[Federal Register Volume 62, Number 89 (Thursday, May 8, 1997)]
[Notices]
[Pages 25226-25354]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-11600]



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Part II





Securities and Exchange Commission





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Self-Regulatory Organizations; Notice of Filing of a Proposed Rule 
Change by the National Association of Securities Dealers, Inc.; Notice

  Federal Register / Vol. 62, No. 89 / Thursday, May 8, 1997 / 
Notices  

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-38545; File No. SR-NASD-97-28]


Self-Regulatory Organizations; Notice of Filing of a Proposed 
Rule Change by the National Association of Securities Dealers, Inc. 
(``NASD'') to Proposed Changes in the By-Laws of the NASD, NASD 
Regulation, Inc., The Nasdaq Stock Market, Inc., the Plan of Allocation 
and Delegation of Functions by the NASD to Subsidiaries, Membership 
Application Procedures, Disciplinary Proceedings, Other Proceedings, 
and Other Conforming Changes

April 24, 1997.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),1 notice is hereby given that on April 18, 
1997,2 the National Association of Securities Dealers, Inc. 
(``NASD'') 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 self-
regulatory organization. The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ On April 23, 1997, the Association filed a technical 
amendment to the proposed rule change. See letter from Alden S. 
Adkins, General Counsel, NASD Regulation, Inc. to Katherine A. 
England, Assistant Director, Division of Market Regulation, 
Commission (``Amendment No. 1'').
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The NASD is filing a proposed rule change to: (1) The By-Laws of 
the NASD; (2) the By-Laws of NASD Regulation, Inc. (``NASD 
Regulation''); (3) the By-Laws of The Nasdaq Stock Market, Inc. 
(``Nasdaq''); (4) the Plan of Allocation and Delegation of Functions By 
NASD to Subsidiaries (``Delegation Plan''); (5) Rule 0120; (6) Rule IM-
2210-4; (7) the Rule 1010 Series; (8) the Rule 8000 Series; and (9) the 
Rule 9000 Series.3
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    \3\ Because the proposed rule change includes a number of 
amendments to the corporate documents of the NASD, NASD Regulation 
and Nasdaq, as well as numerous proposed rules, the three 
corporations collectively will be referred to as the ``Association'' 
for the purpose of this rule filing.
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    Attached as Exhibit 1 is the text of the proposed rule change. In 
(1) the By-Laws of the NASD; (2) the By-Laws of NASD Regulation; (3) 
the By-Laws of Nasdaq; (4) the Delegation Plan; (5) Rule 0120; (6) Rule 
IM-2210-4; and (7) the Rule 8000 Series, proposed new language is 
italicized; proposed deletions are in brackets. In the Rule 1010 Series 
and the Rule 9000 Series, the extensive nature of the proposed changes 
reduces the usefulness of a line-by-line analysis comparing the 
proposed new language with the proposed deleted language. If the 
proposed Rule 1010 Series and the proposed Rule 9000 Series are 
adopted, the Association proposes to rescind in full the current Rule 
1010 Series and the current Rule 9000 Series, except the Rule 9700 
Series and the Rule 9800 Series. The current Rule 9700 Series will 
remain in effect for a short period while Nasdaq seeks approval by the 
Commission to amend such rules, including their renumbering as Rule 
4000 Series provisions.4
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    \4\ The proposed Rule 9500 Series will supersede the Rule 9600 
Series. As part of the deletion of the current Rule 9600 Series, the 
current Rule 9630 Series (Expedited Remedial Proceedings) will be 
deleted. At a later date, however, the Association will propose a 
different approach for an expedited remedial proceeding.
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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 self-regulatory organization 
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 self-regulatory organization 
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

1. Purpose
a. Introduction
    The Association is proposing a comprehensive rule change to address 
three primary issues--how an entity or person becomes a member of the 
Association (``membership proceedings''); how the Association may 
discipline a member or a person associated with a member for 
misconduct; and, how NASD and NASD Regulation nominations and elections 
for certain board and committee positions are conducted. The proposed 
changes in the Association's membership proceedings are set forth in 
the proposed Rule 1010 Series. The proposed changes to the 
Association's array of proceedings to discipline a member or a person 
associated with a member are set forth in the proposed Rule 9000 
Series. The proposed changes to the election procedures are set forth 
in the proposed NASD By-Laws, Article VII, and proposed NASD Regulation 
By-Laws, Articles VI and VIII.
    Both the proposed Rule 1010 Series and the proposed Rule 9000 
Series will effect many changes to the procedures now used. The 
proposed Rule 1010 Series provides that NASD Regulation staff, rather 
than a District Committee,5 will make an initial decision on 
an application for membership. An Applicant may appeal a staff decision 
to the National Business Conduct Committee.6 The National 
Business Conduct Committee decision is subject to discretionary review 
by both the NASD Regulation Board and the NASD Board.7 The 
proposed rule change also sets forth a more detailed and comprehensive 
list of the documents and information that must be submitted with a 
membership application and sets forth more detailed, comprehensive, and 
objective standards to be used to determine whether an applicant should 
be admitted to membership. The proposed rule change also provides more 
procedural rights to applicants to ensure that applications are 
processed expeditiously, including limitations on the time within which 
the Association must issue membership decisions.
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    \5\ Terms that are defined in the proposed rule filing are 
capitalized in this discussion (e.g., the term ``District 
Committee'' means a district committee elected pursuant to Article 
VIII of the NASD Regulation By-Laws). (Proposed NASD Regulation By-
Laws, Art. I(j).)
    \6\ The term ``National Business Conduct Committee'' means the 
committee of the Board of Directors of NASD Regulation that may be 
authorized and directed to act for the Board of Directors of NASD 
Regulation in a manner consistent with the By-Laws of NASD 
Regulation, the Rules of the Association, and the Delegation Plan 
with respect to (1) An appeal or review of a disciplinary 
proceeding; (2) a statutory disqualification decision; (3) a review 
of a membership proceeding; (4) a review of an offer of settlement, 
a letter of acceptance, waiver, and consent, and a minor rule 
violation plan letter; (5) the exercise of exemptive authority; and 
(6) such other proceedings or actions authorized by the Rules of the 
Association. (Proposed NASD Regulation By-Laws, Article IV, Section 
4.14(h) and Proposed Rule 0120(m).)
    \7\ The term ``NASD Board'' means the Board of Governors of the 
NASD. (Proposed Rule 9120(r).) The term ``NASD Regulation Board'' 
means the Board of Directors of NASD Regulation. (Proposed Rule 
9120(s).)
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    In the proposed Rule 9000 Series, definitions and certain rules of 
general applicability are set forth in the proposed Rule 9100 Series. 
Ordinary disciplinary proceedings are addressed in the proposed Rule 
9200 Series, and appeals of these decisions are addressed in the 
proposed Rule 9300 Series.

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    In the proposed Rule 9100 Series, a number of procedural 
enhancements have been added to such Rules. These enhancements include 
requirements for notice and service, a detailed rule prohibiting ex 
parte communications generally, a rule requiring that adjudicatory and 
prosecutorial-like functions remain separated, and a rule allowing the 
removal of counsel for misconduct during a proceeding.
    In the proposed Rule 9200 Series, there are significant changes 
proposed in the way a disciplinary proceeding is investigated, a 
complaint is brought, and a decision is made. A disciplinary proceeding 
will be investigated by the staff of NASD Regulation, the complaint 
will be brought by the Department of Enforcement 8 rather 
than a District Committee or the Market Regulation 
Committee,9 and the matter will be heard and decided by a 
Hearing Panel,10 the chair of which is a Hearing Officer, a 
professional independent staff member of the Association.11 
The other two persons, defined as Panelists, who will constitute the 
Hearing Panel (or, in certain cases, an Extended Hearing Panel), are 
current members of a District Committee, or current or former members 
of the securities industry who have served on a disciplinary hearing 
panel, the National Business Conduct Committee, or one of the corporate 
boards.12 In some cases, one of the two Panelists may be a 
current or former member of the Market Regulation 
Committee.13 There are significant changes in the rights of 
Respondents to obtain evidence and for all Parties to resolve issues in 
pre-hearing conferences and by motion in order to streamline the 
hearing.14
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    \8\ The Commission notes that the NASD Regulation Board and the 
NASD Board will each have the authority to direct the Department of 
Enforcement to issue a complaint. (Proposed Rule 9211(b).)
    \9\ The term ``Market Regulation Committee'' means the committee 
of NASD Regulation designated to consider the federal securities 
laws and the rules and regulations adopted thereunder and various 
Rules of the Association and policies relating to:
    (1) the quotations of securities;
    (2) the execution of transactions;
    (3) the reporting of transactions; and
    (4) trading practices, including rules prohibiting manipulation 
and insider trading, and those Rules designated as Trading Rules 
(Rule 3300 Series), the Nasdaq Stock Market Rules (Rule 4000 
Series), other Nasdaq and NASD Market Rules (Rule 5000 Series), NASD 
Systems and Programs Rules (Rule 6000 Series), and Charges for 
Services and Equipment Rules (Rule 7000 Series). (Proposed Rule 
9120(q).)
    The Market Regulation Committee was formerly the Market 
Surveillance Committee of the NASD. As part of the reorganization, 
the committee was renamed the Market Regulation Committee. Pursuant 
to a resolution of the NASD Regulation Board dated May 8, 1996, NASD 
Regulation acknowledged responsibility for the Market Regulation 
Committee as a committee of NASD Regulation.
    \10\ A ``Hearing Panel'' is a decisional body issuing the 
``trial-level'' decision in a disciplinary proceeding. It is 
composed of a Hearing Officer (as defined below) and two persons 
from the securities industry. They are referred to as ``Panelists'' 
(as defined below). (Proposed Rules 9120(o), 9231 and 9232.)
    In some cases, an ``Extended Hearing Panel,'' rather than a 
``Hearing Panel,'' will be the decisional body that issues the 
``trial-level'' decision. (Proposed Rules 9120(i) and 9231(c).)
    \11\ The term ``Hearing Officer'' means an employee of NASD 
Regulation who is an attorney and who is appointed by the Chief 
Hearing Officer to act in an adjudicative role and fulfill various 
adjudicative responsibilities and duties described in the Rule 9200 
Series regarding disciplinary proceedings brought against members 
and associated person. (Proposed Rule 9120(n).) The term ``Chief 
Hearing Officer'' means the Hearing Officer designated by the 
President of NASD Regulation to manage the Office of Hearing 
Officers, or his or her delegate. (Proposed Rule 9120(b).)
    \12\ In pertinent part, the term ``Panelist'' means a member of 
a Hearing Panel or an Extended Hearing Panel who is not a Hearing 
Officer. (Proposed Rule 9120(t).) A Panelist who serves on a Hearing 
Panel shall be associated with a member of the Association and shall 
be: ``(A) a current member of a District Committee; (B) a person who 
previously served on a disciplinary hearing panel; (C) a former 
member of the National Business Conduct Committee; (D) a person who 
previously served on a disciplinary subcommittee of the National 
Business Conduct Committee, including a Subcommittee, an Extended 
Proceeding Committee, or their predecessor subcommittees; or, (E) a 
person who previously was a Director, a member of the Nasdaq Board 
of Directors, or a Governor, but does not sit currently on any of 
the boards.'' (Proposed Rule 9231(b)(1) (A)-(E).) The group of 
persons eligible to serve as Panelists on an Extended Hearing Panel 
is substantially the same group, but also includes certain persons 
retired from the securities industry. (Proposed Rule 9231(c)(1) (A) 
through (E).)
    However, if the complaint alleges at least one cause of action 
involving a violation of a statute or a rule over which the Market 
Regulation Committee has jurisdiction, the Chief Hearing Officer may 
select as a Panelist a current member of the Market Regulation 
Committee or a former member of the Market Regulation Committee who 
previously served on a disciplinary hearing panel. (Proposed Rule 
9231(b)(2).) See also Proposed Rule 9231(c)(2), providing for a 
Market Regulation Committee Panelists to serve on an Extended 
Hearing Panel, which is substantially similar to proposed Rule 
9231(b)(2).
    \13\ See supra note 9.
    \14\ Although a number of procedural enhancements are proposed 
to the Rule 9000 Series, the NASD explicitly recognizes that a Party 
may appear pro se. The Chief Hearing Officer and all other Hearing 
Officers are trained to apply the Rule 9000 Series flexibly to 
permit a Party to appear pro se without suffering a disadvantage due 
to a failure to follow all aspects of a procedural rule. 
Nevertheless, all Parties are expected to comply with all of the 
Rules. Those who do not, and request flexible treatment from a 
Hearing Officer, must establish that the requesting Party made a 
good faith effort to comply with the rule or rules in question.
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    Although that portion of the Rule 9300 Series concerning appeals 
and reviews has undergone significant changes, the appellate or review 
proceeding retains many of its former characteristics. Changes include 
the right of the Department of Enforcement of NASD Regulation to appeal 
a case and the right of a Party to cross-appeal.
    Several other types of proceedings, which in general are more 
expedited than the ordinary disciplinary proceedings described above, 
are set forth in the proposed Rule 9400 Series and the proposed Rule 
9500 Series.15 These proceedings currently are described in 
the Rule 9500 Series and the Rule 9600 Series.
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    \15\ The proposed Rule 9400 Series and the Rule 9500 Series 
proceedings, for which the Association seeks temporary approval, 
are: (1) Proceedings for regulating the activities of a member 
experiencing financial or operational difficulties; (2) proceedings 
for approving or disapproving a change in business operations that 
will result in a change in exemptive status under SEC Rule 15c3-3; 
(3) proceedings for summary suspension of a member or persons 
associated with a member; (4) proceedings for the non-summary 
suspension, cancellation, or bar of a member or a person; and (5) 
proceedings for obtaining relief from the eligibility requirements 
of the NASD By-Laws and the Rules of the Association.
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    In addition, in order to present the Commission a unified body of 
rules, the Association is proposing changes to various corporate 
documents and Rules of the Association to conform them to the proposed 
Rule 1010 Series and proposed Rule 9000 Series. Thus, proposed rule 
changes are also submitted for the By-Laws of the NASD, NASD 
Regulation, and Nasdaq; the Delegation Plan; Rule 0120; Rule 0121; 
proposed Rule IM-2210-4; and the Rule 8000 Series.
    The following is a comprehensive list of the parts of the proposed 
rule change:
    1. Proposed changes to the By-Laws of the NASD, NASD Regulation, 
and Nasdaq;
    2. Proposed changes to the Delegation Plan;
    3. Proposed changes to Rule 0120 and Rule 0121;
    4. Proposed Rule IM-2210-4;
    5. Proposed changes to the Rule 1010 Series;
    6. Proposed changes to the Rule 8000 Series; and
    7. Proposed changes to the Rule 9000 Series.
(i) Background for Proposed Changes to Membership Application 
Procedures and Rules Providing Procedures for Disciplinary Proceedings 
and Other Proceedings
    The Association's request for the proposed changes to disciplinary 
proceedings instituted against members and their associated persons and 
other proceedings in the Rule 9000 Series follows a series of events 
that compelled the Association to undertake a review of the entire Rule 
9000 Series. At the same time, the Association was requested to

[[Page 25228]]

reexamine its membership application procedures.
    On September 15, 1995, the NASD Board of Governors received a 
report from The NASD Select Committee (``Select Committee''), which the 
NASD had commissioned in 1994. The Report of The NASD Select Committee 
on Structure and Governance To The NASD Board of Governors, dated 
September 15, 1995 (``Select Committee Report''), was the culmination 
of nine months of exhaustive review of the operations of the NASD, and 
contained several recommendations regarding NASD's enforcement program 
and its disciplinary proceedings.16
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    \16\ The Select Committee recommended, among other things, that 
NASD allocate additional personnel and resources to enforcement, 
establish an Office of Hearing Officers, and hire professional 
Hearing Officers to serve as the chair of certain but not all 
Hearing Panels in disciplinary proceedings. The Select Committee 
also recommended that the NASD adopt a rule to prohibit ex parte 
contacts between the disciplinary Hearing Panels and Parties or 
their attorneys, expand the documentary discovery rights of 
respondents in NASD disciplinary proceedings to furnish respondents, 
at a reasonable time in advance of the initial hearing, with all 
non-privileged materials in the NASD's possession (including 
exculpatory evidence) directly relevant to the dispute, and provide, 
by rule, for a motions practice, and the power of a disciplinary 
Hearing Panel to sanction Parties or their counsel for frivolous 
practice or contumacious conduct. The Select Committee also 
recommended that the workload of the National Business Conduct 
Committee be reduced so that the National Business Conduct Committee 
could focus upon national enforcement policy issues and ensure 
uniformity in NASD membership application procedures. Select 
Committee Report, pp. C-25 through 26, V-1 through V-46, R-20 
through R-25.
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    The NASD Board approved the implementation of many of the 
recommendations of the Select Committee, as proposed or in augmented 
form. As is relevant to this rule filing, the NASD Board made the 
following determinations: 17
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    \17\ ``Select Committee on Structure and Governance--Staff 
Implementation Plan,'' discussed November, 1995 (``Implementation 
Plan''). Other recommendations, such as one relating to the 
augmentation of the Association's resources to improve the 
disciplinary process, have been separately addressed.

