[Federal Register Volume 59, Number 143 (Wednesday, July 27, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-18252]


[[Page Unknown]]

[Federal Register: July 27, 1994]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-34420; File No. SR-NASD-94-14]

 

Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Order Approving Proposed Rule Change Relating to 
Application for Membership in the National Association of Securities 
Dealers, Inc.

July 20, 1994.
    On May 4, 1994, the National Association of Securities Dealers, 
Inc. (``NASD'' or ``Association'') filed with the Securities and 
Exchange Commission (``SEC'' or ``Commission'') a proposed rule 
change\1\ pursuant to Section 19(b)(1) of the Securities Exchange Act 
of 1934 (``Act'')\2\ and Rule 19b-4 thereunder.\3\ The rule change 
amends Sections 1(b) and 1(c) to Article III of the NASD By-Laws and 
Schedule C to the By-Laws to clarify the process by which an applicant 
applies for membership in the NASD.
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    \1\The NASD amended the proposed rule change three times 
subsequent to its original filing on March 11, 1994. The first 
amendment changed the requirement that an applicant for membership 
in the NASD submit a copy of its ``current submission to the 
Securities and Exchange Commission pursuant to Rule 15b1-2(c) under 
the Securities Exchange Act of 1934'' to require that the applicant 
submit ``Form BD filed with the Central Registration Depository.'' 
This amendment is technical in nature in that it corrects a 
deficiency that arose out of the 1992 amendments to the broker-
dealer registration process which deleted Rule 15b1-2(c) and 
requires that Form BD be submitted to the NASD. See Securities 
Exchange Act Release No. 31660 (Dec. 28, 1992), 58 FR 11 (Jan. 4, 
1993) (adoption of rule amendments to broker-dealer registration and 
reporting requirements).
    The second amendment reflected the results of the NASD 
membership vote concerning the NASD's proposed rule change. The 
change was submitted to a vote of the NASD membership in NASD Notice 
to Members 94-22 (Apr. 1994), and was approved by the membership, as 
required by Article XVII, Section 1 of the NASD By-Laws, by a vote 
of 1,879 in favor, 161 opposed, and 6 not voting out of 2,046 
ballots received.
    Finally, the third amendment provided minor wording changes to 
Schedule C of the Schedules to the By-Laws, Part I, Section 2(f) and 
further clarified the NASD's basis for proposing certain other 
changes; this amendment was technical in nature and did not have any 
substantive impact.
    \2\15 U.S.C. Sec. 78s(b)(1) (1988).
    \3\17 CFR 240.19b-4 (1994).
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    Notice of the proposed rule change together with its terms of 
substance was provided by issuance of a Commission release and by 
publication in the Federal Register.\4\ No comments were received in 
response to the Commission release. This order approves the proposed 
rule change.
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    \4\Securities Exchange Act Release No. 34156 (June 3, 1994), 59 
FR 29839 (June 9, 1994).
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I. Description of the Rule Change

    The NASD seeks to amend its By-Laws and Rules with respect to the 
procedural aspects of the membership application process. The NASD has 
identified instances where its By-Laws and rules are inconsistent and 
where its actual practices are inconsistent with its rules. This rule 
change corrects these aberrations and further clarifies the membership 
application process.

A. Amendments Concerning the Role of the District Committee in the 
Membership Application Process

    The NASD By-Laws currently provide that any application for 
membership shall be referred to the District Committee of the NASD 
district in which the applicant has its principal place of business. 
The By-Laws further provide that the appropriate District Committee 
shall determine whether the applicant satisfies the NASD's admission 
requirements.\5\ In contrast, the NASD's rules, Schedule C to the By-
Laws, provide that the District Office staff initially determine an 
applicant's eligibility for membership. The rules do, however, further 
set forth procedures for review by the District Committee, upon request 
by the applicant, of the District Office's determination.\6\
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    \5\NASD Manual, By-Laws, Art. III, Secs. 1(b) & (c), (CCH)  
1311.
    \6\Id., Schedules to the By-Laws, Schedule C, Part I, Secs. (1) 
& (2), (CCH)  1783.
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    According to the NASD, the actual practice is for the appropriate 
District Committee to determine an applicant's eligibility for 
membership. The NASD has determined to amend its By-Laws and Schedule C 
to allow each District Committee to designate a Subcommittee to act, 
under limited circumstances, on behalf of the District Committee. The 
proposed rule change, therefore, amends the NASD By-Laws and Schedule C 
to provide that all initial applications for membership be reviewed by 
either the District Committee or a Subcommittee of the District 
Committee, with a right of appeal to the full District Committee.\7\
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    \7\The NASD has also amended the By-Laws by deleting the 
explicit requirement that determinations of the District Committee 
(and now Subcommittees designated by the District Committee) be made 
by a majority of its members. The NASD indicated that it removed 
this requirement because it believes that the requirement that a 
determination be made by a vote presumes that the vote will be a 
majority of the members of the District Committee or Subcommittee 
designated by the District Committee. File No. SR-NASD-94-14, 
Amendment No. 3.
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B. Amendments to Schedule C

    The NASD has also submitted ministerial amendments to Schedule C 
designed to clarify the NASD's procedures concerning the application 
process. These include amendments to Part I of Schedule C to the By-
Laws:

