[Federal Register Volume 61, Number 139 (Thursday, July 18, 1996)] [Notices] [Pages 37515-37518] From the Federal Register Online via the Government Publishing Office [www.gpo.gov] [FR Doc No: 96-18169] ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION [Release No. 34-37424; File No. SR-NASD-96-20] Self-Regulatory Organizations; Order Granting Temporary Accelerated Approval to Proposed Rule Change by National Association of Securities Dealers, Inc. Relating to Changes in the Structure of the NASD Board of Governors July 11, 1996. On May 28, 1996,\1\ the National Association of Securities Dealers, Inc. (``NASD'' or ``Association'') filed with the Securities and Exchange Commission (``SEC'' or ``Commission'') a proposed rule change 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 the NASD By-Laws to conform them to the ``Plan of Allocation and Delegation of Functions by NASD to Subsidiaries'' (``Delegation Plan'').\4\ --------------------------------------------------------------------------- \1\ On June 5, 1996, the NASD filed Amendment No. 1 to the proposed rule change. Amendment No. 1 amends Article VI, Section 5 to clarify that, in a contested election, the term of office of a candidate certified by the National Nominating Committee for inclusion on the ballot for the election of Governors pursuant to Article VI, Section 7(c) would be identical to the term of office of a candidate nominated by the National Nominating Committee pursuant to Article VI, Section 7(c). Amendment No. 1 also amends Article VI, Section 7(a) to clarify that any person elected to the Board of Governors must be nominated or certified by the National Nominating Committee. See Letter from Suzanne E. Rothwell, Associate General Counsel, NASD to Katherine A. England, Assistant Director, Division of Market Regulation, Commission (dated June 4, 1996). On July 2, 1996, the NASD filed Amendment No. 2 to the proposed rule change. Amendment No. 2 provides the final report of the NASD membership with respect to the proposed rule change. 2,227 valid ballots were received from NASD members. 2,101 voted to approve the proposed rule change, 117 voted to disapprove the proposed rule change and 9 did not vote. On July 10, 1996, the NASD filed Amendment No. 3 to the proposed rule change. Amendment No. 3 requests temporary approval of the proposed rule change for a period of 120 days. See Letter from T. Grant Callery, Senior Vice President and General Counsel, NASD to Katherine A. England, Assistant Director, Division of Market Regulation, Commission (dated July 10, 1996). \2\ 15 U.S.C. 78s(b)(1). \3\ 17 CFR 240.19b-4. \4\ See Securities Exchange Act Release No. 37107 (April 11, 1996), 61 FR 16948 (April 18, 1996) (``Release 34-37107''). --------------------------------------------------------------------------- Notice of the proposed rule change, together with the substance of the proposal, was provided by issuance of a Commission release (Securities Exchange Act Release No. 37282, June 6, 1996) and by publication in the Federal Register (61 FR 29777, June 12, 1996). One comment letter was received. This order grants accelerated approval to the proposed rule change for a period of 120 days. I. Background In 1995, the NASD Board of Governors (``Board'') appointed the Select Committee on Structure and Governance (``Select Committee'') to examine the corporate structure, governance, and functions of the NASD and to recommend changes and improvements to enable the NASD to meet its regulatory and business obligations. In September 1995, the Select Committee recommended, among other things, that the NASD establish two distinct subsidiaries; one to perform the regulatory functions of the NASD and the other to run The Nasdaq Stock Market (``Nasdaq''). The Select Committee recommended that each subsidiary have an independent Board of Directors with at least 50% public representation and that the NASD remain as parent corporation overseeing the operations of both subsidiaries. The Select Committee recommended that the NASD Board of Governors be composed of a majority of public directors. In January 1996, the NASD created a new subsidiary, NASD Regulation, Inc. (``NASD Regulation'') to provide regulation and member and constituent services, with the NASD retaining responsibility for general oversight over the effectiveness of the self-regulatory and business operations of the NASD and its major subsidiaries, Nasdaq and NASD Regulation, and final policymaking authority for the association as a whole. The NASD also adopted Select Committee proposals to restructure and reduce the size of the NASD Board and to implement policies to ensure a balance of non-industry and industry representation on the Nasdaq and NASD Regulation Boards. On April 11, 1996, the Commission granted temporary approval for a period of 90 days to: (i) Amendments to Article VII of the NASD By-Laws to create a national nominating committee to nominate persons to serve on the Board of Governors and reconstitute the Board as a majority non- industry Board; \5\ (ii) NASD Rule 130 providing for the delegation of the authority to act on behalf of the NASD to NASD Regulation and Nasdaq pursuant to the Delegation Plan; and (iii) the Delegation Plan.