    1. The Association would amend its disciplinary procedures to 
appoint a Hearing Officer to preside over every contested 
disciplinary proceeding. (In contrast, the Select Committee had 
recommended that such persons be appointed for some cases.)
    2. The Hearing Officer would exercise a key role during a 
disciplinary hearing. These responsibilities would include 
administering pre-hearing matters, including most motions, resolving 
procedural and evidentiary matters in a pre-hearing context, 
overseeing the settlement and discovery process prior to the 
commencement of a hearing, and guarding against ex parte 
communications in all matters. During a hearing, a Hearing Officer 
would chair the Hearing Panel, vote on all matters, rule on 
procedural and other legal matters, advise industry Panelists on 
relevant legal principles, and ensure the maintenance of an 
appropriate record. Following the hearing, the Hearing Officer would 
conduct legal research, review briefs, provide legal guidance to the 
volunteer Panelists, analyze the transcript and exhibits, and draft 
a decision.
    3. The Office of Hearing Officers would be separate from the 
other departments and staff of NASD Regulation, accountable only to 
the President of NASD Regulation. In addition, the Office of Hearing 
Officers would be operated separately from the appellate and 
oversight staffs of NASD Regulation and NASD. In the start-up phase, 
all Hearing Officers would be in one location to ensure uniform 
training, on-site management, and their separation from 
``prosecutorial staff'' located in various Association offices 
nationwide.
    4. The NASD would adopt rules providing for the separation of 
functions so that persons working as ``prosecutorial staff'' in the 
Association would not participate in meetings with an Adjudicator 
regarding a proposed decision (without the other Party present) and 
eliminating the ``prosecutorial staff's'' current role as writer of 
the disciplinary decision. In addition, the Association would adopt 
a more formal, detailed rule prohibiting ex parte communications 
generally in disciplinary proceedings.
    5. The Association's ``prosecutorial staff'' would have the 
right to appeal a case.
    6. By rule, the Association would make available to respondents 
in a disciplinary proceeding non-privileged documents in the staff's 
possession that are directly relevant to the dispute and those that 
contain exculpatory evidence, and would be required to do so a 
``reasonable'' time before a hearing, i.e., more than five days 
before a hearing. Also, by rule, the Association would provide for a 
motions practice in a disciplinary proceeding and for sanctions for 
misconduct during the course of a disciplinary proceeding.
    7. The Association would eliminate the burden on the National 
Business Conduct Committee by reducing the National Business Conduct 
Committee's review of uncontested settlement offers, acceptance, 
waiver, and consent letters and, for the purpose of determining 
whether to call a disciplinary proceeding for review subsequently, 
every disciplinary proceeding.

    All of the above Board decisions have been addressed in this rule 
filing.
    In addition, on August 8, 1996, the NASD and the Commission entered 
into a settlement (``SEC Settlement'').18 Pursuant to the 
SEC Settlement, the NASD agreed to fourteen undertakings 
(``Undertakings''). Under the general terms of some of the 
Undertakings, the NASD became committed to review comprehensively and 
amend the Rule 9000 Series and the Rule 1010 Series. This rule filing 
primarily addresses Undertakings 3 through 5 and, to a lesser extent, 
Undertakings 1 and 6.19 In the discussion following, the 
Association references those proposed rules that specifically 
incorporate the above proposed improvements and address the particular 
requirements of the Undertakings.
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    \18\ Securities Exchange Act Rel. No. 37538 (August 8, 1996), 62 
S.E.C. Docket 1346, Order Instituting Public Proceedings Pursuant to 
Section 19(h)(1) of the Securities Exchange Act of 1934, Making 
Findings and Imposing Remedial Sanctions, In the Matter of National 
Association of Securities Dealers, Inc., Administrative Proceeding 
File No. 3-9056.
    \19\ Id. Undertakings 1, 3, 4, 5, and 6 of the SEC Settlement 
require the Association:
    1. To implement and maintain at least fifty percent independent 
public and non-industry membership in its Board of Governors, the 
Board(s) of Governors or Directors of all of its subsidiaries and 
affiliates that exercise or have delegated self-regulatory 
functions, and the following committees: the National Nominating 
Committee, the Trading/Quality of Markets Committee, the Arbitration 
Committee, the Market Surveillance Committee, the National Business 
Conduct Committee, the Management Compensation Committee, and all 
successors thereto.
    3. To institute the participation of professional Hearing 
Officers (who shall be attorneys with appropriate experience and 
training) to preside over disciplinary proceedings.
    4. To provide for the autonomy and independence of the 
regulatory staff of the NASD and its subsidiaries such that the 
staff, subject only to the supervision of the Board of Governors of 
the NASD and the Boards of Directors of NASDR and Nasdaq, and any 
successor thereto, (a) has sole discretion as to what matters to 
investigate and prosecute, (b) has sole discretion to handle 
regulatory matters such as approval of applications for membership 
and the conditions and limitations that may be placed thereon, (c) 
prepares rule proposals, rule interpretations and other policy 
matters with any consultations with interested NASD constituencies 
made in fair and evenhanded manner, and (d) is generally insulated 
from the commercial interests of its members and the Nasdaq market. 
Among other things, the District Business Conduct Committees and the 
Market Surveillance Committee shall not have any involvement in 
deciding whether or not to institute disciplinary proceedings, nor 
shall the District Committees, or any subcommittee thereof, have any 
involvement in the review or approval of applications for membership 
in the NASD. Subject to the foregoing, the regulatory staff of the 
NASDR engaged in the disciplinary process may, solely on their own 
initiative, inform themselves on matters of market or other 
securities industry expertise by consulting with representatives of 
member firms or committees of the NASD or its subsidiaries.
    5. To promulgate and apply on a consistent basis uniform 
standards for regulatory and other access issues, such as admission 
to the NASD as a member firm, and conditions to becoming a market 
maker; and institute safeguards to ensure fair and evenhanded access 
to all services and facilities of the NASD.
    6. To ensure the existence of a substantial, independent 
internal audit staff which reviews all aspects of the NASD 
(including the regulatory function, the disciplinary process and the 
Nasdaq stock market and its systems) and reports directly to an 
audit committee of the NASD Board of Governors which includes a 
majority of public and non-industry Governors and is chaired by a 
public Governor.
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(ii) Other Sources
    In addition to incorporating the requirements of the Undertakings, 
the

[[Page 25229]]

recommendations of the Select Committee, and the NASD Board 
determination in drafting the revisions to the proposed Rule 1010 
Series, the proposed Rule 8000 Series, and the proposed Rule 9000 
Series, the Association has looked to other sources for the proposed 
revisions. First, the Association reviewed and incorporated, where 
possible, provisions in the SEC Rules of Practice recently adopted by 
the Commission for Commission-initiated enforcement and disciplinary 
proceedings, and proceedings to review the disciplinary proceedings of 
self regulatory organizations.20 Second, the Administrative 
Procedure Act (``APA''), 5 U.S.C. Sec. 551 et seq., also served as a 
source.21 Third, the Federal Rules of Civil Procedure 
(``F.R.C.P.'') served as an important reference. Fourth, the 
Association looked to the model administrative rules of the 
Administrative Conference of the United States (Dec. 
1993).22
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    \20\ SEC Rules of Practice, codified at 60 FR 32738 (June 23, 
1995), 17 CFR 201.100 et seq.
    \21\ 5 U.S.C. 551 et seq.
    \22\ Model Adjudication Rules, Administrative Conference of the 
United States (Dec. 1993) (``MAR'').
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(iii) Rescission of Most Current Rules
    1. Rescission of Current Rules. The Association is proposing that 
if the proposed Rule 1010 Series (Proposed Rules 1010 through 1019) and 
the proposed Rule 9000 Series (Proposed Rules 9000 through 9536) are 
adopted, the current Rule 1010 Series and the current Rule 9000 Series 
(except the Rule 9700 through the Rule 9800 Series) be rescinded in 
full.
    2. Exception for Nasdaq-Related Rules. In a separate rule filing, 
Nasdaq will propose to incorporate proceedings relating to Nasdaq in 
the Rule 4000 Series. In the interim, however, the Association is 
requesting that the current Rule 9700 Series remain in place. When 
Nasdaq submits the rule filing amending the current Rule 9700 Series, 
Nasdaq will request that the current Rule 9700 Series be rescinded.
(iv) Transition Provision
    1. Disciplinary Procedures And Related Proposed Rule Changes. The 
Association proposes that the proposed rules relating to disciplinary 
proceedings (those governed by the proposed Rule 9100 Series, the 
proposed Rule 9200 Series, and the proposed Rule 9300 Series) generally 
become effective 30 days after the date of the Federal Register 
publication approving the new procedures, subject to the following 
schedule of transition.23
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    \23\ As noted above, proposed changes to Rule 0120, Rule 0121, 
and the Rule 8000 Series, and proposed Rule IM-2210-4 would also be 
governed by this schedule of effectiveness and transition.
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    The Association proposes that the transition for disciplinary 
proceedings follow the implementation adopted by the Commission when 
the Commission adopted the revised Rules of Practice.24 
First, the Association proposes that the current Code of Procedure will 
apply to a disciplinary proceeding for which the complaint is served 
prior to the date of the Federal Register publication approving the 
proposed Rule 9000 Series. Thus, such a disciplinary proceeding will be 
completed pursuant to the current Code of Procedure. Second, the 
Association proposes to make the new disciplinary procedures set forth 
in the proposed Rule 9100 Series through the proposed Rule 9300 Series 
apply to a disciplinary proceeding for which the complaint is served on 
or after the date of the Federal Register publication approving the 
proposed Code of Procedure but before the effective date, but only if, 
within 30 days of the effective date, each Respondent in the proceeding 
submits a request in writing to the Chief Hearing Officer that the 
proceedings be conducted under the proposed Code of Procedure, as 
adopted. If each Respondent fails to make such a request, the 
disciplinary proceeding will proceed under the current Code of 
Procedure, as discussed above.
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    \24\ See SEC Rules of Practice, supra note.
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    The rationale for this proposal is as follows:
    a. Retroactive Application of the Revised Code Would Create 
Significant Management and Logistical Problems. As of March 31, 1997, 
there were approximately 400 formal disciplinary proceedings pending at 
various stages in the disciplinary process. The Association believes 
that retroactive application of the revised Code and the assignment of 
Hearing Officers to these cases immediately would create a significant 
management and logistical problem for the Office of Hearing 
Officers.25
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    \25\ Assuming that 50 percent of the 412 pending cases were to 
settle, involved defaults, or otherwise could be disposed of without 
the need for formal hearings, 206 active cases would be required to 
be assigned to six Hearing Officers who have been hired to date, a 
docket of 34 cases per Hearing Officer. Based on historical data and 
discussions with staff in district offices, the Association 
anticipates approximately 200 fully litigated cases per calendar 
year. These cases, of course, would need to be considered in 
addition to the pending cases.
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    Irrespective of their procedural posture, given the volume of cases 
that would be pending as of the effective date of the proposed Rule 
9000 Series, the Association believes that assigning these cases to the 
Hearing Officers would cause serious case management problems. The 
Association further believes that assigning the pre-existing cases, 
along with the cases filed in due course after the Rule 9000 Series' 
effective date, would hinder the ability of the Hearing Officers to 
properly dispatch their responsibilities and duties within the time 
limits set in the Rule 9000 Series. For example, various deadlines in 
the proposed Rule 9000 Series likely could not be met if the Hearing 
Officer program were required to assume a backlog of more than 400 
cases.
    b. Retroactive Application Causes Problems in Proceedings. The 
revised Rule 9000 Series represents a substantial change from the 
existing rules governing disciplinary proceedings, and the scope of the 
proposed changes militates against retroactive application of the Rule 
9000 Series. For example, the proposed Rule 9000 Series contemplates 
certain pre-hearing procedures and motions that are not present in the 
existing rules. Also, in many of the previously-filed proceedings, the 
proposed Rule 9000 Series' time limitations for document disclosure and 
pre-hearing motions or procedures already will have passed. The 
difficulty is further exacerbated if procedural rulings that are not 
consistent with the new Rule 9000 Series already have been made.
    Further, if Hearing Officers were not required to apply either the 
new or old rules to the cases filed prior the effective date of the new 
Rule 9000 Series, the Hearing Officers would be required to develop and 
apply rules on an ad hoc basis to address the specific issues raised in 
each individual case. Finally, the Association believes that fairness 
dictates that Respondents be given notice in advance of the filing of a 
complaint of all procedural rules that will govern the authorization 
and issuance of the complaint and the adjudicative process.
    2. Membership Application Procedures. Unlike disciplinary 
procedures, where NASD Regulation staff determines when and if to 
initiate a proceeding, applicants for membership decide when and if to 
file an application for membership, request a modification of an 
existing membership agreement, or request approval of a change in 
ownership, control, or operations. For this reason, the Association 
believes that the transitional issues with respect to member admission 
proceedings are less