    Subsection (1)(a), clarifying that an applicant must provide 
other relevant information and documents requested by the District 
Office staff;
    Subsection (1)(a)(6), clarifying that an applicant must provide 
other relevant information and documents requested by the District 
Office staff;
    Subsection (1)(b), clarifying that the scheduling of an 
applicant's pre-membership interview and the determination of which 
responsible personnel shall appear on behalf of the applicant at 
such interview will be determined by the District Office staff;
    Subsection (2)(a) clarifying that it is the determination of the 
designated Subcommittee, rather than the District Office, which will 
be reviewed by the District Committee upon request of the applicant;
    Subsection (2)(a) clarifying that the applicant's request for 
review must be filed within 15 calendar days after notification of 
the Subcommittee's determination;
    Subsection (2)(b) clarifying that, in connection with review by 
the District Committee, an applicant is entitled to appear before a 
Hearing Subcommittee of the District Committee and that no member of 
the District Committee who served as a member of the Subcommittee 
originally designated to review the applicant's submission and no 
member of the Hearing Subcommittee shall participate in the 
determination resulting from the District Committee's review;
    Subsection (2)(c) clarifying that the District Committee's 
determination of the record developed before it shall be made 
independent of the determination of the Subcommittee designated by 
the District Committee;
    Subsection (2)(d) clarifying that the District Committee's 
determination shall be subject to review by the National Business 
Conduct Committee (``NBCC'') upon request made by the applicant 
filed within 15 calendar days after the date of notification to the 
applicant by the District Committee of its determination;
    Subsection (2)(e) clarifying that in connection with review by 
the NBCC, the applicant has the right to appear before a 
Subcommittee of the NBCC;
    Subsection (2)(f) clarifying that the NBCC's determination of 
the record developed before it shall be made independent of the 
determination of the Subcommittee designated by the District 
Committee, and shall constitute final action for the NASD for 
purposes of Subsection (2)(h) to Part I of Schedule C to the By-Laws 
unless called for discretionary review by the Board of Governors;
    Subsection (2)(f) clarifying that a decision by the Board 
pursuant to its power of discretionary review shall constitute final 
action for purposes of Subsection (2)(h) to Part I of Schedule C to 
the By-Laws and that such determination and its rationale shall be 
communicated to the applicant in writing;
    New subsection (2)(g) clarifying that review by the Board of 
Governors of NBCC determinations is discretionary\8\ and may occur 
solely at the request of one or more governors and not at the 
request of the applicant;
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    \8\This discretionary review of the Board shall be in accordance 
with the resolutions of the Board governing the review of NBCC 
determinations. The Board may affirm, reverse or modify an NBCC 
decision. The commencement of the review shall operate as a stay of 
any action by the Subcommittee designated by the District Committee 
and any determination by the NBCC until a decision is reached by the 
Board.
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    Subsection (2)(h) (formerly subsection (2)(g)) clarifying that 
an applicant may apply for review to the Commission of any 
determination by the NBCC or the Board;
    Subsection (2)(i) (formerly subsection (2)(h)) clarifying that 
it applies to determinations of restrictions placed on the applicant 
made by the NBCC or a Subcommittee designated by the District 
Committee, as well as to such determinations made by the Board or a 
District Committee;
    Subsection (3)(a) clarifying that review and removal or 
modification of restrictions placed on the applicant shall be done 
by a Subcommittee designated by the District Committee;
    Subsection (3)(b) clarifying that modifications of restrictions 
shall be subject to review by the District Committee and the NBCC, 
as well as by the Board and the Commission; and
    Subsection (3)(c) clarifying that the refusal by a Subcommittee 
designated by the District Committee to remove or modify 
restrictions shall also be subject to review, but only upon request 
of the member filed with the District Committee within ten calendar 
days after the date of notification of such refusal.

II. Discussion

    The Commission has determined to approve the NASD's proposal. The 
Commission believes that the rule change is consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to the NASD, including the requirements of Section 15A(b)(8) 
of the Act.\9\ Section 15A(b)(8) requires, in part, that the rules of 
the NASD be designed to provide a fair procedure concerning the denial 
of membership in the NASD and prohibiting or limiting access to 
services of the NASD.
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    \9\15 U.S.C. 78o-3(b)(8).
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    This rule change clarifies the NASD's membership application 
process by eliminating the inconsistencies between the NASD's by-Laws 
and the Schedules to the By-Laws concerning the administration of this 
process. In addition, this rule change clarifies the procedures set 
forth in the Schedules to the By-Laws for accepting, denying or 
accepting with limitations an application for membership.

III. Conclusion

    In conclusion, for the reasons stated above, the Commission finds 
that the rule change is designed to provide a fair procedure concerning 
the denial of membership in the NASD and prohibiting or limiting access 
to services of the NASD. The Commission therefore finds that the 
proposed rule change is consistent with the requirements of the Act.

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act, that the proposed rule change SR-NASD-94-14 be, and hereby is, 
approved.

    For the Commission, by the Division of Marker Regulation, 
pursuant to delegated authority.\10\
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    \10\17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-18252 Filed 7-26-94; 8:45 am]
BILLING CODE 8010-01-M