[Federal Register Volume 61, Number 76 (Thursday, April 18, 1996)]
[Notices]
[Pages 16948-16955]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-9512]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37107; File No. SR-NASD-96-16]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Temporary Accelerated Approval of Proposed Rule Change by 
National Association of Securities Dealers, Inc. Relating to the 
Allocation and Delegation of Authority and Responsibilities by the 
National Association of Securities Dealers, Inc., to NASD Regulation, 
Inc., and the Nasdaq Stock Market, Inc.

April 11, 1996.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on April 10 
1996, the National Association of Securities Dealers, Inc. (``NASD'' or 
``Association'') filed \1\ with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I, II, and III below, which Items have been prepared by the NASD. 
The Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons. For the reasons discussed 
below, the Commission is granting accelerated approval of the proposed 
rule change for a period of ninety (90) days.
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    \1\ On April 11, 1996, the NASD filed an amendment to its 
filing. This amendment supersedes the original filing. This Notice 
reflects the amendments.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The NASD is proposing to amend its rules to: (1) add new Rule 0130 
\2\ to the NASD's rules delegating to the subsidiaries of the NASD, 
NASD Regulation, Inc. (``NASDR'') and The Nasdaq Stock Market, Inc. 
(``Nasdaq''), the authority to act on behalf of the Association as set 
forth in a Plan of Allocation and Delegation adopted by the Board of 
Governors and approved by the Securities and Exchange Commission 
pursuant to its authority under the Securities Exchange Act of 1934 
(``Act''), and (2) adopting a Plan of Allocation and Delegation (Plan) 
setting forth the purpose, function, governance, procedures and 
responsibilities of the NASD, NASDR and Nasdaq, following the 
reorganization of the NASD.
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    \2\ The SEC recently approved rule filing SR-NASD-95-51 which 
reorganizes the NASD Manual. The proposed new rule contained in this 
rule filing is numbered according to the numbering methodology 
adopted with the new Manual.
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    Below is the text of the proposed rule change. All language is new.

0130  Delegation, Authority and Access

    (a) The National Association of Securities Dealers, Inc., delegates 
to its subsidiaries (NASD Regulation, Inc. and The Nasdaq Stock Market, 
Inc., hereinafter ``Subsidiaries'') the authority to act on behalf of 
the Association as set forth in a Plan of Allocation and Delegation 
adopted by the Board of Governors and approved by the Securities and 
Exchange Commission pursuant to its authority under the Securities 
Exchange Act of 1934 (``Act'').
    (b) Notwithstanding any delegation of authority to the Subsidiaries 
pursuant to this rule, the staff, books, records and premises of the 
Subsidiaries are the staff, books, records and premises of the 
Association subject to oversight pursuant to the Act, and all officers, 
directors, employees and agents of the Subsidiaries are the officers, 
directors, employees and agents of the Association for purposes of the 
Act.

Plan of Allocation and Delegation of Functions by NASD to 
Subsidiaries

I. NASD, Inc.

    The NASD, Inc. (referenced as ``NASD''), the Registered Section 15A 
Association, is the parent company of the wholly-owned Subsidiaries 
NASD Regulation, Inc. (referenced individually as ``NASDR'') and The 
Nasdaq Stock Market, Inc. (referenced individually as ``Nasdaq'') 
(referenced collectively as the ``Subsidiaries''). The term 
``Association'' shall refer to the NASD and the Subsidiaries 
collectively.

A. Governors, Directors and Committee Members

    The following definitions are applicable to Governors of the NASD, 
Directors of the Subsidiaries, and Members of Committees of the NASD 
and the Subsidiaries.
    1. ``Industry'' Governors, Directors or Committee Members shall 
include (a) officers, directors and employees of brokers and dealers 
and persons who have been employed in any such capacity at any time 
within the prior three years; and (b) persons who have consulting or 
employment relationships with or provide professional services to the 
Association and persons who have had any such relationship or provided 
any such services at any time within the prior three years.
    2. ``Non-industry'' Governors, Directors or Committee Members shall 
be (a) Public Governors; (b) officers and employees of issuers of 
securities listed on the Nasdaq Stock Market or traded in the over-the-
counter market; (c) persons affiliated with brokers and dealers that

[[Page 16949]]

operate solely to assist the securities-related activities of the 
business of non-member affiliates (such as a broker or dealer 
established to (i) distribute an affiliate's securities which are 
issued on a continuous or regular basis, or (ii) process the limited 
buy and sell orders of the shares of employee owners of the affiliate); 
(d) employees of an entity that is affiliated with a broker or dealer 
that does not account for a material portion of the revenues of the 
consolidated entity, and who are primarily engaged in the business of 
the non-member entity; and (e) other individuals who would not be 
Industry Governors, Directors or Committee Members.
    3. ``Public'' Governors, Directors or Committee Members shall be 
non-industry persons who have no material business relationship with a 
broker, dealer or the Association.