[[Page 25230]]

complex and, therefore, it proposes that the new procedures apply to 
applications filed, modifications requested, or requests for approval 
of ownership or other changes initiated 30 days after the date of the 
Federal Register publication approving the new procedures. The 30 day 
period is intended to give applicants and staff the opportunity to make 
any final adjustments to the new procedures.
b. Proposed Changes to NASD, NASD Regulation, and NASDAQ By-Laws
    The Association proposes to revise the By-Laws of the NASD, NASD 
Regulation, and Nasdaq to conform them to the Implementation Plan, the 
Undertakings, the Delegation Plan and the proposed changes to the Rules 
of the Association. Changes to punctuation and other minor, non-
substantive changes are not described. The Association proposes to 
revise the NASD By-Laws in the following ways:
(i) Proposed Changes to NASD By-Laws 26
---------------------------------------------------------------------------

    \26\ All changes proposed to the NASD By-Laws are changes to the 
NASD By-Laws temporarily approved by the Commission on November 15, 
1996. See Securities Exchange Act Rel. No. 37956 (November 15, 
1996), 61 FR 59265 (November 21, 1996).
---------------------------------------------------------------------------

Article I. Definitions

    The Association proposes several amendments to Article I, which 
sets forth definitions for the NASD By-Laws. First, amendments to 
several existing definitions and new defined terms are proposed, but 
only to reflect drafting conventions adopted as a result of the 
reorganization of the NASD into three legal entities or other drafting 
conventions. Those definitions are: ``Board''; ``branch office''; 
``day''; ``dealer''; ``Delegation Plan''; ``member''; ``municipal 
securities dealer''; ``NASD''; ``NASD Regulation''; ``NASD Regulation 
Board''; ``Nasdaq''; ``Nasdaq Board''; and ``person associated with a 
member'' or ``associated person of a member.'' (Proposed NASD By-Laws 
Article I (c), (d), (g), (h), (i), (q), (t), (u), (v), (w), (x), (y), 
and (cc).)
    Second, the Association proposes to add the following definitions: 
``district''; ``Industry Director''; ``Industry Governor'' or 
``Industry committee member''; ``National Nominating Committee''; 
``Non-Industry Director''; ``Non-Industry Governor'' or ``Non-Industry 
committee member''; ``Public Director''; ``Public Governor'' or 
``Public committee member.'' (Proposed NASD By-Laws Article I (j), (n), 
(o), (z), (aa), (bb), (dd) and (ee).) All of these terms, except 
``district,'' are currently defined or described in the Delegation 
Plan.27 The Association proposes to add these definitions to 
the NASD By-Laws (and where applicable, to the NASD Regulation and 
Nasdaq By-Laws) because the Association proposes to move the related, 
substantive provisions of the Delegation Plan to the By-Laws of the 
appropriate corporate entity.
---------------------------------------------------------------------------

    \27\ See Delegation Plan, I.A. and I.C.
---------------------------------------------------------------------------

    Third, the Association proposes to delete the definition ``rules of 
the Corporation'' (current Article I(v)) to avoid confusion with the 
more commonly used, but differently defined term, ``Rules of the 
Association.'' The term ``rules of the Corporation'' currently is used 
to refer collectively to the NASD Certificate of Incorporation, the 
NASD By-Laws, and the Rules of the Association. Given the restructuring 
of the NASD into three legal entities, such a collective term for all 
of the corporate documents of the Association would not be useful. 
Thus, under the proposed rule change, where a particular provision must 
be consistent with a particular corporate document, that document is 
specified. Similarly, the Association also proposes to delete the 
definitions of ``Boards'' and ``Corporations'' and instead refer to 
each corporate entity specifically where intended (current Article I 
(d) and (i)).
    Fourth, the Association proposes to amend the definition of the 
term ``Rules of the Association'' to conform it to proposed Rule 0120, 
which defines the term to include the numbered rules set forth in the 
NASD Manual beginning with the Rule 0100 Series, as adopted by the NASD 
Board of Governors pursuant to the NASD By-Laws.
    Finally, the Association proposes to delete the cross-reference in 
the introductory sentence of Article I to the ``rules of the 
Corporation.'' An appropriate cross-reference from the Rules of the 
Association to the NASD By-Laws is proposed in Rule 0121.

Article II. Offices

    The Association proposes to add a new Article II that states the 
location of the registered corporate office of the NASD. This change 
makes the NASD By-Laws consistent with the NASD Regulation and Nasdaq 
By-Laws, which both include such a provision.

Article III. Qualifications of Members and Associated Persons

    Current Article II, Qualifications of Members and Associated 
Persons, which addresses qualifications of members and associated 
persons, is renumbered as proposed Article III. The Association 
proposes to conform Section 3, which addresses ineligibility of certain 
persons for membership or association, to the proposed Rule 9530 
Series, which sets forth rules for the Association's eligibility 
proceedings. Specifically, the Association proposes to amend Section 
3(d) to clarify that members may use eligibility proceedings to obtain 
relief from the Association's eligibility requirements, e.g., to 
resolve a statutory disqualification problem. As written, Section 3(d) 
could be read to suggest that a broker or dealer seeking admission to 
the Association could use such proceedings to obtain relief from 
eligibility requirements as a means of gaining admission to the 
Association. That is not the Association's practice or the provision's 
intent, and Section 3(d) is amended to remove this potential ambiguity.
    The Association proposes to delete Section 3(d)(2), which addresses 
the status of members or persons engaged in eligibility proceedings, 
because that subject is addressed in the proposed Rule 9530 Series. 
(The Association seeks temporary approval of the proposed Rule 9400-
9500 Rules Series, including the proposed Rule 9530 Series.) This 
change does not result in a substantive change in the Association's 
practice. Specifically, if a person is already associated with a member 
at the time a statutory disqualification is discovered, the person may 
remain associated with the member until final action is taken by the 
Association under the proposed Rule 9500 Series. If the person is a 
prospective employee, the person may not become associated with the 
member until the Association takes final action under the proposed Rule 
9530 Series.
    The Association proposes to add a new Section 3(g) to clarify that 
the Board may delegate its authority under Section 3 in a manner not 
inconsistent with the Delegation Plan.
    Finally, the Association proposes to amend Section 4(h) to conform 
it to the Act.

Article IV. Membership

    Current Article III, Membership, is renumbered as proposed Article 
IV. The Association proposes to conform Section 7 to changes in the 
proposed Rule 1010 Series, which sets forth procedures for membership 
applications and changes in a member's operations.

Article V. Registered Representatives and Associated Persons

    Current Article IV, Registered Representatives and Associated 
Persons, is renumbered as proposed Article V.

[[Page 25231]]

Article VI. Dues, Assessments, and Other Charges

    Current Article V, Dues, Assessments, and Other Charges, is 
renumbered as proposed Article VI. The Association proposes to add a 
new Section 5 that states that the NASD may delegate its authority 
regarding dues, assessments, and other charges in a manner not 
inconsistent with the Delegation Plan.

Article VII. Board of Governors

    Current Article VI, Board of Governors, is renumbered as proposed 
Article VII. The Association proposes to amend Section 1(c) to clarify 
the Board's authority to delegate its powers. Specifically, the 
Association proposes to amend Section 1(c) to provide that to the 
fullest extent permitted by applicable law, the Restated Certificate of 
Incorporation, and the By-Laws, the NASD may delegate any power of the 
NASD or the Board to a committee appointed pursuant to proposed Article 
IX, Section 1, the NASD Regulation Board, the Nasdaq Board, or NASD 
staff in a manner not inconsistent with the Delegation Plan. The 
Association proposes to add parallel provisions to the NASD Regulation 
By-Laws (Proposed Article IV, Section 4.1) and the Nasdaq By-Laws 
(Proposed Article IV, Section 4.1).
    The Association proposes to amend Section 2. Section 2 authorizes 
the Board to cancel or suspend the membership of a member or suspend 
the association of a person associated with a member for failure to 
provide requested information. The proposed amendment provides for 
reinstatement pursuant to the Rules of the Association. (Proposed Rule 
8220.) The Association also proposes to delete the provision 
authorizing delegation to the Chief Executive Officer and replace it 
with a delegation provision consistent with other provisions set forth 
in the proposed NASD By-Laws. Specifically, the Association proposes 
that the Board be permitted to delegate its authority under this 
Section in a manner not inconsistent with the Delegation Plan and 
otherwise in accordance with the Rules of the Association.
    The Association proposes to amend Section 4, which addresses the 
composition and qualifications of the Board, by adding provisions 
concerning the number of governors and the ratio of Industry, Non-
Industry, and Public Governors that are currently set forth in the 
Delegation Plan.28
---------------------------------------------------------------------------

    \28\ See Delegation Plan, I.A. and I.C.
---------------------------------------------------------------------------

    The Association proposes to add a new Section 6, which addresses 
the disqualification of a Board member. Proposed Section 6 requires a 
Governor to immediately resign or be automatically removed from office 
if the Board determines that: (a) The Governor no longer satisfies the 
classification (Industry, Non-Industry or Public Governor) for which 
the Governor was elected; (b) failure to remove the Governor would 
violate the compositional requirements of the Board set forth in 
proposed Section 4; and (c) the Governor has a remaining term of office 
of more than six months. Proposed Section 6 is intended to replace a 
provision currently in the Delegation Plan that provides for 
``automatic removal'' if a Governor no longer satisfies the 
classification for which he or she was elected, without describing any 
process for such removal.29 The Association proposes this 
rule change to avoid any potential for the Board to take an ultra vires 
action in the event that a Governor failed to notify the Board promptly 
of a change in his or her classification and continued to sit on the 
Board and cast votes before such removal took place.
---------------------------------------------------------------------------

    \29\ See Delegation Plan, I.C.5.b.
---------------------------------------------------------------------------

    Current Section 6, which addresses the filling of vacancies on the 
Board, is renumbered as proposed Section 7. The Association proposes to 
move the current provisions of the Delegation Plan that address the 
filling of vacancies to this Section and to provide further that if the 
remaining term of office of the governorship to be filled is more than 
one year, then the replacement Governor must stand for election in the 
next annual election.30
---------------------------------------------------------------------------

    \30\ See Delegation Plan, I.C.5.
---------------------------------------------------------------------------

    Current Section 7, which describes nomination and election 
procedures, is expanded and renumbered as proposed Sections 9 through 
14. Proposed Section 9 sets forth the powers of the National Nominating 
Committee. The National Nominating Committee nominates Industry, Non-
Industry, and Public Governors for each vacant or new Governor position 
on the NASD Board and Industry, Non-Industry, and Public Directors for 
each vacant or new position on the NASD Regulation Board and the Nasdaq 
Board.31 Proposed Section 9 also includes and clarifies the 
compositional requirements for the National Nominating Committee, which 
are currently set forth in the Delegation Plan.32 Finally, 
Proposed Section 9 includes a new provision that requires the Secretary 
of the NASD to collect from each nominee for Governor and each nominee 
for Director of the NASD Regulation Board or Nasdaq Board such 
information as is reasonably necessary to serve as the basis for a 
determination of the nominee's classification as an Industry, Non-
Industry, or Public Governor or Director. The Association proposes that 
the Secretary certify to the National Nominating Committee each 
nominee's classification to ensure that the compositional requirements 
of each Board are met.
---------------------------------------------------------------------------

    \31\ See Delegation Plan, I.C.2.b.
    \32\ See Delegation Plan, I.C.2.b.(1).
---------------------------------------------------------------------------

    Proposed Section 10 largely parallels current Section 7(c) and adds 
provisions regarding contested elections currently located in the 
Delegation Plan. In addition to clarifying the procedures for a 
contested election, the Association also proposes to change the number 
of members that must sign a petition to support adding a candidate to 
the ballot for NASD Board elections. Currently, a person seeking to be 
added to a ballot must obtain the support of two percent of the members 
of the NASD. The Association proposes to increase the level to three 
percent of the members, one-half of which must have their principal 
place of business outside of the district where the person who wishes 
to contest the election is employed. As is currently the case, a 
petition may only be signed by a member's Executive Representative. 
Proposed Section 10 also transfers authority to certify the additional 
candidate from the National Nominating Committee to the Secretary. 
Because the Secretary maintains the records of Executive 
Representatives and, under the proposed rule change would be charged 
with reviewing information regarding the classification (Industry, Non-
Industry, or Public) for each governorship, the Association believes 
that it would be more efficient for the Secretary to exercise this 
authority.
    Proposed Sections 11 and 12 are new provisions that parallel new 
provisions added to the NASD Regulation and Nasdaq By-Laws. Proposed 
Section 11 prohibits the NASD, the Board, the National Nominating 
Committee, other committees, and NASD staff from taking any official 
position regarding a contested nomination or election under the 
proposed NASD or NASD Regulation By-Laws. Proposed Section 11 permits 
Board and committee members to communicate their views with respect to 
a candidate in a contested election only if the Board or committee 
member acts solely in his or individual capacity and disclaims any 
intention to communicate in any official capacity. Administrative 
support to the candidates in a contested NASD election is limited to 
two mailings; any other administrative support in any

[[Page 25232]]

NASD or NASD Regulation contested election or nomination is prohibited.
    Proposed Section 13 is largely parallel to current Section 7(a), 
with conforming amendments to proposed Sections 9 through 12.
    Proposed Section 14 is a new procedure that requires each Governor 
to update the information submitted to the NASD Secretary under 
proposed Section 9(e) regarding his or her classification as an 
Industry, Non-Industry, or Public Governor at least annually and upon 
request of the Secretary and to report immediately to the Secretary any 
change in such classification. Parallel provisions are proposed for the 
NASD Regulation and Nasdaq By-Laws. These submissions and reports will 
help the Association ensure that the compositional requirements of the 
Board are maintained.
    The Association proposes to amend current Section 8, which address 
meetings, quorums, and voting of the Board, to provide that a quorum 
shall consist of a majority of the Board, including not less than 50 
percent of the Non-Industry Governors. This proposed change would 
ensure that Industry Governors alone could not constitute or dominate a 
quorum of the Board, and thereby thwart the balanced compositional 
requirements of the Board under proposed Section 4. Current Section 8 
is not renumbered.

Article VIII. Officers, Agents, And Employees

    Current Article VII, Officers, Agents, and Employees, is renumbered 
as proposed Article VIII. The Association proposes to amend Section 1 
to require that the Board elect a Secretary. Under current Section 1, 
the Board is authorized, but not required, to do so. Given the number 
of responsibilities assigned to the Secretary under the proposed By-
Laws and the Board's practice of always electing a person to such 
position, the Association proposes to require that a Secretary be 
elected.
    The Association proposes to amend Section 3 to provide that agents 
and employees shall be under the supervision and control of the 
officers, unless the Board, by resolution, provides that an agent or 
employee shall be under the supervision and control of the Board. 
Generally, agents and employees are under the supervision and control 
of the officers, but the Board may wish in certain circumstances to 
retain control over an employee or agent, e.g., as in Section 4, when 
the Board determines that it wishes to retain counsel.
    The Association proposes to move current Section 5, which provides 
for compensation of Board and committee members, to its own Article, 
proposed Article X, Compensation of Board and Committee Members.
    The Association proposes to add new Sections 5, 6, and 7 to this 
Article to conform it to proposed Article 7 of the NASD Regulation By-
Laws and proposed Article 6 of the Nasdaq By-Laws. Proposed Section 5 
permits the Board to delegate the duties and powers of any officer to 
any other officer. Proposed Section 6 provides for the resignation and 
removal of officers. Proposed Section 7 permits the NASD to secure the 
fidelity of its officers, agents, and employees by bond or otherwise.