\6\ The Delegation Plan sets forth the purposes, [[Page 37516]] functions and governance procedures of the three corporations working together. --------------------------------------------------------------------------- \5\ Securities Exchange Act Release No. 37106 (April 11, 1996), 61 FR 16944 (April 18, 1996) (``Release 34-37106''). \6\ Release 34-37107. --------------------------------------------------------------------------- The rule change approved today is intended to ensure that the NASD possesses the requisite corporate authority to continue the restructuring necessary to implement the principles articulated in the report of the Select Committee. II. Description of Proposed Rule Change The rule change approved today amends the NASD By-Laws to make the By-Laws consistent with the Delegation Plan granted temporary approval today by the Commission \7\ by providing for the creation of a national nominating committee to identify and nominate for election industry and non-industry persons to serve on the Board and by deleting sections and language now unnecessary or inappropriate as a result of the Delegation Plan. Included in the proposed rule change is the deletion of nearly all references to the Districts and local administration, because responsibility for the local administration of regulatory affairs under the Delegation Plan has been assigned to NASD Regulation.\8\ The amended By-Laws also conform terms and rule citations to those used in the reorganized NASD Manual, including, for example, replacing the term ``Code of Procedure'' with ``Procedural Rules,'' \9\ and make various miscellaneous clarifying corrections to the By-Laws. Finally, all references to the NASD ``Certificate of Incorporation'' are being changed to the ``Restated Certificate of Incorporation'' to reflect that the Certificate of Incorporation has been amended to be consistent with the changes previously adopted and proposed herein to the By-Laws. --------------------------------------------------------------------------- \7\ See Securities Exchange Act Release No. 37425 (July 11, 1996) (granting accelerated approval to amended Delegation Plan for 120 days) (``Release 34-37425''). \8\ In recognition of this assignment of responsibility, the Board of Directors of NASD Regulation adopted a resolution at its May 13, 1996, meeting to appoint the Districts and District Committees as Districts and District Committees of NASD Regulation. \9\ The new version of the NASD Manual is divided into four sections (Administrative, Corporate Organization, Rules of the Association, and SEC Rules and Regulation T) and includes an expanded key word index. See Notice to Members 96-25 (April 1996). --------------------------------------------------------------------------- A. Definitions ``Delegation Plan'' is the term by which the ``Plan of Allocation and Delegation of Functions by NASD to Subsidiaries'' will be known. ``Corporations'' and ``Boards'' are the terms that will refer to the NASD, its subsidiaries and their boards of directors. In addition, the definition of ``Act'' is revised to match the definition in the Delegation Plan, and the definition of ``rules of the Corporation'' is revised to be consistent with the various references to rules in the reorganized NASD Manual.\10\ --------------------------------------------------------------------------- \10\ The definition published for member vote in Special Notice to Members 96-35, attached as Exhibit 2 to the proposed rule change, has been modified to eliminate certain rule language that would not have been consistent with the reorganized NASD Manual. --------------------------------------------------------------------------- Finally, the definition of ``bank'' is reviewed to expand the reference to national banks to include the citation that such banks are included in the definition that are ``under the authority of the Comptroller of the Currency pursuant to the first section of Public Law 87-722 (12 U.S.C. 92a) * * *.'' B. Applications for Membership Article III, Section 1(a)(3) is amended to extend to the Nasdaq and NASD Regulation Boards, committee members, officers, and employees protection from liability for action taken within the scope of their authority, except for willful malfeasance. See also Article IV, Sec. 2(a)(2) of the By-Laws. C. Affiliated Securities Associations The NASD has deleted Article V governing the affiliation of other Registered Securities Associations with the NASD. Such affiliations remain authorized by Section 15A of the Act. D. Board of Governors A majority of the changes to the By-Laws affect the powers and authority of the Board of Governors, its size, composition and the manner of its selection. The NASD has added a provision to the By-Laws setting forth the authority of the Corporation to delegate functions, provided that such delegations are not inconsistent with the Delegation Plan. The NASD also is eliminating the special committee formerly established to take action in case of emergencies or extraordinary market conditions when the full Board is not available. The amended