B. Functions and Authority of NASD

    The NASD shall have ultimate responsibility for the rules and 
regulations of the Association and its operation and administration. As 
set forth below in Sections II.A. and III. A, the NASD has delegated 
certain authority and functions to its subsidiaries. Actions taken 
pursuant to delegated authority, however, remain subject to review, 
ratification or rejection by the NASD Board in accordance with 
procedures established by that Board. Any function or responsibility as 
a registered securities association under the Exchange Act or as set 
forth in the articles of incorporation or the by-laws is hereby 
reserved, except as expressly delegated to the subsidiaries. In 
addition, the NASD expressly retains the following authority and 
functions:
    1. To exercise overall responsibility for ensuring that the 
Association's statutory and self-regulatory obligations and functions 
are fulfilled.
    2. To delegate authority to the Subsidiaries to take actions on 
behalf of the NASD.
    3. To elect the Subsidiary Boards of Directors.
    4. To review the rulemaking and disciplinary decisions of the 
Subsidiaries (See Sections II.C. and III.C. below).
    5. To coordinate actions of the Subsidiary Boards as necessary.
    6. To resolve any disputes between the Subsidiaries.
    7. To administer common overhead and technology of the 
Subsidiaries.
    8. To administer the Office of Internal Review as provided in 
Section I.D.4 below.
    9. To manage external Association relations on major policy issues.
    10. To direct the Subsidiaries to take action necessary to 
effectuate the purposes and functions of the Association.

C. Board of Governors

1. Composition
    The NASD Board of Governors (``NASD Board'') shall be composed of 
at least Nine (9) and no more than Thirteen (13) Governors, a majority 
of whom shall be Non-industry (including at least Two (2) Public 
Governors). The Chief Executive Officer (``CEO'') of NASD shall be a 
Governor. In the event that the NASD Board shall consist of Eleven (11) 
or more Governors, at least Three (3) shall be Public Governors.
2. Election Procedures
    a. Commencing with the selection of Governors to take office in 
April of 1997, Governors (except the CEO of NASD) shall be elected by a 
majority vote of those members of the NASD casting ballots on a slate 
of nominees presented to the NASD membership by the National Nominating 
Committee for election by secret ballot.
    b. National Nominating Committee:
    (1) The National Nominating Committee shall be composed of at least 
Six (6) and not more than Nine (9) members, equally balanced between 
Industry and Non-industry Committee Members (including at least Two (2) 
Public Committee Members). In the event that the Nominating Committee 
shall consist of Seven (7) or more members at least Three (3) shall be 
Public Committee Members. If at any time there shall be an odd number 
of members of the National Nominating Committee, Non-industry Committee 
Members shall be in the majority. No officer or employee of the 
Association shall serve as a member of the National Nominating 
Committee in any voting or non-voting capacity. Two members of the 
National Nominating Committee shall be selected by each of the 
Subsidiaries and the NASD. No more than three of the Committee Members 
and no more than two of the Industry Committee Members shall be current 
members of the NASD Board or of the Board of Directors of one of the 
Subsidiaries (collectively the ``Association Boards''). Any member of 
the National Nominating Committee who is a current member of any 
Association Board shall be in his/her final year of service on any 
Association Board.
    (2) Members of the National Nominating Committee shall be appointed 
annually by the NASD Board and may be removed for cause by a majority 
vote of the NASD Board.
    (3) The National Nominating Committee shall propose to the NASD 
Board one or more nominees for each vacant or new Governor position, 
and for each Director position on the Boards of Directors of the 
Subsidiaries.
3. Contested Elections
    a. A candidate for the NASD Board who has not been nominated may be 
included on the ballot if the candidate presents duly executed 
petitions to the National Nominating Committee demonstrating that such 
candidate has the support of Two (2) percent of the members of the 
NASD.
    b. A candidate for the NASD Board shall be certified by the 
National Nominating Committee and included on the ballot only if the 
Committee certifies that the candidate's petitions are duly executed by 
the requisite number of members of the NASD and that the candidate 
meets the qualifications for the position to be filled, as defined in 
Section I.A. above.
4. Term of Office
    a. Each Governor shall hold office for a term of not more than 
three years, or until a successor is elected and qualified, or until 
death, disqualification, resignation, or removal. Except as provided in 
paragraph (b) and (c), Governors may not serve more than two 
consecutive terms of office on any Association Board.
    b. The CEO of the NASD shall serve as a member of the NASD Board 
until a successor is selected and qualified, or until death, 
resignation, disqualification, or removal.
    c. Where a Governor is appointed to fill a term of less than one 
year, such Governor shall not be precluded from serving two additional 
terms of office.
5. Vacancies
    a. If a Governor position becomes vacant before the expiration of 
the Governor's term of office, the National Nominating Committee shall 
recommend, and the NASD Board shall elect by majority vote of the 
remaining Governors, a person satisfying the criteria for a Governor 
position of the type (Industry, Non-industry or Public), vacated as 
defined in Section I.A. above, unless such Governor has a remaining 
term of office of no more than six months, in which case no replacement 
will be required.
    b. If a Governor no longer satisfies the criteria for the category 
in which he or she was elected (Industry, Non-industry or Public) and 
has a remaining term of office of more than six months, such

[[Page 16950]]

Governor shall be automatically removed from office unless the 
remaining members of the NASD Board determine otherwise by a majority 
vote and the failure to remove the Governor does not affect the 
proportional representation set forth in Section I.C.1. above.