Article IX. Committees

    Current Article VIII, Committees, which addresses the formation and 
powers of committees, is renumbered as proposed Article IX. The 
Association proposes to amend Section 1 to cross-reference proposed 
Article VII, Section 1(c), which limits the Board's authority to 
delegate its powers and authority.
    The Association proposes to add a new Section 2, which is designed 
to help the Association maintain the compositional requirements of 
certain committees. Undertakings 1 and 6 under the SEC Settlement 
require certain committees 33 to have a particular balance 
of Industry, Non-Industry, and Public committee members. For committees 
consisting solely of one or more Governors or one or more Directors, 
the compositional requirements are set forth in the By-Laws of the 
appropriate corporation; for committees that have members other than 
Governors or Directors, the compositional requirements are set forth in 
the Delegation Plan.34 To help ensure that compositional 
requirements are maintained for committees appointed by the NASD Board, 
proposed Section 2 authorizes the Secretary to collect from each 
prospective member of a committee that must be balanced such 
information as is reasonably necessary to serve as the basis for a 
determination of the prospective committee member's classification as 
an Industry, Non-Industry, or Public committee member. The Secretary 
must certify to the Board each prospective committee member's 
classification. Each committee member must update the information 
submitted at least annually and upon request of the Secretary of the 
NASD, and shall report immediately to the Secretary any change in such 
classification. Parallel provisions are set forth in proposed Article 
4, Section 4.14(i) of the NASD Regulation By-Laws and proposed Article 
4, Section 4.14(g) of the Nasdaq By-Laws.
---------------------------------------------------------------------------

    \33\ Undertaking 1 sets forth compositional requirements for 
``the National Nominating Committee, the Trading/Quality of Markets 
Committee, the Arbitration Committee, the Market Surveillance 
Committee, the National Business Conduct Committee, the Management 
Compensation Committee, and all successors thereto.'' Undertaking 6 
sets forth compositional requirements for an audit committee. The 
current names of such committees are the National Nominating 
Committee, the Quality of Markets Committee, the National 
Arbitration and Mediation Committee, the Market Regulation 
Committee, the National Business Conduct Committee, the Management 
Compensation Committee, and the Audit Committee. See supra note 19.
    \34\ See Delegation Plan, I.C.2.b.(1), I.D.2., and I.E.2. The 
sole exception is the Management Compensation Committee, a committee 
of the NASD Board. The Management Compensation Committee's 
compositional requirements are set forth in the Delegation Plan.
---------------------------------------------------------------------------

    Current Section 2, which addresses removal of a committee member, 
is renumbered as proposed Section 3 and amended to clarify that a 
committee member can only be removed by majority vote of the whole 
Board.
    The Association proposes to add new sections to authorize the 
appointment of an Executive Committee and to require, in keeping with 
Undertaking 6, the appointment of an Audit Committee. Proposed Section 
4 authorizes the NASD Board to appoint an Executive Committee. Proposed 
Section 4 requires the Chief Executive Officer of the NASD to be a 
member of the Executive Committee and requires that the remaining 
members reflect the balance of Industry and Non-Industry Governors on 
the Board. Proposed Section 5 contains the provisions relating to the 
Audit Committee currently found in the Delegation Plan.35
---------------------------------------------------------------------------

    \35\ See Delegation Plan, I.D.
---------------------------------------------------------------------------

    Finally, the resolution concerning interpretations and explanations 
is deleted because the NASD Board intends to rescind it. The resolution 
no longer conforms to Association practice and is contrary to 
Undertaking 4.

Article X. Compensation of Board and Committee Members

    As noted previously, current Article VII, Section 5, which 
addresses compensation of Board and committee members, is renumbered as 
proposed Article X, Compensation of Board and Committee Members.

Article XI. Rules

    Current Article IX, Rules, which authorizes the NASD to adopt 
rules, is renumbered as proposed Article XI. No substantive change is 
proposed.

[[Page 25233]]

Article XII. Disciplinary Proceedings

    Current Article X, Disciplinary Proceedings, which authorizes 
disciplinary proceedings, is renumbered as proposed Article XII. No 
substantive change is proposed.

Article XIII. Powers of Board to Impose Sanctions

    Current Article XI, Powers of Board to Prescribe Sanctions, which 
authorizes the Board to impose sanctions, is renumbered as proposed 
Article XIII. The Association proposes to amend Section 1(e) and add a 
new Section (2) to clarify that any delegation under the proposed 
Article must be in conformity with the Delegation Plan.

Article XIV. Uniform Practice Code

    Current Article XII, Uniform Practice Code, which authorizes the 
Board to adopt a Uniform Practice Code, is renumbered as proposed 
Article XIV. The Association proposes to amend Section 2 to provide 
that the Board may delegate its authority with respect to administering 
the Code to the NASD Regulation Board and Nasdaq Board in accordance 
with the Delegation Plan.

Article XV. Limitation of Powers

    Current Article XIII, Limitation of Powers, which sets forth 
limitations on the Board's powers, is renumbered as proposed Article 
XV. The Association proposes to rescind the resolution that follows 
current Article XIII, Section 2, which provides for the use of the 
NASD's name by members, and move the provisions of the resolution to 
proposed IM-2210-4.
    The Association proposes to amend Section 4, which addresses 
conflicts of interest. The Association proposes to amend Section 4 by 
redesignating it as Section 4(a) and therein prohibiting any Governor 
or committee member from directly or indirectly participating in any 
adjudication of the interests of any party if the Governor or committee 
member has a conflict of interest or bias, or if circumstances 
otherwise exist where his or her fairness might reasonably be 
questioned. Proposed Section 4(a) further requires the Governor or 
committee member to recuse himself or herself or be disqualified in 
accordance with the Rules of the Association (e.g., Rule 9160). Current 
Section 4 simply references the Rules of the Association; current Rule 
9131 provides for disqualification of the Governor or committee member 
if a matter substantially affects his or her interests or the interests 
of any person in whom he or she is directly or indirectly interested. 
For a more detailed discussion of the conflict standard, see Part h, 
Section (xiii) of this rule filing.
    In addition, the Association proposes to add a new Section 4(b) to 
address conflicts of interests in non-adjudicatory matters in a manner 
consistent with the By-Laws for the NASD Regulation Board and the 
Nasdaq Board. Proposed Section 4(b) provides that no contract or 
transaction between the NASD and a Governor or officer, or between the 
NASD and any other entity in which a Governor or officers is a director 
or officer, or has a financial interest, shall be void or voidable 
solely for this reason if: (i) The material facts pertaining to the 
Governor's or officer's relationship or interest and the contract or 
transaction are disclosed or are known to the Board or the committee, 
and the Board or committee in good faith authorizes the contract or 
transaction by the affirmative vote of a majority of the disinterested 
Governors; or (ii) the material facts are disclosed or become known to 
the Board or committee after the contract or transaction is entered 
into, and the Board or committee in good faith ratifies the contract or 
transaction by the affirmative vote of a majority of the disinterested 
Governors. Only disinterested Governors may be counted in determining 
the presence of a quorum at the portion of a meeting of the Board or of 
a committee that authorizes the contract or transaction.
    Finally, Section 6, which limited the Association rulemaking 
authority over government securities activities, is deleted to conform 
the By-Laws to changes previously made to the Association's authority 
over the government securities activities of its members.

Article XVI. Procedure for Adopting Amendments to By-Laws

    Current Article XIV, Procedure for Adopting Amendments to By-Laws, 
is renumbered as proposed Article XVI.
    In proposed Article XVI, the Association proposes to provide more 
persons with the ability to propose an amendment to the NASD By-Laws. 
Currently, a Governor, a district committee, or 25 members may propose 
amendments to the By-Laws. Proposed Article XVI permits a committee 
appointed by the Board, the NASD Regulation Board of Directors, or the 
Nasdaq Board of Directors, by resolution, to propose amendments to the 
NASD By-Laws. In addition, proposed Article XVI permits the Chief 
Executive Officer of the NASD, the President of NASD Regulation, and 
the President of Nasdaq to propose amendments. The Association proposes 
to permit the NASD Regulation and Nasdaq Boards to propose changes 
because much of their authority under the Delegation Plan derives from 
the NASD By-Laws. The Association proposes to authorize the most senior 
officer of each corporate entity to propose changes to further the 
purpose of Undertaking 4, which requires the Association to provide the 
staff with autonomy and independence in preparing rule proposals, many 
of which are authorized or affected by the NASD By-Laws. Finally, the 
Association proposes to delete authority for the district committees to 
propose changes to the NASD By-Laws because the Association believes 
that under the new corporate structure, proposals by the district 
committees should be presented to the NASD Regulation Board, which in 
turn should determine what proposals are presented to the NASD Board.
    The Association files any change to the By-Laws or Certificates of 
Incorporation of the NASD, NASD Regulation, or Nasdaq that constitute a 
proposed rule change under the Act with the Commission.

Article XVII. Corporate Seal

    Current Article XV, Corporate Seal, is renumbered as proposed 
Article XVII. There are no substantive changes to proposed Article 
XVII.

Article XVIII. Checks

    Current Article XVI, Checks, is renumbered as proposed Article 
XVIII. There are no substantive changes to proposed Article XVIII.

Article XIX. Annual Financial Statement

    Current Article XVII, Annual Financial Statement, is renumbered as 
proposed Article XIX. There are no substantive changes to proposed 
Article XIX.
(ii) Proposed Changes to NASD Regulation By-Laws
    NASD Regulation proposes to amend the By-Laws of NASD Regulation as 
follows:

Description of Proposed Rule Change

    NASD Regulation adopted its current By-Laws on July 19, 1996. These 
By-Laws were drafted to comply with the requirements of Delaware law 
and have not previously been filed with the Commission. The Association 
proposes to amend the NASD Regulation By-Laws in the manner described 
previously in the introduction to Section II. In addition, the 
Association proposes to explicitly recognize the NASD as the sole 
stockholder of NASD Regulation capital stock and add detailed

[[Page 25234]]

procedures for regional nominations and district elections. Significant 
changes to the NASD Regulation By-Laws are described below. Minor, non-
substantive changes and changes to reflect drafting conventions are not 
described.

Article I. Definitions

    First, a new Article I, entitled ``Definitions,'' is proposed. 
Current Article I is renumbered as proposed Article II.
    The Association proposes that the By-Laws for each corporate entity 
have a free-standing set of definitions. Therefore, the Association 
proposes to add definitions for the following terms, which conform to 
the definitions in proposed Article I of the NASD By-Laws: ``Delegation 
Plan''; ``Executive Representative''; ``Industry Director'' or 
``Industry committee member''; ``NASD Regulation''; ``National 
Nominating Committee''; ``Non-Industry Director'' or ``Non-Industry 
committee member''; and ``Public Director'' or ``Public committee 
member.'' (Proposed Section 1.1 (h), (o), (q), (u), (v), (w), and (x).)
    The Association proposes to include the following definitions only 
in the NASD Regulation By-Laws: ``District Committee''; ``District 
Director''; ``District Nominating Committee''; ``district office''; 
``Independent Agent''; and ``Regional Nominating Committee.'' These 
terms relate to the election procedures set forth in proposed Article 
VI and VIII, and therefore are not used in the proposed NASD and Nasdaq 
By-Laws.
    In addition, the Association proposes to add the following 
definitions for clarity and to conform to the drafting conventions 
adopted generally, but which do not result in any substantive change: 
``Board''; ``day''; ``Delaware law''; ``Director''; ``NASD''; ``NASD 
member''; and ``Rules of the Association'' or ``Rules.'' (Proposed 
Section 1.1 (b), (e), (g), (i), (r), (t), and (z).)

Article II. Offices

    Current Article I, Offices, is renumbered as proposed Article II. 
Sections 1.1 and 1.2 are renumbered as Sections 2.1 and 2.2. There are 
no substantive changes in proposed Article II.

Article III. Meetings of Stockholders

    Current Article II, Meetings of Stockholders, is renumbered as 
proposed Article III. Current Article II sets forth general provisions 
for meetings of stockholders consistent with Delaware law. In proposed 
Article III, in recognition of the fact that NASD Regulation has only 
one stockholder, the NASD, the Association proposes to delete all of 
the general provisions regarding meetings of stockholders and retain 
only the provision on which NASD Regulation generally relies, namely 
obtaining the stockholder's written consent for any action that is 
required or permitted to be taken at a stockholder meeting. Thus, 
Sections 2.1 through 2.6 are deleted, and Section 2.7 is renumbered as 
3.1.

