconvenience of a formal hearing. If rejected. a formal complaint would generally be issued and the respondents would be afforded an opportunity for a hearing. Under the NASD Bylaws the summary complaint procedure can be used only where the NASD determines that an appropriate penalty would be no greater than a fine not exceeding $500.

SECURITIES AND EXCHANGE COMMISSION

CLASSIFICATION OF DEFENDANTS IN CRIMINAL CASES DEVELOPED BY THE COMMISSION, FISCAL YEARS

Registered broker-dealers 1 (including

principals of such firms):

1957 THROUGH 1966

Total

(10 years) 1966 1965 1964 1963 1962 1961 1960 1959 1958 1957

48

22

227

19

56

11

79

13

14

27

4

170

28

3 24

0

0

52 53 27

Number convicted.

1 Includes persons registered at or prior to time of indictment.

2 The persons referred to in this column, while not engaged in a general business in securities, were almost without exception prosecuted for violations of law involving securities transactions.

CRIMINAL CASES DEVELOPED BY FISCAL YEAR 1 (1957 THROUGH 1966)

1 The figures given for each year reflect actions taken and the status of cases as of the end of the most recent fiscal year with respect to cases referred to the Department of Justice during the year specified. For example, convictions obtained in fiscal 1966 with respect to cases referred during fiscal 1965 are included under fiscal 1965. While the table shows only 10 convictions under 1966, the total number of convictions for cases referred during that year and prior years was 76. There were 50 indictments returned in 45 cases during fiscal year 1966.

2 The number of defendants in a case is sometimes increased by the Department of Justice over the number against whom prosecution was recommended by the Commission, and more than 1 indictment may result from a single reference. 327 references involving 82 proposed defendants, and 24 prior references involving 95 proposed defendants, were still being processed by the Department of Justice as of the close of the fiscal year.

302 cases have been completed as to 1 or more defendants. Convictions have been obtained in 210, or 62 percent, of such cases. Only 131, or 39 percent, of such cases have resulted in acquittals or dismissals as to all defendants; this includes numerous cases in which indictments were dismissed without trial because of the death of defendants or for other administrative reasons. (See note 5, infra.)

Includes 31 defendants who died after indictment.

ADMINISTRATIVE PROCEEDINGS PURSUANT TO SECS. 15(b), 15A, AND 19(a)(3) OF THE EXCHANGE ACT, FISCAL YEARS 1957-66

Proceedings pending at beginning of fiscal year:

Against broker-dealer registrants.
Against broker-dealer applicants.
Against individuals only 1

1966 1965 1964 1963 1962 1961 1960 1959 1958 1957

1 The Securities Acts Amendments of 1964, gave the Commission for the first time, the authority to proceed directly against an individual associated with a broker-dealer firm without joining the firm itself in the proceeding. It also gave the Commission power to censure an associated person and to suspend for a period not exceeding 12 months or bar him tram being associated with a member of a registered securities association. In addition, the Commission may now censure a broker-dealer or suspend its registration for a period not exceeding 12 months.

NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC., SUMMARY OF COMPLAINTS AND PENALTIES, CALENDAR YEARS 1957 THROUGH 1966