D. Audit Committee

    1. The Audit Committee shall be a committee of the NASD Board and 
shall include the following functions:
    a. To ensure the existence of adequate controls and the integrity 
of the financial reporting process of the Association.
    b. To recommend to the NASD Board, and to monitor the independence 
and performance of, the certified public accountants retained as 
outside auditors by the NASD.
    c. To direct and oversee all the activities of the Association's 
internal review function, including but not limited to management's 
responses to the internal review function.
    2. Composition: The Audit Committee shall be composed of Four (4) 
or Five (5) members of the NASD Board, none of whom are officers or 
employees of the Association. The Committee shall include at least one 
Public Committee Member who shall serve as Chairperson of the 
Committee. The Committee shall have no more than two Industry Committee 
Members. If the Committee shall have Four (4) members it shall have not 
more than One (1) Industry Committee Member. In the event that the size 
of the NASD Board shall at any time consist of Eleven (11) or more 
members, the Audit Committee shall include Two (2) Public Committee 
Members. In addition, each Subsidiary shall designate a Public Member 
of its Board as a liaison to the Audit Committee. The Audit Committee 
may consult with that person on issues relating to the functions of the 
Subsidiary, but neither the liaison nor any officer or employee of the 
Association shall serve on the Audit Committee in any voting or non-
voting capacity.
    3. No member of the Audit Committee shall participate in the 
consideration or decision of any matter relating to a particular NASD 
member, company or individual if he or she has a material interest in, 
or a professional, business or personal relationship with, that member, 
company or individual or if such participation shall create an 
appearance of impropriety. Committee members shall consult with the 
General Counsel of NASD to determine if recusal is necessary. In the 
event that a member of the Committee is recused from consideration of a 
matter, any decision on the matter shall be by a vote of a majority of 
the remaining members of the Committee.
    4. Office of Internal Review: The Audit Committee shall have 
exclusive authority: (a) To hire or terminate the Director of Internal 
Review, (b) to determine the compensation of the Director of Internal 
Review, and (c) to determine the budget for the Office of Internal 
Review. The Office of Internal Review shall report directly to the 
Audit Committee. The Audit Committee may, in its discretion, direct 
that the Office of Internal Review also report to senior management of 
the NASD on matters it deems appropriate and may request that senior 
NASD management perform such operational oversight as necessary and 
proper, consistent with preservation of the independence of the 
internal review function.

E. Management Compensation Committee

    1. The Management Compensation Committee shall be a Committee of 
the NASD Board and shall have the following functions: To consider and 
recommend compensation policies, programs and practices for employees 
of the Association.
    2. Composition: The Management Compensation Committee shall be 
composed of Four (4) or more Members of the NASD Board, equally 
balanced between Industry and Non-industry Governors. If at any time 
there shall be an odd number of members of the Management Compensation 
Committee, Non-industry Committee Members shall be in the majority.

F. Access to and Status of Officers, Directors, Employees, Books, 
Records and Premises of Subsidiaries

    Notwithstanding the delegation of authority to the Subsidiaries, as 
set forth in Section II.A. and III.A. below, the staff, books, records 
and premises of the Subsidiaries are the staff, books, records and 
premises of the NASD subject to oversight pursuant to the Securities 
Exchange Act of 1934 (``Act''), and all officers, directors, employees 
and agents of the Subsidiaries are officers and directors, employees 
and agents of the NASD for purposes of the Act.

II. NASD Regulation, Inc. (``NASDR'')

A. Delegation of Functions and Authority

    1. The NASD hereby delegates to the NASDR and the NASDR assumes the 
following responsibilities and functions as a registered securities 
association:
    a. To establish rules and regulations for NASD members including, 
but not limited to fees and membership requirements and the Code of 
Arbitration and Mediation Procedure.
    b. To determine Association policy, including developing and 
adopting necessary or appropriate rule changes, relating to the 
business and sales practices of NASD members and associated persons 
with respect to, but not limited to, (i) arbitration of disputes among 
and between NASD members, associated persons and customers, (ii) public 
and private sale or distribution of securities including underwriting 
arrangements and compensation, (iii) financial responsibility, (iv) 
qualifications for NASD membership and association with NASD members, 
(v) clearance and settlement of securities transactions, (vi) NASD 
member advertising practices, (vii) administration, interpretation and 
enforcement of Association rules, (viii) administration and enforcement 
of Municipal Securities Rulemaking Board (``MSRB'') rules, the federal 
securities laws, and other laws, rules and regulations the Association 
has the authority to administer or enforce, and (ix) standards of proof 
for violations and sanctions imposed on NASD members and associated 
persons in connection with disciplinary actions.
    c. To take necessary or appropriate action to assure compliance 
with Association policy, Association and MSRB rules, the federal 
securities laws, and other laws, rules and regulations the Association 
has the authority to administer or enforce, through examination, 
surveillance, investigation, enforcement, disciplinary and other 
programs.
    d. To administer programs and systems for the surveillance and 
enforcement of rules governing NASD members' conduct and trading 
activities in The Nasdaq Stock Market, other markets operated by The 
Nasdaq Stock Market, the third market for securities listed on a 
registered exchange, and the over-the-counter market.
    e. To examine and investigate NASD members and associated persons 
to determine if they have violated Association or MSRB rules, the 
federal securities laws, and other laws, rules and regulations the 
Association has the authority to administer, interpret or enforce.
    f. To administer Association enforcement and disciplinary programs, 
including investigation, adjudication of cases and the imposition of 
fines and other sanctions.
    g. To administer the Association's office of professional hearing 
officers.
    h. To conduct arbitrations, mediations and other dispute resolution 
programs.