By- Laws vest authority to take action under emergency conditions with the full Board, or with any person or persons designated by the Board. The amended By-Laws reconstitute the Board as a smaller, majority Non-Industry \11\ Board, comprising the Chief Executive Officer, one or more Non-Industry Governors representative of issuers and investors and not associated with an NASD member, and one or more Industry Governors. The Commission also is granting approval to amendments reducing the minimum size of the Board from 25 to 5. --------------------------------------------------------------------------- \11\ The Delegation Plan defines ``Non-industry'' Governors, Directors or Committee Members as (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 operate solely to assist the securities-related activities of the business of non-members 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 employees 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. See Release 34-37425, supra note 7. --------------------------------------------------------------------------- Another amendment to the By-Laws requires that the Board of Governors be composed in a manner consistent with the Delegation Plan and Section 15A(b)(4) of the Securities Exchange Act of 1934. This is intended to ensure that the Board will at all times include full representation of issuers, investors, and the securities industry, with a Non-Industry majority. Another amendment to the By-Laws provides that, except for the Chief Executive Officer, no Governor may serve more than two consecutive three-year terms except for a Governor that has been appointed to fill a term of less than one year. Such a Governor may serve up to two consecutive terms following the expiration of that Governor's current term. The filling of vacancies cannot be inconsistent with the Delegation Plan. Consistent with Section I.C. of the Delegation Plan, which described the procedure for the nomination and election of NASD Governors, the By-Laws have been amended to provide that the members of the NASD Board of Governors shall be elected by a plurality of the votes of the members of the NASD that are present in person or represented by proxy at the annual meeting of the NASD and entitled to vote. The Board is further authorized to establish a National Nominating Committee, which will consist of six or more persons meeting qualifications to be established by the Board in conformance with the Delegation Plan,\12\ to nominate or certify [[Page 37517]] one or more persons for each governorship up for election. Any person nominated or certified for election to the Board must demonstrate to the National Nominating Committee that that person meets the applicable qualifications for the position. --------------------------------------------------------------------------- \12\ See Release 34-37425, supra note 7. The Delegation Plan provides that the National Nominating Committee shall be composed of at least 6 and not more than 9 members, equally balanced between Industry and Non-industry Committee Members (including at least 2 Public Committee Members), with 2 members of the National Nominating Committee selected by NASD, NASD Regulation, and Nasdaq, respectively. 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. --------------------------------------------------------------------------- The By-Laws also have been amended to permit members of the Board or any committee of the NASD to participate in a meeting by communications facilities that permit the parties to hear and speak to each other. Participation in a meeting constitutes the person's presence at a meeting. Board members continue to be prohibited from voting by proxy at any meeting. E. Consistency With the Delegation Plan The By-Laws have been amended in several places to ensure that certain powers of the NASD Board must be exercised in a manner consistent with the requirements of the Delegation Plan. For example, those provisions of the By-Laws granting the Chief Executive Officer ex-officio membership in all committees have been deleted as inconsistent with the requirements of the Delegation Plan. In addition, amendments to the By-Laws provide that determinations of the NASD Board regarding the employment of administrative staff and the establishment of committees shall not be inconsistent with the Delegation Plan. III. Comments Received As noted above, the Commission received one comment concerning the proposed rule change.