Article IV. Board of Directors

    Current Article III, Board of Directors, is renumbered as proposed 
Article IV. Sections 3.1 through 3.7 are renumbered as Section 4.1 
through 4.7. Proposed Section 4.1 sets forth the general powers of the 
Board. The Association proposes to conform the Board's authority to 
delegate its powers to the delegation authority set forth in proposed 
Article VII, Section 1(c) of the NASD By-Laws, i.e., to the fullest 
extent permitted by applicable law, the Restated Certificate of 
Incorporation, and the By-Laws, the Board may delegate any of its 
powers to a committee appointed under proposed Section 4.14 or to NASD 
Regulation staff in a manner not inconsistent with the Delegation Plan.
    The Association proposes to amend Sections 4.2 and 4.3, Number of 
Directors and Qualifications, to set forth the compositional 
requirements and discussions of the classifications of Directors 
(Industry, Non-Industry, and Public Directors) of the Board currently 
found in the Delegation Plan. Proposed Section 4.3(b) is a new 
provision requiring the Board to elect a Chair and Vice Chair from 
among its members. Proposed Section 4.3(c) is a new provision requiring 
Directors to provide the Secretary of the NASD with updated information 
regarding the Director's classification at least annually and upon 
request and to report any change in the classification to the NASD 
Secretary immediately. This provision is parallel to proposed Article 
VII, Section 14 of the NASD By-Laws.
    Proposed Section 4.4(a), which provides for the election of 
Directors, is amended to reflect the NASD's role as sole stockholder. 
Proposed Section 4.4(b) describes briefly the roles of the National 
Nominating Committee and the Regional Nominating Committee in the 
election of NASD Regulation Directors. As described in proposed Article 
VII, Section 9 of the NASD By-Laws, the National Nominating Committee 
is appointed by the NASD Board to nominate Governors for the NASD Board 
and Directors for the NASD Regulation and Nasdaq Boards. NASD 
Regulation also has a distinctive nominating process for those Industry 
Directors who represent a particular region. The regional nominating 
process culminates in the presentation of a candidate to the National 
Nominating Committee, which, as the final decision maker for all 
nominations, may accept or reject such candidate. The NASD Board, in 
turn, may elect or reject the candidates nominated by the National 
Nominating Committee. The regional nominating process is described in 
proposed Article VI of the NASD Regulation By-Laws.
    Proposed Section 4.5 includes new provisions specifying how the 
terms of office of Director shall expire so that, in general, one-third 
of the Board is elected each year.
    Proposed Section 4.7 clarifies that a Director may be removed from 
office only by a majority vote of the NASD Board.
    Proposed Section 4.8, Disqualification, and Proposed Section 4.9, 
Filling of Vacancies, are new. Current Sections 3.8 through 3.11 
(Quorum and Voting, Regulation, Meetings, Notice of Meetings, 
respectively) are renumbered as proposed Sections 4.10 through 4.13. 
Current Section 3.12, Conflicts of Interest, is renumbered as proposed 
Section 4.15. Current Section 3.13, Committees of the Board of 
Directors, is renumbered as proposed Section 4.14 and retitled 
``Committees.'' Current Section 3.12, Action Without Meeting, is 
renumbered as proposed Section 4.16.
    Proposed Sections 4.8, 4.9, 4.10, and 4.15, which set forth 
provisions for disqualification, filling of vacancies, quorums and 
conflicts of interest, are designed to parallel proposed Article VII, 
Sections 6 through 8, and proposed Article XV, Section 4 of the NASD 
By-Laws.36
---------------------------------------------------------------------------

    \36\ One difference is noteworthy in the conflicts of interest 
provision. The proposed By-Laws for NASD Regulation and Nasdaq 
provide that a transaction also is not void or voidable if the 
material facts pertaining to the Director's or officer's 
relationship or interest and the contract or transaction are 
disclosed or are known to the stockholder, i.e., the NASD, and the 
contract or transaction is approved in good faith by vote of the 
stockholder. (Proposed NASD Regulation and Nasdaq By-Laws Article 
IV, Section 4.15.)
---------------------------------------------------------------------------

    There are no substantive changes in proposed Section 4.11, 
Regulation; proposed Section 4.12, Meetings; or proposed Section 4.16, 
Action Without Meeting.
    In proposed Section 4.13, the Association proposes to increase the 
amount of time required for mail notice of a meeting from two to seven 
days, to clarify that any of the permissible forms of notice described 
may be used for any meeting of the Board, and to add a

[[Page 25235]]

subsection that provides that any meeting of the Board is a legal 
meeting without any prior notice if all Directors are present.
    Proposed Section 4.14 (current Section 3.13 as renumbered) sets 
forth new provisions regarding committees. Proposed Section 4.14(a) 
authorizes the Board to appoint committees. Proposed Section 4.14(b) 
describes how the Board may delegate to such committees. With respect 
to functions and responsibilities set forth in the Delegation Plan, the 
Board may delegate its authority to any duly appointed committee. Any 
action by such committee is subject to review, ratification, or 
rejection by the Board. In addition, such delegations must be in 
conformance with applicable law, the Restated Certificate of 
Incorporation, these By-Laws, and the Delegation Plan. These 
limitations previously were set forth in the Delegation Plan. Proposed 
Section 4.14(b) further clarifies that, with respect to other matters, 
the Board may delegate its powers and authority to act on behalf of the 
Board in managing the business and affairs of NASD Regulation only to 
committees consisting solely of one or more Directors, and that any 
such delegation must be not inconsistent with the Delegation Plan.
    Proposed Section 4.14(f), like proposed Article IX of the NASD By-
Laws, authorizes the NASD Regulation Board to appoint specific 
committees, including an Executive Committee, a Finance Committee, and 
a National Business Conduct Committee, and specifies their 
compositional requirements. Some of the provisions regarding the 
National Business Conduct Committee currently are set forth in the 
Delegation Plan.37
---------------------------------------------------------------------------

    \37\ See Delegation Plan II.D.
---------------------------------------------------------------------------

    Proposed Section 4.15, like proposed Article XV, Section 4 of the 
NASD By-Laws, sets standards of conduct for Directors with regard to 
conflicts of interest. Proposed Section 4.15(b) addresses conflicts of 
interests in non-adjudicatory matters in a manner consistent with the 
By-Laws for the NASD Board and the Nasdaq Board. Proposed Section 4.15 
provides that no contract or transaction between NASD Regulation and a 
Director or officer, or between NASD Regulation and any other entity in 
which a Director or officer is a director or officer, or has a 
financial interest, shall be void or voidable solely for this reason 
if: (i) The material facts pertaining to the Director's or officer's 
relationship or interest and the contract or transaction are disclosed 
or are known to the Board or the committee, and the Board or committee 
in good faith authorizes the contract or transaction by the affirmative 
vote of a majority of the disinterested Directors; (ii) the material 
facts are disclosed or become known to the Board or committee after the 
contract or transaction is entered into, and the Board or committee in 
good faith ratifies the contract or transaction by the affirmative vote 
of a majority of the disinterested Directors; or (iii) the material 
facts pertaining to the Director's or officer's relationship or 
interest and the contract or transaction are disclosed or are known to 
the stockholder entitled to vote thereon, and the contract or 
transaction is specifically approved in good faith by vote of the 
stockholder. Only disinterested Directors may be counted in determining 
the presence of a quorum at the portion of a meeting of the Board or of 
a committee that authorizes the contract or transaction.

Article V. Compensation

    Proposed Article V, Compensation, is a new Article that parallels 
proposed Article X of the NASD By-Laws.

Article VI. Regional Nominating Committees

    The Association proposes to add a new Article VI, Regional 
Nominating Committees, to the NASD Regulation By-Laws. The procedures 
for regional nominations are currently set forth in the Delegation Plan 
38 and in NASD Regulation Board resolutions. Proposed 
Article VI combines and expands on those procedures.
---------------------------------------------------------------------------

    \38\ See Delegation Plan II.B.
---------------------------------------------------------------------------

    As noted previously, Industry Directors who serve on the NASD 
Regulation Board represent a region designated by the Board. These 
Directors are initially nominated by a Regional Nominating Committee. 
Each Regional Nominating Committee presents a nominee to the National 
Nominating Committee to represent such region on the Board of 
Directors. The Regional Nominating Committee acts essentially in an 
advisory capacity because only the National Nominating Committee may 
formally nominate to the NASD Board a candidate for Director of the 
NASD Regulation Board. The NASD Board, in turn, may elect or reject the 
candidates nominated by the National Nominating Committee.
    Proposed Article VI sets forth the following procedures for the 
regional nominating process. As previously noted, the Board designates 
each region. Each region has a Regional Nominating Committee. The 
Regional Nominating Committee is composed of two members from each 
District Committee in the region, who are selected by their District 
Nominating Committee. (See discussion of proposed NASD Regulation By-
Laws Article VIII for a description of how District Committee and 
District Nominating Committee members are elected.) When the term of 
office of an Industry Director representing a region is due to expire, 
the Secretary of NASD Regulation notifies the appropriate Regional 
Nominating Committee, which initiates the regional nominating process.
    The Regional Nominating Committee receives from the Secretary of 
NASD Regulation a description of the firms eligible to vote in the 
Districts. Firms eligible to vote are those that either are 
headquartered in the region or have a branch office in the region. In 
making nominations, the Regional Nominating Committee seeks to ensure 
appropriate and fair representation of the classes and types of firms 
eligible to vote in the region.
    Currently, corporate resolutions authorize the Regional Nominating 
Committee to nominate one candidate for the consideration of the NASD 
membership in the region. The Association proposes to authorize the 
Regional Nominating Committee to nominate more than one candidate so 
that the NASD membership in the region may vote on a nominee to present 
to the National Nominating Committee. (This process would work in the 
same manner as a contested nomination, which is described below.)
    Once the Regional Nominating Committee selects a nominee (or 
nominees), it sends notice of its nomination to the Executive 
Representative of each NASD member eligible to vote. The Executive 
Representative is the officer or employee of the member who casts votes 
for the member in all nominations and elections. If any person not 
nominated wishes to contest a nomination, he or she sends notice of 
intent to contest to the Regional Nominating Committee or the Secretary 
of NASD Regulation within a specified period. Such person then must 
submit within a specified period a written petition signed by at least 
ten percent of the members eligible to vote in the region supporting 
such person's candidacy. If support of ten percent of the membership is 
not obtained within the requisite time, and if the Nominating Committee 
has nominated only one candidate, then the nominee of the Regional 
Nominating Committee is presented to the National Nominating Committee.

[[Page 25236]]

    If the Nominating Committee nominates more than one candidate, or 
if a person who is not nominated obtains the necessary support, then 
contested nomination procedures apply. Under these procedures, the 
Association pays for two mailings of nomination literature for each 
candidate, and the members of all NASD, Nasdaq, and NASD Regulation 
Boards and committees, and NASD, Nasdaq, and NASD Regulation staff, are 
prohibited from expressing views on the nomination. However, members of 
the Boards and committees may express views if they make it clear they 
are acting in their individual capacities and disclaim any intention to 
communicate in an official capacity. A ballot is sent to Executive 
Representatives of the firms eligible to vote, and specified 
procedures, including the use of an independent agent to qualify 
returned ballots and count votes, are then followed to determine the 
outcome of the nomination. If the National Nominating Committee or the 
NASD Board rejects a nominee of a Regional Nominating Committee, the 
Regional Nominating Committee goes through the regional election 
procedures again and submits another nominee to the National Nominating 
Committee.

Article VII. Officers, Agents and Employees

    Former Article IV, Officers, Agents and Employees, is set forth as 
proposed Article VII. Former Sections 4.1, 4.3, 4.4, and 4.5 were 
renumbered, respectively, as 7.1, 7.4, 7.5, and 7.6. Changes to these 
sections were made only as necessary to conform to the proposed 
definitions in proposed Article I and other drafting conventions. The 
Association proposes to add a new Section 7.2, Absence of the 
President, to provide a standard operational mechanism in the event of 
the President's inability to act, absence, or a vacancy in the 
position, in conformity with proposed Article 8, Section 2 of the NASD 
By-Laws. In proposed Section 7.3, the Association proposes a conforming 
change to clarify supervision and control of agents and employees. 
(Proposed NASD By-Laws Article VIII, Section 3, and Proposed Nasdaq By-
Laws Article VI, Section 6.3.)

Article VIII. District Committees and District Nominating 
Committees

    Proposed Article VIII, District Committees and District Nominating 
Committees, is a new Article. Proposed Article VIII authorizes the 
Board to designate districts and sets forth procedures for the members 
within each district to elect a District Committee and a District 
Nominating Committee. The language of proposed Article VIII is drawn 
from former Article VIII of the NASD By-Laws, which authorized the NASD 
Board to form such committees. Proposed Article VIII is drafted to 
conform to the Undertakings. Specifically, under Proposed Article VIII, 
Section 8.2, the role of the District Committee members is limited to 
serving as panelists in disciplinary proceedings in accordance with the 
Rule 9200 Series, recommending policy and rule changes to the NASD 
Regulation Board, and selecting members of the Regional Nominating 
Committees in a manner consistent with the proposed NASD Regulation By-
Laws. (Proposed NASD Regulation By-Laws Article VI.)
    Election procedures for District Committees and District Nominating 
Committees currently are set forth in corporate resolutions. The 
Association proposes to add these procedures, with further 
clarifications and detail, to the By-Laws in proposed Article VIII. The 
procedures conform to the nomination procedures in proposed Article VI.
    Proposed Article VIII sets forth the following procedures for 
district elections. In May of each year, each District Nominating 
Committee solicits candidates to fill the vacancies anticipated to 
occur on its District Committees as well as candidates to serve on the 
following year's District Nominating Committee. (District Nominating 
Committee members serve a one-year term, while District Committee 
members serve a three-year term.) The District Nominating Committee 
receives from the Secretary of NASD Regulation a description of the 
firms eligible to vote in the district. Firms eligible to vote are 
those that either are headquartered in the district or have a branch 
office in the district. In making nominations, the District Nominating 
Committee seeks to ensure appropriate and fair representation of the 
classes and types of firms eligible to vote in the district.
    Current corporate resolutions authorize the District Nominating 
Committee to nominate one candidate for each vacancy. The Association 
proposes to authorize the District Nominating Committee to nominate 
more than one candidate per vacancy. (This process would trigger 
contested election procedures, which work like the contested nomination 
procedures described above.)
    Once the District Nominating Committee selects its nominees, it 
sends notice of its slate to the District Committee and the Executive 
Representative of each firm eligible to vote. If any person not 
nominated wishes to contest an election, he or she sends notice of 
intent to contest to the District Director or the Secretary of NASD 
Regulation within a specified period. Such person then must submit 
within a specified period a written petition evidencing support for 
such contest by at least ten percent of the members eligible to vote in 
the district. If the person does not obtain ten percent support for a 
contest within the requisite period, or if the District Nominating 
Committee has not nominated more candidates than there are vacancies, 
then nominees of the District Nominating Committee are deemed elected, 
and the election process is finished.
    If the District Nominating Committee nominates more candidates than 
there are vacancies, or if a person obtains the necessary support for a 
contest, then contested election procedures apply. These procedures 
conform to the procedures for contested regional nominations. See 
discussion of Proposed NASD Regulation By-Laws, Article VI. The 
candidates for District Committee membership receiving the largest 
number of votes cast in the district for that office are declared 
elected such that the number of candidates declared elected equals the 
number of vacancies on the District Committee. The candidates for 
District Nominating Committee membership receiving the largest number 
of votes cast in the district for that office are declared elected such 
that the number of candidates declared elected equals the number of 
vacancies on the District Nominating Committee.

Article IX. Indemnification

    Current Article V, Indemnification, is renumbered as proposed 
Article IX. Sections 5.1 through 5.5 are combined, amended, and 
renumbered as proposed Section 9.1, and current Section 5.6 is 
renumbered as proposed Section 9.2. The Association proposes to make 
the indemnification policies for all three corporate entities 
identical. Therefore, proposed Sections 9.1 and 9.2 conform to proposed 
Article VII, Sections 7.1 and 7.2 of Nasdaq By-Laws and the provisions 
for indemnification in the NASD's Restated Certificate of 
Incorporation.
    NASD Regulation By-Laws provide for the indemnification of and 
advancement of expenses to persons named or threatened to be named as a 
party to any civil, administrative, or investigative proceeding because 
such person is or was a Director, officer, employee, or agent of the 
corporation. The By-Laws also provide that: (1) The right of 
indemnification is not exclusive

[[Page 25237]]

of any other right the person may have; (2) the amount of 
indemnification is reduced by the amount the indemnified person 
collects from another source; and (3) NASD Regulation has the power to 
purchase and maintain indemnification insurance.
    The Association proposes to modify NASD Regulation's By-Laws to 
make indemnification and advancement of expenses to agents 
discretionary with the Board rather than mandatory, in order to permit 
the Board to determine whether indemnification is appropriate under the 
particular circumstances. Indemnification of non-officer employees 
remains the presumption. However, the Association proposes to authorize 
the Board to refuse to advance expenses to an employee if: (1) The 
employee (i) acted in bad faith, or (ii) did not act in a manner that 
the employee believed to be in or not opposed to the best interests of 
NASD Regulation; (2) with respect to a criminal matter, the employee 
believed or had reasonable cause to believe that his or her conduct was 
unlawful; or (3) the employee breached his or her duty to NASD 
Regulation. Finally, the Association proposes to add a provision 
requiring NASD Regulation, in response to a written claim for 
indemnification or advancement, to make such payment within 60 days of 
the claim.
    While it is a common corporate practice to provide for 
discretionary indemnification of employees (as well as agents), NASD 
Regulation believes that it is essential that employees have confidence 
that they will be indemnified in the event they are named in any 
proceeding resulting from actions taken in good faith. At the same 
time, NASD Regulation believes it is essential that the Board have the 
opportunity to evaluate and deny advancement of expenses if it 
determines the action was not taken in good faith or if the person had 
reason to believe the action was illegal or breached a duty to the 
corporation.