[[Page 16951]]

    i. To conduct qualification examinations and continuing education 
programs.
    j. To operate the Central Registration Depository (``CRD'').
    k. To determine whether applicants for NASD membership have met the 
requirements for membership established by the Association.
    l. To place restrictions on the business activities of NASD members 
consistent with the public interest, the protection of investors and 
the federal securities laws.
    m. To determine whether persons seeking to register as associated 
persons of NASD members have met such qualifications for registration 
as may be established by the Association, including whether statutorily 
disqualified persons will be permitted to associate with particular 
NASD members and the conditions of such association.
    n. To oversee all District Office activities.
    o. To establish the annual budget and business plan for NASDR.
    p. To determine allocation of NASDR resources.
    q. To establish and assess fees and other charges on NASD members, 
persons associated with NASD members and others using the services or 
facilities of NASDR.
    r. To manage external relations on enforcement, regulatory and 
other policy issues with Congress, the Securities and Exchange 
Commission (``SEC''), state regulators, other self-regulatory 
organizations, business groups, and the public.
    2. All action taken pursuant to authority delegated pursuant to (1) 
shall be subject to the review, ratification, or rejection by the NASD 
Board in accordance with procedures established by the NASD Board.

B. Board of Directors

    1. Subsequent to January of 1997, the NASDR Board of Directors 
(``NASDR Board'') shall be composed of at least Twenty-one (21) and no 
more than Twenty-five (25) Directors. The President of NASDR shall be a 
member of the NASDR Board and the remaining members shall be equally 
balanced between Industry and Non-industry Directors. If at any time 
there shall be an odd number of Directors, excluding the President, a 
majority of the Directors other than the President shall be Non-
industry. The NASDR Board shall include Seven (7) representatives of 
NASD members representing geographical regions defined by the NASDR 
Board, and at least Three (3) at-large industry representatives. The 
NASDR Board shall include at least Ten (10) Non-industry Directors, 
including at least Three (3) Public Directors. In the event that the 
NASDR Board shall consist of more than Twenty-two (22) Members, at 
least Four (4) shall be Public Directors. The NASDR Board shall include 
representatives of an issuer of investment company shares or an 
affiliate of such an issuer and an insurance company or an affiliated 
NASD member. The CEO of NASD shall be an ex-officio non-voting member 
of the NASDR Board.
    2. Election Procedures.
    a. The National Nominating Committee shall propose to the NASD 
Board nominees for each position on the NASDR Board.
    b. The Seven (7) Industry Members of the NASDR Board shall be 
nominated by Regional Nominating Committees for consideration by the 
National Nominating Committee. A Regional Nominating Committee shall 
consist of equal numbers of members from each district comprising the 
regions and members shall be selected by the District Committee for 
that District.
    c. Any officer, director or employee of an NASD member who has not 
otherwise been nominated by the Regional Nominating Committee may seek 
nomination if the candidate presents duly executed petitions to the 
Regional Nominating Committee for the appropriate geographical region 
demonstrating that such candidate has the support of at least Ten (10) 
percent of the NASD members in that region. The Regional Nominating 
Committee shall submit the names of its nominees and of all the 
candidates presenting qualifying petitions to the members in that 
region for nomination by secret ballot. The Regional Nominating 
Committee shall nominate to the National Nominating Committee the 
candidate receiving the most votes.
    d. Terms of Office and Vacancies: The terms of office of Directors 
and the procedures for the filling of vacancies shall be the same as 
those set forth under Section I.C.4. and 5. above.

C. NASDR Board Procedures

    1. Disciplinary Action--Any initial disciplinary decision of the 
Association, including dismissals, may be appealed to the NBCC within 
15 calendar days, or called for review by the NBCC within 45 calendar 
days, as set forth in the Code of Procedure. A decision of the NBCC may 
be called for review by any member of the NASDR Board not later than 
its meeting next following the NBCC's decision. A decision of the NBCC 
or the NASDR Board may be called for review by any member of the NASD 
Board not later than its meeting next following the decision of the 
NBCC or NASDR Board but which is 15 calendar days or more following the 
decision of the NBCC or NASD Board. Any disciplinary decision not 
appealed or called for review shall become the final action of the 
Association upon the expiration of the time allowed for appeal or call 
for review. A respondent has the right to appeal a final action of the 
Association taken by the NBCC, NASDR or NASD to the SEC.
    2. Statutory Disqualification Decisions--Any decision of the NBCC 
with respect to statutory disqualification may be called for review by 
any member of the NASDR Board not later than its meeting next following 
the NBCC's decision. A decision of the NBCC or the NASDR Board may be 
called for review by any member of the NASD Board not later than its 
meeting next following the decision of the NBCC or NASDR Board but 
which is 15 calendar days or more following the decision of the NBCC or 
the NASDR Board. Any decision that is not called for review shall 
become the final action of the Association upon expiration of the time 
allowed for appeal or call for review. A respondent has the right to 
appeal a final action of the Association taken by the NBCC, NASDR or 
NASD to the SEC.
    3. Rule Filings--Any rule change adopted by the NASDR Board that 
imposes fees or other charges on persons or entities other than NASD 
members or that the NASDR Board refers to the NASD Board because in the 
view of the NASDR Board it raises significant policy issues shall be 
reviewed and ratified by the NASD Board before becoming the final 
action of the Association. If the NASDR Board does not refer a rule 
change to the NASD Board for review, the NASDR Board action will become 
the final action of the Association unless called for review by any 
member of the NASD Board not later than its meeting next following the 
NASDR Board's action but which is 15 calendar days or more following 
the action of the NASDR Board. During the process of developing rule 
proposals, NASDR staff shall consult with and seek the advice of Nasdaq 
staff before presenting any rule proposal to the NASDR Board.

