[Federal Register Volume 61, Number 139 (Thursday, July 18, 1996)]
[Notices]
[Pages 37518-37521]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-18170]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37425; File No. SR-NASD-96-29]


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.

July 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 July 2, 
1996,\1\ the National Association of Securities Dealers, Inc. (``NASD'' 
or ``Association'') filed 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 120 days.
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    \1\ On July 8, 1996, the NASD filed Amendment No. 1 to the 
proposed rule change. Amendment No. 1 amended the language of 
proposed new Subsections II.C.4. and III.C.3 of the Delegation Plan 
to clarify that it is proposed that the NASD Board of Governors have 
authority to determine to both call for review or not call for 
review a matter of the subsidiary Board during the 15-day period 
provided for consideration by the NASD Board.
    On July 10, 1996, the NASD filed Amendment No. 2 to the proposed 
rule change. Amendment No. 2 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).
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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 
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 NASD Board 
of Governors and approved by the Commission pursuant to its authority 
under the Act; and (2) adopt a Plan of Allocation and Delegation of 
Functions by NASD to Subsidiaries (``Plan'') setting forth the purpose, 
function, governance, procedures and responsibilities of the NASD, 
NASDR and Nasdaq, following the reorganization of the NASD.
    The proposed rule change submitted herein, with exceptions, was 
previously filed with the Commission in SR-NASD-96-16 and was 
simultaneously published for comment and approved by the Commission on 
a temporary basis for a period of 90 days.\2\ Release 34-37107 
contained the full text of the proposed rule change, with the exception 
of three amendments thereto. Set forth below are excerpts from the 
Plan, marked to show the three amendments. Additions to the Plan are in 
italics; deletions are in brackets.\3\
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    \2\ Securities Exchange Act Release No. 37107 (April 11, 1996), 
61 FR 16948 (April 18, 1996) (Release 34-37107).
    \3\ The Commission is separately approving SR-NASD-96-20, 
amending the NASD By-Laws consistent with the Plan, for a period of 
120 days. See Securities Exchange Act Release No. 37424 (July 11, 
1996).
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Plan of Allocation and Delegation of Functions by NASD to Subsidiaries

I. NASD, Inc.

* * * * *

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 on 
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 
pursuant to Section 2.b(3) above may be [included on the ballot] 
nominated by petition, for the term of office specified by the Board 
for the vacant governorship, 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] may be [certified by the 
National Nominating Committee and] included on the ballot only if the 
Committee certifies that the candidate's petitions

[[Page 37519]]

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.
* * * * *

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

* * * * *

C. NASDR Board Procedures

    1. Disciplinary Actions--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 
decisions 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.
    4. Notwithstanding the requirements set forth in paragraphs 1 
through 3 of this Section, the NASD Board may determine it is advisable 
to call or not call for review any disciplinary action, statutory 
disqualification decision, or rule change within the 15 calendar day 
period following the decision of the NBCC or the NASDR Board, as 
applicable.
* * * * *

III. Delegation to Nasdaq

* * * * *

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 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.
    3. Notwithstanding the requirements set forth in paragraphs 1 and 2 
of this Section, the NASD Board may determine it is advisable to call 
or not call for review any listing/delisting decision or rule change 
within the 15 calendar day period following the decision of the Listing 
Committee or the Nasdaq Board, as applicable.
* * * * *

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.

(a) Purpose of the Proposed Rule Change

Description of Plan

    The Plan is organized in three principal parts, one for 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.\4\ The

[[Page 37520]]

Plan, the contents of which are self-explanatory, describes the 
purposes, functions, governance, procedures and responsibilities of 
each entity.
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    \4\ 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 NASD 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 NASD'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, creation of a National Nominating 
Committee,\5\ term of office, vacancies and removal from office; the 
function, composition and reporting structure of the Audit Committee 
and the Office of International Review; the function and composition of 
the Management Composition Committee; and the Commission's access to 
and status of officers, directors, employees, books, records and 
premises of the subsidiaries.
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    \5\ The National Nominating Committee shall be composed of at 
least six and not more than nine members equally balanced between 
Industry and Non-Industry Committee Members (including at least two 
Public Committee Members). Two members of the National Nominating 
Committee shall be selected by each of the Subsidiaries and the 
NASD, of which it is anticipated that at least three will be Non-
Industry Members.
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    The second part of the Plan describes the regulatory subsidiary, 
NASD Regulation, Inc. The Plan sets forth the delegation of authority 
to NASDR by the NASD; the purpose, function and authority of NASDR; the 
composition of and 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.