Article X. Capital Stock

    Current Article VI, Capital Stock, is renumbered as proposed 
Article X. The Association proposes to add a new Section 10.1, 
recognizing the NASD's status as sole stockholder. Current Sections 6.1 
through 6.7 are renumbered as proposed Section 10.2 through 10.8. The 
Association proposes certain changes only to conform the proposed 
Article to the drafting conventions and stylistic changes incorporated 
generally in the NASD By-Laws, the NASD Regulation By-Laws, and the 
Nasdaq By-Laws. There are no substantive changes to proposed Article X. 
In proposed Section 10.8, the Association proposes to delete detailed 
provisions of Delaware law for the fixing of record dates, which are 
more useful to corporations with more than one stockholder, and instead 
provide that a record date may be fixed in accordance with Delaware 
law.

Article XI. Miscellaneous Provisions

    Current Article VII, Miscellaneous Provisions, is renumbered as 
proposed Article XI. There are no substantive changes in proposed 
Article XI. Current Sections 7.1, 7.2, 7.3, 7.4, and 7.5 are proposed 
to be renumbered, respectively, as Sections 11.1, 11.2, 11.3., 11.4, 
and 11.5.

Article XII. Amendments; Emergency By-Laws

    Current Article VIII, Amendments; Emergency By-Laws, is renumbered 
as proposed Article XII. There are no substantive changes in Article 
XII. Current Sections 8.1, 8.2, and 8.3 are proposed to be renumbered, 
respectively, as Sections 12.1,12.2, and 12.3.
(iii) Proposed Changes to Nasdaq By-Laws
    Nasdaq adopted its current By-Laws on October 27, 1993. These By-
Laws were drafted to comply with the requirements of Delaware law and 
to include more detailed provisions describing the powers of the Board 
and the corporation's officers, employees, and agents. Nasdaq's By-Laws 
have not previously been filed with the Commission. The Association 
proposes to amend the Nasdaq By-Laws to conform them to the proposed 
NASD and NASD Regulation By-Laws, where appropriate, and to certain 
other changes proposed for the Rules of the Association. Significant 
changes to Nasdaq's By-Laws are described below. Minor, non-substantive 
changes and changes to reflect drafting conventions are not described.

Article I. Definitions

    The Association proposes to add a new Article I, Definitions. As 
noted previously, the Association proposes that the By-Laws for each 
corporate entity have a free-standing set of definitions. Therefore, 
the Association proposes to add the following definitions, which 
conform to definitions proposed for inclusion in the NASD and NASD 
Regulation By-Laws: ``Act''; ``Board''; ``broker''; ``Commission''; 
``day''; ``dealer''; ``Delaware law''; ``Delegation Plan''; 
``Director''; ``Industry Director'' or ``Industry committee member''; 
``NASD''; ``NASD Board''; ``NASD Regulation''; ``Nasdaq''; ``National 
Nominating Committee''; ``Non-Industry Director'' or ``Non-Industry 
committee member''; ``Public Director'' or ``Public committee member''; 
and ``Rules of the Association'' or ``Rules.''

Article II. Offices

    Current Article I, Offices, is renumbered as proposed Article II, 
and the Sections are renumbered accordingly.

Article III. Meetings of Stockholders

    Current Article II, Meetings of Stockholders, is renumbered as 
proposed Article III and conformed to the changes in proposed Article 
III of the NASD Regulation By-Laws.

Article IV. Board of Directors

    Current Article III, Board of Directors, is renumbered as proposed 
Article IV. The changes in proposed Article IV are designed to conform 
it, as appropriate, to proposed Article IV of the NASD Regulation By-
Laws, with the following exceptions. First, the number, qualifications, 
and election of the Directors reflects the current provisions of the 
Delegation Plan. See Delegation Plan III.B and Proposed Nasdaq By-Laws 
Sections 4.2 through 4.4. Second, like the NASD Regulation Board, the 
Nasdaq Board is divided into three classes, except that the terms of 
office of the Directors of Nasdaq Board are set to expire beginning in 
1998, rather than 1997. Third, proposed Section 4.14 concerning 
Committees, largely parallels the same provision in the NASD Regulation 
By-Laws, except the Nasdaq By-Laws authorize only one specific 
committee, an Executive Committee. (Other provisions concerning Nasdaq 
committees remain in proposed Section III.D. of the Delegation Plan.)
    Fourth, Proposed Section 4.15, like proposed Article XV, Section 4 
of the NASD By-Laws, sets standards of conduct for Directors with 
regard to conflicts of interest. Proposed Section 4.15(b) addresses 
conflicts of interests in non-adjudicatory matters in a manner 
consistent with the By-Laws for the NASD Board and the NASD Regulation 
Board. Proposed Section 4.15 provides that no contract or transaction 
between Nasdaq and a Director or officer, or between Nasdaq and any 
other entity in which a Director or officer is a director or officer, 
or has a financial interest, shall be void or voidable solely for this 
reason if: (i) The material facts pertaining to the Director's or 
officer's relationship or interest and the contract or transaction are 
disclosed or are

[[Page 25238]]

known to the Board or the committee, and the Board or committee in good 
faith authorizes the contract or transaction by the affirmative vote of 
a majority of the disinterested Directors; (ii) the material facts are 
disclosed or become known to the Board or committee after the contract 
or transaction is entered into, and the Board or committee in good 
faith ratifies the contract or transaction by the affirmative vote of a 
majority of the disinterested Directors; or (iii) the material facts 
pertaining to the Director's or officer's relationship or interest and 
the contract or transaction are disclosed or are known to the 
stockholder entitled to vote thereon, and the contract or transaction 
is specifically approved in good faith by vote of the stockholder. Only 
disinterested Directors may be counted in determining the presence of a 
quorum at the portion of a meeting of the Board or of a committee that 
authorizes the contract or transaction.
    In addition, in proposed Section 4.15(a), Conflicts of Interest; 
Contracts and Transactions Involving Directors, there is no cross-
reference to the Rules of the Association because the present Nasdaq 
rules do not include particular disqualification standard for Nasdaq 
proceedings as has been included in the proposed Rule 9160 Series for 
NASD Regulation disciplinary proceedings. Finally, proposed Section 
4.17, Communication of Views Regarding NASD or NASD Regulation 
Elections or Nomination, holds Nasdaq and its Board, committee, and 
staff to the same standards proposed for NASD and NASD Regulation with 
respect to contested elections or nominations. (Proposed NASD By-Laws 
Article VII, Sections 11 and 12, and Proposed NASD Regulation By-Laws 
Article VI, Sections 6.14 and 6.19, and Article VIII, Sections 8.21 and 
8.26.)

Article V. Compensation

    Article V, Compensation, is a new Article that conforms with 
proposed Article X of the NASD By-Laws and proposed Article V of the 
NASD Regulation By-Laws.

Article VI. Officers, Agents and Employees

    Current Article IV, Officers, Agents and Employees, is renumbered 
as proposed Article VI, and the Sections are renumbered accordingly. 
Only one substantive change is proposed. Proposed Section 6.3 (current 
Section 4.3), Subordinate Officers, Agents, or Employees, includes a 
provision that clarifies that agents and employees of Nasdaq are under 
the supervision and control of the officers of Nasdaq, unless the 
Nasdaq Board, by resolution, provides that an agent or employee shall 
be under its supervision and control. (Proposed NASD By-Laws Article 
VIII, Section 3 and Proposed NASD Regulation By-Laws Article VII, 
Section 7.3.)

Article VII. Indemnification

    Current Article V, Indemnification, is renumbered as proposed 
Article VII, and the Sections are renumbered accordingly. Proposed 
Article VII conforms to the provisions for indemnification in the 
NASD's Restated Certificate of Incorporation and proposed Article IX of 
the NASD Regulation By-Laws. As noted above, the Association proposes 
to make the indemnification policies for all three corporate entities 
identical.
    Current Article V provides for the mandatory indemnification of 
persons made or threatened to be made a party to any civil, 
administrative, or investigative proceeding by reason of the fact that 
he or she was a director or officer of the corporation. Advancement of 
expenses, and the indemnification of employees and agents, is 
discretionary. Current Article V also provides that (1) the right of 
indemnification is not exclusive of any other right the person may 
have; (2) the amount of indemnification is reduced by the amount an 
indemnified person collects from another source; and (3) Nasdaq has the 
power to purchase and maintain indemnification insurance.
    The Association proposes to modify current Article V in the same 
manner and for the same reasons set forth in the discussion of proposed 
Article IX of the NASD Regulation By-Laws.

Article VIII. Capital Stock

    Current Article VI, Capital Stock, is renumbered as proposed 
Article VIII. The Association proposes changes to conform to those set 
forth for proposed Article X of the NASD Regulation By-Laws.

Article IX. Miscellaneous Provisions

    Current Article VII, Miscellaneous Provisions, is renumbered as 
proposed Article IX, and the Sections are renumbered accordingly. There 
are no substantive changes.

Article X. Amendments; Emergency By-Laws

    Current Article VIII, Amendments; Emergency By-Laws, is renumbered 
as proposed Article X, and the Sections are renumbered accordingly. 
There are no substantive changes.
c. Proposed Changes to the Delegation Plan and Restated Certificates of 
Incorporation
    The Association proposes to amend the Delegation Plan to delete 
provisions added to the By-Laws of the NASD, NASD Regulation, and 
Nasdaq. Specifically, in Section I.A., the definitions of Industry, 
Non-Industry, and Public Governors, Directors, and committee members 
are deleted and instead cross-reference the By-Laws of the NASD, NASD 
Regulation, and Nasdaq, where the Association proposes to define such 
terms. (Proposed NASD By-Laws Article I; Proposed NASD Regulation By-
Laws Article I; and Proposed Nasdaq By-Laws Article I.)
    Similarly, the Association proposes to delete Section I.C., I.D., 
II.B., III.B., and parts of II.D. and III.D., which address the 
composition of the Boards, elections, terms of office, vacancies, 
disqualification due to change in classification, and the composition 
and authority of certain committees because the Association proposes to 
include these provisions in the appropriate By-Laws. (Proposed NASD By-
Laws Article VII, Sections 4, 5, 6, 7, 9, and 10; Proposed NASD 
Regulation By-Laws Article IV, Sections 4.2, 4.3, 4.4, 4.5, 4.8, 4.9 
and 4.14; and Proposed Nasdaq By-Laws Article IV, Sections 4.2., 4.3, 
4.4, 4.5, 4.8, 4.9 and 4.14.) With respect to committees, the 
Association proposes to include in the appropriate By-Laws or in the 
Delegation Plan the compositional requirements for specified committees 
as provided in the Undertakings. Generally, if the committee consists 
solely of Directors or Governors, the Association proposes to include 
provisions describing the committee's powers and compositional 
requirements in the appropriate corporate By-Laws. If the committee 
consists of Directors or Governors as well as other members, the 
Association proposes to include provisions describing the committee's 
powers and compositional requirements in the Delegation Plan. Thus, the 
Association proposes to add provisions regarding the powers and 
composition of the Market Regulation Committee and the National 
Arbitration and Mediation Committee as proposed Section II.C. of the 
Delegation Plan.
    The Association proposes to amend Section II.A.1.f. to specify that 
NASD Regulation will establish procedures to consider requests by 
members, associated person, and members of the public that NASD 
Regulation initiate formal disciplinary action. This provision is 
discussed below in

[[Page 25239]]