D. Supplemental Delegation Regarding the Formation of Committees

    1. The NASDR Board may designate one or more committees and 
delegate to such committees such powers and authority, as necessary and 
appropriate, to act on behalf of the NASDR Board in carrying out the 
functions and authority delegated to the NASDR by the NASD.

[[Page 16952]]

Such delegations shall be in conformance with law, the charter and the 
by-laws and the requirement as set forth below as part of this Plan of 
Allocation and Delegation. Any action taken by a committee pursuant to 
delegated authority shall be subject to review, ratification or 
rejection by the NASDR Board in accordance with procedures established 
by the NASDR Board.
    (a) National Business Conduct Committee--A National Business 
Conduct Committee may be created for the purpose of:
    (i) Hearing and deciding appeals of initial disciplinary decisions 
of the Association.
    (ii) Considering and recommending to the NASDR Board policy and 
rule changes relating to the business and sales practices of NASD 
members and associated persons.
    (iii) Considering and recommending Association enforcement 
policies, including policies with respect to fines and other sanctions.
    (b) The NBCC shall be composed of at least Eight (8) members of the 
NASDR Board equally balanced between Industry and Non-industry 
Committee Members (including at least one Public Member). If at any 
time there shall be an odd number of Committee Members, a majority of 
the Members shall be Non-industry. Each NBCC Member shall be elected to 
serve a one-year term.
    2. Other Committees--With respect to any other committees that may 
be formed pursuant to this Section D for purposes other than those set 
forth in 1. above, such committee shall be created in accordance with 
the by-laws by resolution or resolutions adopted by a majority of the 
whole NASDR Board.

III. Delegation to Nasdaq

A. Delegation of Functions and Authority

    1. The NASD hereby delegates to Nasdaq and Nasdaq assumes the 
following responsibilities and functions as a registered securities 
association:
    a. To operate The Nasdaq Stock Market, automated systems supporting 
The Nasdaq Stock Market, and other markets or systems for non-Nasdaq 
securities.
    b. To provide and maintain a telecommunications network 
infrastructure linking market participants for the efficient processing 
and handling of quotations, orders, transaction reports and comparisons 
of transactions.
    c. To collect, process, consolidate and provide to NASDR the 
information requisite to operation of the surveillance audit trail.
    d. To develop and adopt rule changes (i) applicable to the 
collection, processing, and dissemination of quotation and transaction 
information for securities traded on The Nasdaq Stock Market, on other 
markets operated by The Nasdaq Stock Market, in the third market for 
securities listed on a registered exchange, and in the over-the-counter 
market, (ii) for Nasdaq-operated trading systems for these securities, 
and (iii) establishing trading practices with respect to these 
securities.
    e. To develop and adopt rules, interpretations, policies and 
procedures to maintain and enhance the integrity, fairness, efficiency, 
and competitiveness of The Nasdaq Stock Market and other markets 
operated by The Nasdaq Stock Market.
    f. To act as a Securities Information Processor for quotations and 
transaction information related to securities traded on The Nasdaq 
Stock Market and other markets operated by The Nasdaq Stock Market.
    g. To act as processor under the Nasdaq/Unlisted Trading Privileges 
Plan to collect, consolidate, and disseminate quotation and transaction 
reports in eligible securities from all Plan Participants in a fair and 
non-discriminatory manner.
    h. To administer the Association's involvement in National Market 
System Plans related to Nasdaq/Unlisted Trading Privileges or the 
trading in the third market for securities listed on a registered 
exchange.
    i. To develop, adopt and administer rules governing listing 
standards applicable to securities traded on The Nasdaq Stock Market 
and the issuers of those securities.
    j. To establish standards for participation in The Nasdaq Stock 
Market, other markets or systems operated by Nasdaq and determine in 
accordance with Association and Nasdaq procedures if: (i) persons 
seeking to participate in any of such markets and systems have met the 
standards established for participants; and (ii) persons participating 
in any of the markets or systems continue to meet the standards 
established for participants.
    k. To establish and assess listing fees upon issuers and fees for 
the products and services offered by Nasdaq.
    l. To establish the annual budget and business plan for Nasdaq.
    m. To determine allocation of Nasdaq resources.
    n. To manage external relations on matters related to trading on 
and the operation and functions of The Nasdaq Stock Market, other 
markets operated by The Nasdaq Stock Market and systems operated by the 
Nasdaq Stock Market with Congress, the SEC, state regulators, other 
self-regulatory organizations, business groups, and the public.
    2. All action taken pursuant to authority delegated pursuant to 1. 
shall be subject to the review, ratification, or rejection by the NASD 
Board in accordance with procedures established by the NASD Board.