Description of Amendments to Plan

    The NASD is filing as part of this rule change three amendments to 
the Plan previously approved by the Commission in SR-NASD-96-16. The 
NASD is proposing to amend Article I.C.3 of the Plan that is titled 
Contested Elections in order to make clear that: (1) the term for which 
a candidate nominated by petition would be elected cannot subsequently 
be set by the Board of Governors of the NASD for a term shorter than 
that for which the Nominating Committee's candidate was proposed; and 
(2) the Nominating Committee certifies only that a nominee has 
satisfied the criteria for nomination by position in the category to be 
filled (i.e., Public, Non-industry, Industry).
    In addition, the NASD is proposing to add a new subparagraph to 
Sections II.C. and III.C of the Plan. Those sections currently specify 
that disciplinary, statutory disqualification, listing/delisting, and 
rule filing actions by the subsidiaries may be called for review by the 
NASD Board at the meeting next following the subsidiary's board 
meeting, so long as the NASD Board meeting is at least 15 calendar days 
after the subsidiary's Board meeting. With the exception of rule 
filings, an action by one of the subsidiaries that is not called for 
review will only become a final action of the NASD after the expiration 
of the 15-day period. Rule filings that are referred by a subsidiary to 
the NASD Board are permitted to be reviewed immediately. If, however, 
the rule filing is not so referred, the Board's determination to review 
or not review on its own motion must wait for the expiration of the 15-
day period. While this mandatory time period ensures that the NASD 
Board will have sufficient opportunity to determine whether or not to 
call for review, there are situations where the NASD believes it to be 
in the public interest to expedite its determination whether or not to 
call for review a disciplinary, statutory disqualification or rule 
filing action by a subsidiary board and, if a matter is called for 
review, to take appropriate action. Examples of situations that might 
require such an expedited treatment include: proceedings to revoke the 
registration of a member or person associated with a member when the 
associated person has become subject to a statutory disqualification or 
the member or the person has failed to pay an arbitration award; 
disciplinary proceedings imposing sanctions of expulsion of a member or 
bar of an associated person; and rulemaking that results from a market 
emergency or otherwise requires submission to the Commission on an 
expeditious basis in the public interest.
(b) Statutory Basis for the Proposed Rule Change
    The NASD believes that the proposed rule change is consistent with 
the provisions of Section 15A(b)(2) of the Act \6\ 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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    \6\ 15 U.S.C. 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. However, in 
connection with the publication for member vote of proposed amendments 
to the By-Laws to implement the Plan in Notice to Members 95-101 
(December 11, 1995), attached as Exhibit 2 to proposed rule change SR-
NASD-96-02, the NASD received three comments which were attached as 
Exhibit 4 to that proposed rule change. The NASD's statement on the 
comments received with respect to Notice to Members 95-101 is set forth 
in SR-NASD-96-02 and was published by the Commission in Securities 
Exchange Act Release No. 37106 (April 11, 1996), 61 FR 16944 (April 18, 
1996). SR-NASD-96-02 proposed certain of the By-Law amendments issued 
for member vote in Notice to Members 95-101 (December 11, 1995) in 
order to permit the reorganization of its Board of Governors consistent 
with the Plan submitted in SR-NASD-96-16.

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

[[Page 37521]]

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 of the Act and the rules and regulations thereunder. The 
Commission believes that the proposed rule change will allow the NASD 
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 (with amendments to the 
NASD By-Laws simultaneously approved in SR-NASD-96-20, as set forth 
below) to assure a fair representation of the NASD's members, in the 
selection of its 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 rules and any subsequent changes that 
may be implemented from time-to-time will enable the NASD to better 
comply with the requirements of Section 15A(b)(2) in particular and the 
Act in general.
    The Commission finds good cause for 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 September 1995 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, has held meetings to carry out the 
business of the Association. The subsidiaries also have held meetings 
of the Board of Directors of NASDR and Nasdaq in order to carry out the 
business of the subsidiaries during the 90 day period during which the 
Plan has been effective.
    The proposed rule change, with the exception of the three 
amendments submitted herein, was previously filed with the Commission 
in SR-NASD-96-16 and was simultaneously published for comment and 
approved by the Commission on a temporary basis for a period of 90 days 
in Release 34-37107. The 90-day approval period expires on July 10, 
1996. No comment letters concerning SR-NASD-96-16 were received by the 
Commission. The reorganization of the NASD Board of Governors is also 
reflected in proposed rule changes to the NASD By-Laws submitted in 
rule filing SR-NASD-96-20 and published for comment by the Commission 
in Securities Exchange Act Release No. 37282 (June 6, 1996), 61 FR 
29777 (June 12, 1996). The Commission is granting temporary accelerated 
approval to that proposed rule change.\7\
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    \7\ See Securities Exchange Act Release No. 37424 (July 11, 
1996).
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    Accordingly, the Commission believes that accelerating the approval 
of the proposed rule change will benefit members and the public 
interest by fully implementing the reorganization of the NASD and its 
subsidiaries.

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, N.W., Washington, D.C. 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 August 8, 1996.
    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change SR-NASD-96-29 be, and hereby is, approved 
for a period of 120 days.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\8\
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    \8\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-18170 Filed 7-17-96; 8:45 am]
BILLING CODE 8010-01-M