connection with the discussion of the proposed deletion of current Rule 
8120.
    The Association proposes to amend Section II.C., which sets forth 
certain NASD Regulation Board review procedures, by deleting specific 
procedures that are set forth in the proposed Rule 9000 Series. 
Instead, the Rules of the Association are cross-referenced.
    Finally, the Association proposes to clarify that both NASD 
Regulation and Nasdaq are responsible for operating Stockwatch. 
Therefore, new Sections II.A.1.t. and III.A.1.o. are added and the 
Section pertaining to Stockwatch is renumbered as Section IV of the 
Delegation Plan.
    The Association also proposes to amend the Certificates of 
Incorporation for the NASD, NASD Regulation, and Nasdaq. This is the 
first time the Association has filed the Certificates of Incorporation 
for NASD Regulation and Nasdaq with the Commission. The Association 
proposes to revise the three Certificates to conform them to the 
proposed changes to the By-Laws of the three corporations and other 
proposed rule changes and to make the Certificates more consistent with 
one another. No substantive changes are intended.
d. Proposed Changes to Rules 0120 and 0121
    The Association proposes to add four new definitions to Rule 0120, 
which provides definitions of general applicability, and amend one 
definition. The four definitions that the Association proposes to add 
are: ``NASD,'' ``NASD Regulation,'' ``Nasdaq,'' and ``National Business 
Conduct Committee.'' NASD, NASD Regulation, and Nasdaq are the same 
terms defined in the By-Laws of the NASD, NASD Regulation, and Nasdaq. 
The Association proposes to define these terms in Rule 0120, to aid a 
person reading the Rules of the Association and any future drafter of a 
Rule. The Association proposes to add the term ``National Business 
Conduct Committee'' to avoid duplicating the definition in several 
proposed Rule Series and to aid the reader. The term is defined in the 
current Rule 9120 and used in other series of the Rules (e.g., the Rule 
1010 Series).
    The Association intends to amend one currently defined term, 
``Rules,'' to ```Rules'' or ``Rules of the Association','' and to 
clarify the definition. The new definition clarifies that the terms 
``Rules'' and ``Rules of the Association'' are synonymous and that the 
definition includes any Rule set forth as a numbered Rule in the NASD 
Manual.
    Finally, paragraph (j) is relettered as proposed paragraph (n), 
paragraph (k) is relettered as proposed paragraph (o), paragraph (l) is 
relettered as proposed paragraph (p), and paragraph (m) is relettered 
as proposed paragraph (q).
    The Association proposes to amend current Rule 0121 to clarify that 
the definitions in the NASD By-Laws apply unless a Rule indicates 
otherwise.
e. Proposed IM-2210-4
    The Association proposes to add IM-2210-4 as a filed interpretation 
of Rule 2210. IM-2210-4 is based on a resolution of the NASD Board of 
Directors that currently is included in Article XVI, Section 2 of the 
NASD By-Laws, which concerns the use of the Association's name by 
members. Because the Association will no longer include corporate 
resolutions with the By-Laws, the Association proposes to convert the 
resolution into interpretive material for Rule 2210, which addresses 
members' communications with the public. In addition, the language of 
the resolution is clarified and reorganized to make it easier to read 
and understand.
f. Proposed Changes to the Membership Application Procedures in the 
Rule 1010 Series
    The Rule 1010 Series sets forth procedures for processing 
membership applications. The Rule 1010 Series is revised to reflect the 
recommendations of the Implementation Plan and to comply with 
Undertakings 4 and 5. The Implementation Plan recommended that the NASD 
strive to bring about greater national uniformity and coordination in 
the membership application process and lighten the National Business 
Conduct Committee's workload in order to allow the National Business 
Conduct Committee to assist in providing such uniformity. Undertaking 4 
requires the NASD to ``provide for the autonomy and independence of the 
regulatory staff * * * such that the staff, subject only to the 
supervision of the Board of Governors of the NASD and the Board of 
Directors of NASDR * * * has sole discretion to handle the approval of 
applications for membership.'' Undertaking 4 also requires that the 
District Business Conduct Committees no longer be involved in reviewing 
or approving membership applications. Undertaking 5 requires that the 
Association ``promulgate and apply on a consistent basis uniform 
standards for regulatory and other access issues, such as admission to 
the NASD as a member firm, and conditions to becoming a market maker; 
and institute safeguards to ensure fair and evenhanded access to all 
services and facilities of the NASD.''
(i) Current Rules
    Under the current Rule 1010 Series, a prospective member files a 
membership application with the district office in the district in 
which it intends to have its principal place of business. A 
Subcommittee is designated by the District Committee to render a 
determination on the application. Current Rule 1011 specifies a short 
list of documents and information to be provided with the application 
and generally permits the district office to request any other relevant 
information or documents. If the applicant fails to respond to a 
request for information by the district office or responds to such a 
request in a materially inadequate manner, the Rule provides that the 
application terminates, unless the Subcommittee determines otherwise.
    Before an applicant is admitted to membership, current Rule 1011 
requires that the applicant participate in a pre-membership interview. 
The Association has one year from the date of application to complete 
the pre-membership interview process. During the pre-membership 
interview, there is a review of the applicant's: (1) Business plan; (2) 
capital arrangements; (3) proposed record keeping system; (4) proposed 
internal procedures; (5) familiarity with Rules of the Association and 
federal securities laws; and (6) capability to properly conduct the 
type of business intended in view of (a) The number, experience, and 
qualifications of persons to be associated with the applicant at the 
time of its admission to membership, (b) the applicant's planned 
facilities, (c) arrangements with banks and clearings corporations, (d) 
supervisory personnel, methods, and procedures, and (e) other factors 
relevant to the scope and operation of the applicant's business. The 
applicant is required to demonstrate ``the appropriateness of its 
admission to membership in the Association to conduct the type of 
business intended in the manner specified in its submission.''
    Within 30 days after the pre-membership interview or the receipt of 
any additional documents requested, whichever is later, the 
Subcommittee notifies the applicant whether its application is granted, 
denied, or granted subject to restrictions on its business activities. 
If restrictions are imposed at this stage or after appeal or review 
under Rule 1012, the applicant must execute a written agreement to 
abide by any restrictions imposed and to obtain the Association's 
approval before modifying its business activities in any way 
inconsistent with the agreement.

[[Page 25240]]

    Under current Rule 1012, the applicant may request that the full 
District Committee review the Subcommittee's determination. The 
applicant may request a hearing before a separate Hearing Subcommittee 
of the District Committee. No member of the Subcommittee that rendered 
the initial determination on the application may participate in the 
determination of the District Committee. After review, the District 
Committee determines whether the application should be granted, denied, 
or granted subject to restrictions.
    The applicant may appeal the full District Committee's decision to 
the National Business Conduct Committee, or the National Business 
Conduct Committee on its own motion may call the decision for review. 
The applicant has the right to appear before the National Business 
Conduct Committee and may supplement the record; the National Business 
Conduct Committee may require the applicant to appear and provide 
additional information. Unless the NASD Board calls the membership 
application proceeding for discretionary review, the National Business 
Conduct Committee notifies the applicant whether its application is 
granted, denied, or granted subject to restrictions, and the National 
Business Conduct Committee's action constitutes final action of the 
Association. The applicant may apply for review by the Commission.
    A Governor of the NASD Board may call a determination of the 
National Business Conduct Committee on a membership application for 
review. The NASD Board may affirm, modify, or reverse the National 
Business Conduct Committee's determination, and the Board's 
determination constitutes final action of the Association. The 
applicant may apply for review by the Commission.
    Under current Rule 1013, a member may request that the Association 
remove or modify any restrictions imposed on its business activities as 
a result of the membership admission process. The request must be filed 
in writing and reviewed by a Subcommittee of the District Committee of 
the district in which the member currently has its principal place of 
business. The member must demonstrate that such action is appropriate 
in light of the criteria in current Rule 1013. The Subcommittee 
considers the circumstances that gave rise to the imposition of the 
restrictions, the operations of the member since the imposition of the 
restrictions, and any new evidence submitted in connection with the 
request. The District Committee, the National Business Conduct 
Committee, and the NASD Board may review a modification of restrictions 
approved by the Subcommittee pursuant to the procedures for reviewing a 
membership application under current Rule 1012. If the Subcommittee 
denies a request to remove or modify restrictions, the member may file 
a request for review with the District Committee. The District 
Committee's determination is subject to appeal or review pursuant to 
current Rule 1012.
    Under current Rule 1014, if the ownership or control of a member 
changes, the Association may condition continuance in membership on 
prompt compliance with the pre-membership procedures contained in 
current Rules 1011 through 1015.
    Under current Rule 1015, a member must notify the Association of 
certain mergers, acquisitions, or other changes in equity ownership or 
partnership capital within 10 business days after the event.
(ii) Proposed New Rules
    The proposed rule change substantially alters current membership 
procedures. First, consistent with Undertaking 4, the proposed rule 
change shifts the authority to render an initial decision on a 
membership application from the District Committees to the Department 
of Member Regulation (``Department'') of NASD Regulation. Second, 
consistent with Undertaking 5, the proposed rule change sets forth in 
greater detail the information that must be submitted with a membership 
application, sets forth more detailed and objective standards for 
rendering a decision on a membership application, and requires that any 
restrictions placed on an Applicant's business activities be 
specifically related to a particular standard and that the rationale 
for such restrictions be clearly articulated. Third, the proposed rule 
change sets forth additional details about membership application 
procedures and generally provides more procedural rights to Applicants, 
including time limits by which the Department, and if applicable, the 
National Business Conduct Committee, the NASD Regulation Board, and the 
NASD Board must issue a decision. Finally, various other time limits 
are imposed throughout the admission process to ensure that 
applications are acted on promptly. These changes will help bring about 
greater national uniformity and coordination in the membership 
application process and more even-handed access to the facilities of 
the NASD.
    Proposed Rule 1011 sets forth definitions for the proposed Rule 
1010 Series. The terms ``Applicant,'' ``Associated Person,'' 
``Department,'' ``Director,'' ``district,'' ``district office,'' 
``Governor,'' ``Interested Association Staff,'' ``sales practice 
violations,'' and ``Subcommittee'' are defined.
    Proposed Rule 1012 sets forth general procedural provisions for 
service of notices and decisions by the Association and filings by an 
Applicant, prohibitions on ex parte communications with Applicants or 
Interested Association staff, recusals or disqualifications of NASD and 
NASD Regulation Board members and National Business Conduct Committee 
members, computations of time, and recording of events in the 
Association's membership application docket.
    Proposed Rule 1013 sets forth procedures for filing a membership 
application and conducting a membership interview.39 
Applicants must file membership applications with the Membership 
Department,40 which will transmit the application for 
processing to Department staff at the district office in the district 
in which the Applicant has or intends to have its principal place of 
business. Proposed Rule 1013(a) sets forth a detailed list of items 
that must be submitted with a membership application. Newly specified 
items include a more detailed business plan; evidence of all required 
registrations and licenses and copies of the most recent Forms U-4 and 
U-5 for each Associated Person; documentation of disciplinary history 
and certain regulatory, civil, and criminal actions, arbitrations, and 
customer complaints for the Applicant and its Associated Persons; a 
written acknowledgment that heightened supervisory procedures may be 
required for certain Associated Persons; copies of proposed or final 
contracts with banks, clearing entities, and service bureaus; a 
description of the nature and source of Applicant's capital; a 
description of financial controls; a more detailed description of the 
Applicant's supervisory system and

[[Page 25241]]

personnel; a description of the proposed recordkeeping system; and a 
copy of the Applicant's written training plan.
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    \39\ The Association proposes to discontinue the use of the term 
``pre-membership interview'' and instead use the term ``membership 
interview.'' Under the proposed rule change, interviews are required 
before an Applicant may become a member and may be required after an 
Applicant becomes a member in order to remove or modify a 
restriction under proposed Rule 1018 or to review a change in 
ownership or operations under proposed Rule 1019. Thus, interviews 
will occur before and may occur after admittance to membership.
    \40\ The Membership Department is located in the Association's 
Rockville offices and performs certain administrative functions for 
all membership applications. It is distinct from the Department of 
Member Regulation.
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    Proposed Rule 1013 adds a new provision requiring the Department to 
determine if the application is complete within 30 days after receipt 
of the application. If the application is not complete, the Department 
may request additional information and documents, and may continue to 
make such requests at any time during the membership application 
process. Unless the Applicant and the Department agree otherwise, 
additional documents or information must be provided within 60 days 
after the initial request and 30 days after any subsequent request. 
Proposed Rule 1013(b) provides that an application for membership 
lapses if the Applicant fails to respond fully to requests for 
information or fails to appear at a membership interview, absent a 
showing of good cause by the Applicant.
    Proposed Rule 1013(c) describes the membership interview process. 
The Department must conduct a membership interview before it issues a 
decision on an application for admission. The Applicant is notified of 
the interview by facsimile or commercial courier at least seven days 
before the interview. Unless the Department directs otherwise for good 
cause shown, a membership interview must be scheduled to occur within 
90 days after receipt of the application or within 60 days after the 
receipt of all requested documents and information, whichever is later. 
During the membership interview, the Department reviews the standards 
for admission with the Applicant's representatives and informs them of 
any preliminary determinations as to whether the Applicant meets such 
standards. If the Department intends to rely on information not 
submitted by the Applicant, such information is provided to the 
Applicant.
    Proposed Rule 1014 provides that after considering the application, 
membership interview, other information and documents, the public 
interest, and the protection of investors, the Department must 
determine whether the Applicant meets the specified standards. For 
standards relating to capital, supervision, and capability of complying 
with applicable law, the proposed rule change sets forth specific 
criteria that the Department may consider in determining whether the 
Applicant meets the standard. Other standards address the completeness 
and accuracy of the application and supporting documents; possession of 
all required licenses and registrations; establishment of necessary 
relationship with banks, clearing corporations, and service bureaus; 
plans to obtain necessary facilities; financial controls; compliance, 
supervisory, operational, and internal control practices and standards; 
recordkeeping; and training. In addition, the Association must not 
possess any information indicating that the Applicant may circumvent, 
evade, or otherwise avoid compliance with the federal securities laws 
or the Rules of the Association, and the application and supporting 
documents must otherwise be consistent with the federal securities laws 
and the Rules of the Association.
    If an Applicant meets each of the standards, the Department grants 
the application for membership. If an Applicant fails in whole or part 
to meet one or more of the standards, the Department may deny the 
application or grant it subject to restrictions designed to address 
specific financial, operational, supervisory, disciplinary, investor 
protection, or other regulatory concerns based on the standards in 
proposed Rule 1014.
    Under the proposed rule change, if the Department grants an 
application, with or without restriction, the Applicant's approval for 
membership is contingent upon the Applicant's submission of a 
membership agreement to engage only in the business set forth in its 
business plan and the membership agreement; abide by any restriction 
specified in the Department's written decision; obtain the Department's 
prior approval of the removal or modification of such restriction under 
proposed Rule 1018; and notify and obtain the Department's approval of 
a change in ownership or control or a material change in business 
operations under proposed Rule 1019. The execution of this membership 
agreement does not affect the Applicant's right to request a review of 
the Department's decision under proposed Rule 1015.
    Under subparagraph (d) of Rule 1014, if the Department denies an 
application, the decision must explain the reason for the denial and 
reference the applicable standard that is not met. If the Department 
grants the application subject to restrictions, the decision must 
explain the reason for each restriction, referencing the applicable 
standard that is not met and identifying the specific financial, 
operational, supervisory, disciplinary, investor protection, or other 
regulatory concern that the restriction is designed to address and the 
manner in which the restriction is reasonably designed to address the 
concern.
    The Department must issue a written decision within 30 days after 
the conclusion of the membership interview or after the submission of 
additional information or documents, whichever is later. The proposed 
rule change also provides a new remedy if the Department fails to act 
promptly on an application. If the Department fails to issue a written 
decision within 180 days after receipt of an application, or such later 
date as the Department and the Applicant agree, the Applicant may 
request that the NASD Board direct the Department to issue the decision 
immediately or show good cause for an extension. If the Department 
shows good cause, the 180 day time limit may be extended by not more 
than 90 days.
    Under proposed Rule 1015, the Applicant may request that the 
National Business Conduct Committee review the decision of the 
Department by filing a written request within 25 days after service of 
the Department's decision. As under current Rule 1012, upon submission 
of the membership agreement, an Applicant may begin operating subject 
to the terms of such agreement while the review is 
pending.41
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    \41\ The Commission notes that only an Applicant who has been 
approved, but subject to a restriction, may begin operating subject 
to the terms of its membership agreement while its review is 
pending. An Applicant who has not been disapproved may not begin 
operating.
---------------------------------------------------------------------------

    If the Applicant requests a review, the National Business Conduct 
Committee appoints a Subcommittee to participate in the review. The 
Subcommittee is composed of two or more members. At least one member 
must be a current member of the National Business Conduct Committee; 
the remaining member or members may be current or past members of the 
NASD Regulation Board or past members of the NASD Board. The Applicant 
may request a hearing before the Subcommittee, or the Subcommittee may 
direct that a hearing be held. After the Subcommittee completes its 
review, the Subcommittee transmits a recommended decision in writing to 
the National Business Conduct Committee and to the other Directors of 
the NASD Regulation Board not later than 60 days after the date of the 
membership hearing, and not later than seven days before the National 
Business Conduct Committee meeting at which the proceeding will be 
considered.
    After considering all matters presented in the review and the 
Subcommittee's recommended decision, the National Business Conduct 
Committee may affirm, modify, or reverse the Department's decision or 
remand the proceeding with instructions. The National Business

[[Page 25242]]