\13\ The Singer Letter objects to the proposal to require applicants for NASD membership to agree to exculpate the Nasdaq and NASD Regulation Boards, committee members, officers, and employees from liability for action taken within the scope of authority, except for willful malfeasance. The By-Laws would continue to require that applicants exculpate the NASD Board, its committee members, officers, and employees from such liability. The Singer Letter states that ``the NASD seeks to obtain unwarranted, virtual, absolute immunity for itself and its staff as the price for NASD membership or registration.'' \14\ The Singer Letter states that the public interest is clearly not served when a self-regulatory organization can insulate itself from wrongdoing except in cases where the misconduct rises to the level of willful malfeasance. The Singer Letter urges that the scope of exculpation from liability be limited to action taken ``while discharging necessary and proper prosecutorial or adjudicatory functions.'' The Commission notes that this provision is currently a part of the NASD By-Laws, and is not substantively amended by this filing. The Commission also notes that the scope of conduct addressed by the provision is limited to action taken within the scope of the actor's authority. The Commission also notes that the standard proposed by the Singer Letter would subject NASD, NASD Regulation and Nasdaq personnel to personal liability for ordinary negligence in performing regulatory functions required to carry out the purposes of the Act or required to enforce compliance by NASD members and their associated persons with the provisions of the Act.\15\ The Commission believes that such liability would have a chilling effect upon the actions of such personnel and would hinder the NASD's ability to discharge its regulatory responsibilities under the Act.\16\ --------------------------------------------------------------------------- \13\ Letter from Bill Singer, Esq., Singer, Bienenstock, Zamansky, Ogele & Selengut, LLP. to Jonathan G. Katz, Secretary, Commission, dated July 1, 1996 (``Singer Letter''). \14\ See Singer Letter, supra note 13. \15\ See 15 U.S.C. 78o-3(b) (1)-(2). \16\ See id. In addition, the Commission notes that the Delaware General Corporation Law (``DGCL'') permits a Delaware corporation such as the NASD to provide its directors and officers with broad protection from liability. The DGCL permits a corporation to either eliminate or limit the personal liability of a director to the corporation or its stockholders for monetary damages for breach of fiduciary duty, provided that such provisions do not eliminate or limit the liability of a director for, among other things, (i) Breach of the director's duty of loyalty to the corporation and its stockholders, or (ii) acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law. See 8 Del. Code Sec. 102(b)(7). Furthermore, the DGCL permits corporations to indemnify officers against expenses, judgments, fines and settlement amounts reasonably incurred if the officer acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interest of the corporation. See 8 Del. code Sec. 145 (a)-(b). --------------------------------------------------------------------------- IV. Commission Findings The Commission finds that the proposed rule change is consistent with the provisions of Sections 15A(b) (2), (4), and (6) of the Act\17\ in that the restructured organization will: (1) 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; (2) provide for the fair representation of members, issuers and investors on the Board of Governors and in the administration of the NASD's affairs; and (3) enhance the NASD's ability to protect investors and the public interest in furtherance of the purposes of the Act. --------------------------------------------------------------------------- \17\ 15 U.S.C. 78o-3. --------------------------------------------------------------------------- The NASD has requested that the Commission approve the proposed rule change on or before July 11, 1996, which is prior to the 30th day following publication of notice of the filing of the proposed rule change in the Federal Register, in order to permit the uninterrupted authorization of those corporate actions necessary to effectuate the Delegation Plan. Pursuant to Section 19(b)(2) of the Act,\18\ the Commission finds good cause for approving the proposed rule change, as amended, prior to the 30th day after publication in the Federal Register. The proposed rule change will permit the NASD to continue to carry out the functions and organize itself in the manner contemplated by the Delegation Plan, which is intended to enable the NASD to meet its regulatory and business obligations. Because the Commission believes that the proposed rule change facilitates the ability of the NASD to manage its affairs in a manner that enhances its ability to carry out the purposes of the Act or required to enforce compliance by NASD members and their associated persons with the provisions of the Act, the Commission believes that the rule filing should be approved without delay, for a 120 day period. --------------------------------------------------------------------------- \18\ 15 U.S.C. 78s(b)(2). --------------------------------------------------------------------------- V. Solicitation of Comment 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 [[Page 37518]] number in the caption above and should be submitted by August 8, 1996. It is therefore ordered, pursuant to Section 19(b)(2) of the Act, that SR-NASD-96-20 be, and hereby is, approved effective immediately, for a period of 120 days. For the Commission, by the Division of Market Regulation, pursuant to delegated authority, 17 CFR 200.30-3(a)(12). Margaret H. McFarland, Deputy Secretary. [FR Doc. 96-18169 Filed 7-17-96; 8:45 am] BILLING CODE 8010-01-M