B. Board of Directors

    1. Composition--As of January of 1997 the Nasdaq Board of Directors 
(``Nasdaq Board'') shall be composed of at least Eleven (11) and not 
more than Fifteen (15) Directors. The President of Nasdaq shall be a 
member of the Nasdaq Board and the remaining Members shall be equally 
balanced between Industry and Non-industry Directors, including at 
least two (2) Public Directors. If at any time there shall be an odd 
number of Directors, excluding the President, a majority of the 
Directors other than the President shall be Non-industry. In the event 
that the Nasdaq Board shall consist of more than Twelve (12) Members, 
at least Three (3) shall be Public Directors. The CEO of NASD shall be 
an ex-officio non-voting member of the Nasdaq Board.
    2. Election Procedures.
    a. The National Nominating Committee shall propose to the NASD 
Board nominees for each position on the Nasdaq Board.
    b. Terms of Office and Vacancies: The terms of office of Directors 
and the procedures for the filling of vacancies shall be the same as 
those set forth under I.C.4. and 5. above.

C. Nasdaq Board Procedures

    1. Listing/Delisting Decisions--Any initial decision of Nasdaq 
staff concerning the listing or delisting of securities on The Nasdaq 
Stock Market may be appealed to the Nasdaq Listing and Hearing Review 
Committee (``Listing Committee'') within 15 calendar days, or called 
for review by any member of the Listing Committee within 45 days, as 
set forth in the Code of Procedure. A decision of the Listing Committee 
may be called for review by any member of the Nasdaq Board not later 
than its meeting next following the Listing Committee's decision. A 
decision of the Nasdaq Board may be called for review by any member of 
the NASD Board not later than its meeting next following the Nasdaq 
Board's decision but which is 15 calendar days or more following the 
decision of the Listing Committee or the Nasdaq Board. Any decision not 
appealed or called for review shall become the final action of the 
Association upon expiration of the

[[Page 16953]]

time allowed for appeal or call for review. An issuer has the right to 
appeal a final action of the Association taken by the Listing 
Committee, Nasdaq Board or NASD to the SEC.
    2. Rule Filings--Any rule change adopted by the Nasdaq Board that 
imposes fees or other charges on persons or entities other than NASD 
members or issuers or that the Nasdaq Board determines to refer to the 
NASD Board because in the view of the Nasdaq Board it raises 
significant policy issues shall be reviewed and ratified by the NASD 
Board before becoming the final action of the Association. If the 
Nasdaq Board does not refer a rule change to the NASD Board for review, 
the Nasdaq Board action will become the final action of the Association 
unless called for review by any member of the NASD Board not later than 
its meeting next following the Nasdaq Board's action but which is 15 
calendar days or more following the action of the Nasdaq Board. During 
the process of developing rule proposals, Nasdaq staff shall consult 
with and seek the advice of NASDR staff before presenting any rule 
proposal to the Nasdaq Board.

D. Supplemental Delegation Regarding the Formation of Committees

    The Nasdaq Board may designate one or more committees and delegate 
to such committees such powers and authority, as necessary and 
appropriate, to act on behalf of the Nasdaq Board in carrying out the 
functions and authority delegated to Nasdaq by the NASD. Such 
delegations shall be in conformance with law, the charter and the by-
laws and the requirements as set forth below as part of this Plan of 
Allocation and Delegation. Any action taken by a committee pursuant to 
delegated authority shall be subject to review, ratification or 
rejection by the Nasdaq Board.
1. Specific Committees
a. Quality of Markets Committee (``QOMC'')
    (1) The QOMC shall be a committee appointed by the Nasdaq Board on 
issues relating to the fairness, integrity, efficiency and 
competitiveness of the information, order handling and execution 
mechanisms of The Nasdaq Stock Market, other markets operated by The 
Nasdaq Stock Market and systems operated by The Nasdaq Stock Market 
from the perspective of investors, both individual and institutional, 
retail firms, market making firms, and Nasdaq-listed companies, and 
other participants in The Nasdaq Stock Market.
    (ii) To advise the Nasdaq Board with respect to national market 
systems plans and linkages between the facilities of Nasdaq and 
registered exchanges.
    (2) The QOMC will have broad representation that is equally 
balanced between industry and non-industry committee members. The 
committee members shall include broad representation of participants in 
The Nasdaq Stock Market, including investors, market makers, integrated 
retail firms and order entry firms.
b. Market Operations Review Committee (``MORC'')
    (1) the MORC shall be a committee appointed by the Nasdaq Board and 
shall exercise the functions contained in Section 70 of the Uniform 
Practice Code (``UPC''), in accordance with the procedures specified 
therein. NASDR shall receive weekly reports of all determinations made 
by the staff or MORC under Section 70 of the UPC for regulatory review.
    (2) The MORC shall be appointed by resolution of the Nasdaq Board 
and shall have no more than Fifty (50) percent of its members directly 
engaged in market making activity or employed by a member firm whose 
revenues from market making activity exceed 10% of its total revenues.
c. Firm Operations and Clearance Committee (``FOCC'')
    (1) The FOCC shall be a committee appointed by the Nasdaq Board and 
shall have the following functions:
    (i) To issue interpretations or rulings with respect to Sections 4-
10, 12, 46, 67-68 and 71 of the UPC, as well as any other provision of 
the UPC pertaining to transactions and post execution processing.
    (ii) To advise the Nasdaq Board with respect to modifications to 
the UPC dealing with the transactions and post execution processing.
d. Nasdaq Listing and Hearing Review Committee (``Listing Committee'')
    (1) The Listing Committee shall be a committee appointed by the 
Nasdaq Board and shall have the following functions:
    (i) To advise the Nasdaq Board on the formulation or modification 
of initial or maintenance eligibility criteria and fees applicable to 
securities listed on The Nasdaq Stock Market or traded on other markets 
operated by The Nasdaq Stock Market.
    (ii) To exercise the functions set forth in Article IX of the Code 
of Procedure, in accordance with the procedures specified therein.
    (2) The Listing Committee shall be appointed by resolution of the 
Nasdaq Board and shall have no more than Fifty (50) percent of its 
members directly engaged in market making activity or employed by a 
member firm whose revenues from market making activity exceed 10% of 
its total revenues.
2. Other Committees
    With respect to any other committees that may be formed pursuant to 
this Section D for purposes other than those set forth in (1) above, 
such committee shall be created in accordance with the By-laws by 
resolution or resolutions adopted by a majority of the whole Nasdaq 
Board.

E. Stockwatch

    The Stockwatch section handles the trading halt functions for The 
Nasdaq Stock Market and exchange-listed securities traded in the over-
the-counter market (i.e., the Third Market). Review of all questionable 
market activity, possible rule infractions or any other matters that 
require any type of investigative or regulatory follow-up will be 
referred to and conducted by NASDR, which will assume sole 
responsibility for the matter until resolution. This responsibility 
will include examinations, investigations, document requests, and any 
enforcement actions that the NASDR may deem necessary. NASDR staff at 
all times will have access to all records and files of the Stockwatch 
function.

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 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. The 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

    In order to implement a reorganization of the NASD and to create 
two new operating subsidiaries, NASD Regulation, Inc. (``NASDR'') and 
The Nasdaq Stock Market, Inc. (``Nasdaq''), the NASD is proposing to: 
(1) adopt a new rule delegating to the NASD's subsidiaries, NASDR and

[[Page 16954]]

Nasdaq, the authority to act on behalf of the Association as set forth 
in a Plan of Allocation and Delegation adopted by the Board of 
Governors and approved by the Securities and Exchange Commission 
pursuant to its authority under the Act; and, (2) adopt a Plan of 
Allocation and Delegation setting forth the purpose, function, 
governance, procedures and responsibilities of the NASD, NASDR, and 
Nasdaq, following the reorganization of the NASD.
    The proposed Plan is organized in three principal parts, one each 
of the three major entities that will constitute the reorganized NASD: 
the parent corporation, National Association of Securities Dealers, 
Inc.; the regulatory subsidiary, NASD Regulation, Inc.; and the stock 
market operating subsidiary, The Nasdaq Stock Market, Inc. \3\ The 
Plan, the contents of which are self-explanatory, describes the 
purposes, functions, governance, procedures and responsibilities of 
each entity.
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    \3\ The Plan does not discuss other wholly owned subsidiary 
corporations of the NASD, such as the Securities Dealers Risk 
Purchasing Group, Inc. and Securities Dealers Insurance Co., Ltd. 
These and any other wholly owned subsidiaries of the NADS not 
described in the Plan do not perform any of the Association's 
regulatory functions or the operating functions related to the 
operation of the Nasdaq Stock Market. In addition, the Plan does not 
address the NADS's ownership role in corporations such as the 
National Securities Clearing Corporation or the Depository Trust 
Company.
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    The first part of the Plan describes the parent corporation, 
National Association of Securities Dealers, Inc. The Plan sets forth 
the purpose and function of the NASD; the composition of the Board of 
Governors, including provisions relating to the qualifications for 
Governors, election procedures, term of office, vacancies and removal 
from office; the function, composition and reporting structure of the 
Audit Committee and the Office of Internal Review; the function and 
composition of the Management Composition Committee; and the SEC's 
access to and status of officers, directors, employees, books, records 
and premises of the subsidiaries.
    The second part of the Plan describes the regulatory subsidiary, 
NASD Regulation, Inc. The Plan sets forth the delegation of authority 
to the NASDR by the NASD; the purpose, function and authority of the 
NASDR; the composition of the qualifications for members of the Board 
of Directors from 1997 forward, including, provisions relating to 
election procedures; the function and composition the National Business 
Conduct Committee; the Board's procedures for reviewing disciplinary 
actions, statutory disqualification decisions and proposed rule change 
recommendations; and the Board's procedures for initiating actions.
    The third part of the Plan describes the stock market operating 
subsidiary, the Nasdaq Stock Market, Inc. The Plan sets forth the 
delegation of authority to Nasdaq; the purpose and function of Nasdaq; 
the composition of and qualifications for members of the Board of 
Directors, including, provisions relating to election procedures and 
the authority of the Board; the Board's procedures for reviewing 
listing/delisting decisions, and rule change recommendations; the 
Board's procedures for initiating actions; the functions and 
composition of the Quality of Markets Committee; and functions of the 
Stockwatch Department.
    In connection with establishing the composition of and 
qualifications for members of the Boards, Parts I.A.2.(c) and (d) of 
the Plan provides for an alternative definition of ``Non-Industry'' 
Governors, Directors or Committee Members. The alternative definition 
would include as ``Non-Industry:''

persons affiliated with brokers and dealers that operate solely to 
assist the securities-related activities of the business of non-
member affiliates (such as a broker or dealer established to (i) 
distribute an affiliate's securities which are issued on a 
continuous or regular basis, or (ii) process the limited buy and 
sell orders of the shares of employee owners of the affiliate); 
[and] employees of an entity that is affiliated with a broker or 
dealer that does not account for a material portion of the revenues 
of the consolidated entity, and who are primarily engaged in the 
business of non-member entity. * * *.


    This provision is intended to recognize that certain individuals 
represent primarily non-industry constituencies, even though their 
company has an affiliated or subsidiary member firm where the member 
engages in the securities business solely or primarily to assist in the 
non-securities activities of its affiliates. For examples, certain 
large industrial corporations engage in nearly continuous distributions 
of debt securities to enable them to do business and do so through an 
affiliated member firm. In addition, insurance companies and investment 
companies (or their sponsors) often have an affiliated member firm that 
engages solely or primarily in the distribution of their affiliate's 
securities. In these and similar instances, the NASD does not believe 
that employees of the member's affiliate should be categorized as 
``industry'' Governors, Directors or Committee Members on the basis 
that their primary constituency is non-industry and their involvement 
with the securities industry is only incidental to their non-industry 
responsibilities.
    The NASD believes that the proposed rule change is consistent with 
the provisions of Section 15A(b)(2) of the Act \4\ in that the terms of 
the Plan will provide for the organization of the Association in a 
manner that will permit the Association, through its operating 
subsidiaries, to carry out the purposes of the Act, to comply with the 
Act, and to enforce compliance by Association members and persons 
associated with members with the Act, the rules and regulations 
thereunder, the rules of the Association and the federal securities 
laws.
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    \4\ 15 U.S.C. Sec. 78o-3.
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(B) Self-Regulatory Organization's Statement on Burden on Competition

    The 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, as amended.

(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

    The NASD has requested that the Commission find good cause pursuant 
to Section 19(b)(2) for approving the proposed rule change prior to the 
30th day after publication in the Federal Register.

IV. Discussion

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to the NASD and, in particular, the requirements 
of Section 15A and the rules and regulations thereunder. The Commission 
believes that the proposed rule change will allow the NASD to be able 
to carry out the purposes of the Act to comply with, and enforce 
compliance by its members and associated persons, with the provisions 
of the Act, the rules and regulations thereunder, and the rules of the 
NASD. Furthermore, the amendments are designed (subject to further 
changes consistent with the NASD Plan of Allocation and Delegation of 
Functions by NASD to Subsidiaries to be submitted to the NASD 
membership) to assure a fair representation of the NASD's members, in 
the selection of its

[[Page 16955]]

directors and administration of its affairs as well as comply with the 
public and non-industry participant requirements of the Act. It is 
envisioned that these temporary rules and subsequent changes that may 
be implemented from time-to-time will enable the NASD to better comply 
with the requirements of Section 15A(b)(6) in particular and the Act in 
general.
    The Commission finds good cause for temporarily approving the 
proposed rule change prior to the 30th day after the date of 
publication of notice of filing thereof in that accelerated approval 
will enhance the NASD's ability to carry out its regulatory obligations 
under the Act. The Commission believes that the proposed rule change is 
intended to accomplish certain allocations and delegations of authority 
necessary to reorganize the NASD, and establish as separate 
subsidiaries the NASDR and Nasdaq in accordance with the 
recommendations of The Select Committee on Structure and Governance in 
order to enable the NASD to meet its regulatory and business 
obligations. The Plan, which is part of this proposed rule change sets 
forth the purpose, functions, governance, procedures, and 
responsibilities of the NASD, the NASDR and Nasdaq following the 
reorganization of the NASD. The NASD's Board of Governors, which has 
been reorganized to be consistent with the proposed rule change, will 
hold its first meeting on April 11, 1996. The reorganization of the 
NASD Board of Governors is also reflected in proposed rule changes to 
the NASD By-Laws submitted in a separate rule filing and which the 
Commission is approving on an accelerated basis. Accordingly, the 
Commission believes that accelerating the approval of the proposed rule 
change will benefit members and the public interest by permitting the 
NASD Board of Governors to conduct business at its meeting on April 11, 
1996.

V. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street NW., Washington, DC 20549. 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 will also be 
available for inspection and copying at the principal office of the 
NASD. All submissions should refer to the file number in the caption 
above and should be submitted by May 9, 1996.
    It is Therefore Ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change be, and hereby is, approved and effective 
through July 10, 1996.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\5\
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    \5\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-9512 Filed 4-17-96; 8:45 am]
BILLING CODE 8010-01-M