Conduct Committee prepares a proposed written decision that describes 
the Department's decision and rationale, describes the principal issues 
raised in the review, summarizes the evidence on each issue, and states 
the National Business Conduct Committee's disposition of the proceeding 
and the rationale therefor, referencing the applicable standards in 
proposed Rule 1014. A Director of the NASD Regulation Board or a 
Governor of the NASD Board may call the National Business Conduct 
Committee's proposed written decision for review in the sequence and 
within the time limits set forth in proposed Rule 1016, as described 
below.
    If the National Business Conduct Committee's proposed written 
decision is not called for review by either Board, the National 
Business Conduct Committee's proposed written decision becomes the 
final written decision. The Applicant is notified that the call for 
review period has expired and that the National Business Conduct 
Committee is required to serve its final written decision within 15 
days. If the National Business Conduct Committee does not serve its 
final written decision within 15 days, the Applicant may request that 
the NASD Board direct the National Business Conduct Committee to serve 
its decision immediately or show good cause for an extension of time. 
If the National Business Conduct Committee shows good cause, the NASD 
Board may extend the 15 day limit by an additional 15 days.
    Proposed Rule 1016 sets forth procedures for the NASD Regulation 
Board to call the National Business Conduct Committee's proposed 
written decision for review and for the NASD Board to call a proposed 
written decision of the National Business Conduct Committee or the NASD 
Regulation Board for review. The call for review process begins with 
the mailing of the Subcommittee's recommended decision to the National 
Business Conduct Committee and to the other Directors at least seven 
days in advance of the National Business Conduct Committee meeting at 
which the National Business Conduct Committee will consider and act 
upon the recommended decision. The National Business Conduct Committee 
then holds its meeting and acts on the Subcommittee's recommended 
decision. Under current practices, the NASD Regulation Board meets on 
the day after the National Business Conduct Committee meeting. At this 
Board meeting, each Director receives a summary (not the full written 
text) of the National Business Conduct Committee's proposed decision, 
including any changes the National Business Conduct Committee made to 
the Subcommittee's recommended decision. Based upon the Subcommittee's 
recommended decision (which Directors will have had at least seven days 
to review) and the summary of the National Business Conduct Committee's 
proposed decision, any Director may call the National Business Conduct 
Committee's proposed decision for review.
    After the Board meeting, Directors get a second opportunity to call 
a proposed National Business Conduct Committee decision for review when 
they receive the full written text and the summary of the National 
Business Conduct Committee's proposed decision, which incorporate any 
changes from the Subcommittee's recommended decision. A Director may 
call the National Business Conduct Committee's proposed written 
decision for review by the full Board not later than seven days after 
the date on which the Director receives the decision. Thus, in most 
cases a Director will have at least 14 days to consider whether to call 
a proceeding for review--seven days before the Board meeting and at 
least seven days after the Board meeting. (The Board, by a unanimous 
vote, may shorten the seven-day period following the Board meeting, or 
by majority vote, may lengthen the seven-day period following the Board 
meeting.) If a Director calls the National Business Conduct Committee's 
proposed written decision for review, the review is conducted at the 
next Board meeting. The NASD Regulation Board may affirm, modify, or 
reverse the National Business Conduct Committee's proposed written 
decision or remand the proceeding with instructions. The NASD 
Regulation Board prepares a proposed written decision that describes 
the Department's decision and rationale, describes the principal issues 
raised in the review, summarizes the evidence on each issue, and states 
the NASD Regulation Board's disposition of the proceeding and the 
rationale therefor, referencing the applicable standards in proposed 
Rule 1014. The NASD Regulation Board transmits its proposed written 
decision to the Governors of the NASD Board.
    If a Governor does not call the NASD Regulation Board's proposed 
written decision for review within the time prescribed, the NASD 
Regulation Board's proposed written decision becomes the final written 
decision. The Applicant is notified that the call for review period has 
expired and that the NASD Regulation Board is required to serve its 
final written decision within 15 days. If the decision is not served 
within such time, the Applicant may request that the NASD Board direct 
the NASD Regulation Board to serve its final written decision 
immediately or show good cause for an extension of time. If the NASD 
Regulation Board shows good cause, the NASD Board may extend the 15 day 
limit by an additional 15 days.
    The process for review by the NASD operates similarly to that 
described above. A Governor of the NASD Board may call the NASD 
Regulation Board's proposed written decision for review not later than 
the next NASD Board meeting that is at least seven days after the date 
on which the Governor receives the decision. (The Board, by a unanimous 
vote, may shorten the seven-day period, or by majority vote, may 
lengthen the seven-day period.) If a Governor calls the NASD Regulation 
Board's proposed written decision for review, the review is conducted 
at the following Board meeting. The NASD Board may affirm, modify, or 
reverse the NASD Regulation Board's proposed written decision or remand 
the proceeding with instructions. The NASD Board prepares a final 
written decision that describes the Department's decision and 
rationale, describes the principal issues raised in the review, 
summarizes the evidence on each issue, and states the NASD Board's 
disposition of the proceeding and the rationale therefor, referencing 
the applicable standards in proposed Rule 1014. The NASD Board must 
serve its final written decision within 15 days after the meeting at 
which it conducted its review.
    Alternatively, if a Director of the NASD Regulation Board does not 
call the National Business Conduct Committee's proposed written 
decision for review within the time prescribed, the NASD Board may call 
such decision for review. Upon the expiration of the NASD Regulation 
Board's call for review period, the National Business Conduct 
Committee's proposed written decision is transmitted to the Governors 
of the NASD Board. A Governor may call the National Business Conduct 
Committee's proposed written decision for review not later than the 
next Board meeting that is at least seven days after the Governor 
receives the decision. (The Board, by a unanimous vote, may shorten the 
seven-day period, or by majority vote, may lengthen the seven-day 
period.) If a Governor calls the National Business Conduct Committee's 
proposed written decision for review, the review is conducted at the 
following NASD Board meeting. The NASD Board may affirm, modify, or 
reverse the

[[Page 25243]]

National Business Conduct Committee's proposed written decision or 
remand the proceeding with instructions. The NASD must serve its final 
written decision within 15 days after the meeting at which it conducted 
its review. The final written decision contains the same elements 
described in the preceding paragraph.
    Under proposed Rule 1017, as under current Rule 1012(h), a decision 
by the National Business Conduct Committee, NASD Regulation Board, or 
the NASD Board that constitutes final action of the Association may be 
appealed to the Commission.
    Under proposed Rule 1018, a member may submit an application to 
remove or modify a restriction on its business activities by submitting 
a written application to the Department at the district office in the 
district in which the member's principal place of business is located. 
The application must present facts showing that the circumstances that 
gave rise to the restriction have changed and state with specificity 
why the restriction should be modified or removed in light of the 
membership application standards in proposed Rule 1014 and the 
articulated rationale for the imposition of the restriction. The 
Department has 30 days to determine whether an application is complete 
and, if not, the Department may request that the Applicant submit 
additional information or documents. The Department also may request 
that the Applicant participate in a membership interview. The 
Department issues its written decision after considering whether 
maintenance of the restriction is appropriate in light of the standards 
set forth in proposed Rule 1014, the circumstances that gave rise to 
the imposition of the restrictions, the Applicant's operations since 
the restrictions were imposed, any change in ownership or control or 
supervisors and principals, and any new evidence submitted in 
connection with the application. (Proposed Rule 1018(b)(1).) The 
Applicant may file a written request for review of the Department's 
decision by the National Business Conduct Committee. The procedures set 
forth in proposed Rules 1015 and 1016 apply to such a request. In 
addition, a new provision is added requiring the Department of Member 
Regulation to modify or remove restrictions on its own initiative if 
that Department determines that such action is appropriate in light of 
the circumstances described above.
    Current Rule 1015 requires a member to notify the Association of 
certain changes in ownership and control within 10 days after the 
event. In contrast, proposed Rule 1019 requires members to notify the 
Association at least 30 days prior to the occurrence of certain changes 
in ownership, control, or operations and obtain approval of such 
changes prior to their effectiveness. The changes specified in proposed 
Rule 1019 include a merger with or acquisition of another member, an 
acquisition of substantially all assets of the member, a change in the 
equity ownership or partnership capital of a member that results in one 
person or entity controlling 25 percent or more of the equity or 
partnership capital, and a material change in a member's business 
operations. The Department must review such a change before it takes 
effect and may maintain existing restrictions on the member's business 
activities and place new interim restrictions on the member based on 
the standards in proposed Rule 1014, pending final Department action. 
The Department may condition continued membership on the submission of 
information and the participation in a membership interview pursuant to 
proposed Rule 1013 and on prompt compliance with the standards and 
requirements in proposed Rule 1014, in which case all procedural 
protections under the proposed Rule 1010 Series apply, including the 
time limits imposed on the issuance of a decision.
    As discussed above, the Association proposes that the proposed Rule 
1010 Series become effective 30 days after approval by the Commission.
g. Proposed Changes to the Rule 8000 Series
    The Association proposes to amend the Rule 8000 Series to reflect 
proposed rule changes to the Rule 9000 Series and to clarify and 
reorganize certain provisions in order to make them easier to read and 
understand.
    Rule 8110, which requires members to keep certain NASD corporate 
documents, rules, and interpretations in their branch offices, is 
revised to require members to keep a current copy of the NASD Manual in 
their main and branch offices. The NASD Manual will contain the 
corporate documents for the NASD, NASD Regulation, and Nasdaq as well 
as the Rules of the Association and interpretations.
    Current Rules 8120, 8130, and 8140 concern the initiation of 
disciplinary proceedings. Current Rule 8120 allows any person who 
believes he or she has been aggrieved by any act of any member or 
associated person to institute a formal disciplinary proceeding. In 
view of the enhancements to the disciplinary process being proposed 
(including the change to staff-initiated disciplinary proceedings), 
enhancements to the arbitration process, and the institution of an 
expanded and independent NASD internal review function (including an 
Ombudsman Office), the Association believes it is no longer necessary 
to give ``aggrieved persons'' the right to invoke Association processes 
to institute formal disciplinary actions. The Association also believes 
that the availability of such a procedure to ``aggrieved persons,'' who 
may include members and associated persons seeking to advance 
competitive or pecuniary interests, as well as to members of the 
public, could permit such persons to encumber the Association's 
disciplinary process. This would be inconsistent with the fundamental 
purpose of the Association's disciplinary procedures, which are 
designed to provide a mechanism for the protection of investors 
generally and the promotion of the public interest, rather than a means 
to redress individual private grievances. In this connection, the 
Association notes that no other self-regulatory organization has a 
similar provision in its rules.
    For these reasons, the Association proposes to rescind current Rule 
8120. While the Association believes this Rule is no longer necessary 
or appropriate, the Association also acknowledges its responsibility as 
a self-regulatory organization to give due consideration to complaints 
by members, associated persons, or members of the public who bring 
forth information suggesting wrongdoing. Under these circumstances, the 
Association recognizes its duty to investigate and to determine whether 
its disciplinary process should be invoked. For this reason, the 
Association proposes to add to the Delegation Plan a provision 
requiring NASD Regulation to establish internal procedures for 
considering complaints by members, associated persons, and members of 
the public who request an investigation or disciplinary action by the 
Association. 42 The procedures established would involve 
regular oversight by NASD Internal Review.
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    \42\ NASD Regulation currently logs, tracks, and investigates 
all customer complaints through the Association's long-standing 
customer complaint program.
---------------------------------------------------------------------------

    The Association also proposes to delete current Rule 8130, which 
authorizes District Business Conduct Committees to file complaints, to 
comply with Undertaking 4. The Association proposes to delete current 
Rule 8140, which authorizes the NASD Board to file a complaint, because

[[Page 25244]]

procedures for the NASD Board and the NASD Regulation Board to initiate 
a complaint are included in proposed Rule 9211.
    The Association proposes a new Rule 8120 to clarify that the terms 
used in the proposed Rule 8000 Series have the meaning defined in the 
proposed Rule 0120 Series, except the term ``Adjudicator,'' which has 
the meaning defined in the proposed Rule 9120 Series as described 
below.
    Proposed Rule 8210 combines current Rule 8210, which provides for 
reports and inspections of books, records, and accounts for the purpose 
of investigating or hearing a complaint, and current Rule 9132, which 
requires members to provide reports and permit examinations of books 
and records for the purpose of an investigation or a Rule 9000 Series 
proceeding.43 Proposed Rule 8210 also clarifies that the 
Association may require a member, a person associated with a member, or 
a person still subject to the Association's jurisdiction to testify 
under oath or affirmation if requested. In addition, proposed Rule 8210 
divides the concepts in Rule 8210 into shorter sentences and more 
paragraphs in order to make the Rule easier to read and understand.
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    \43\ Proposed Rule 8210 also reflects a proposed rule change to 
provide for electronic submissions, which was submitted to the 
Commission in rule filing NASD-96-46.
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    The Association proposes significant changes to current Rule 8220, 
which authorizes the suspension of a member for failure to furnish the 
Association with duly requested information or for failure to keep a 
membership application and supporting documents current. The proposed 
changes retain the summary suspension power the Association requires, 
but provide members with enhanced procedural protections in connection 
with the suspension process.
    The proposed Rule 8220 Series applies to members and persons 
associated with members. Under the proposed revisions to Rule 8221, the 
National Business Conduct Committee, rather than the President of the 
Association, must provide written notice of the suspension to the 
member or associated person. The notice specifies the information that 
must be provided or the action that must be taken and states that the 
failure to do so within 20 days after service of the notice constitutes 
grounds for suspension. The National Business Conduct Committee must 
serve notice of the suspension via personal service or commercial 
courier.
    Proposed Rule 8222 makes explicit the right of a member or 
associated person to request a hearing concerning the notice of 
suspension. This change conforms the proposed Rule with the Act and 
proposed Article VII, Section 2 of the NASD By-Laws, which authorize 
such a suspension after notice and opportunity for a hearing is 
provided. If a member or associated person wants a hearing on the 
suspension, the member or associated person must request a hearing 
within five days after service of the notice of suspension under Rule 
8221. Any requested hearing is scheduled on an expedited basis (within 
20 days after service of the Rule 8221 notice) and is held before a 
subcommittee of the National Business Conduct Committee. At least seven 
days before the scheduled hearing, the member or associated person 
receives written notice (via commercial courier or facsimile) of the 
date and time of the hearing and is provided with copies of all 
documents the National Business Conduct Committee considered in 
determining to issue the proposed Rule 8221 notice.
    The appropriate NASD Regulation department or office 44 
and the member or associated person may be represented by counsel at 
the hearing. Copies of proposed hearing exhibits and witness lists must 
be exchanged and provided to the subcommittee at least four days before 
the hearing. Witnesses subject to the jurisdiction of the Association 
must testify under oath or affirmation. The hearing is recorded by a 
court reporter, and a transcript is prepared.
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    \44\ The appropriate department or office of NASD Regulation is 
the department or office that issued the request for information, 
reports, material, data, or testimony that the member or associated 
person failed to provide, or in the case of a member that failed to 
keep its membership application or supporting documents current, the 
Department of Member Regulation.
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    Proposed Rule 8223 requires the subcommittee to prepare a proposed 
written decision. If the subcommittee decides to impose a suspension, 
then the decision must state the grounds for the suspension and the 
conditions for terminating the suspension. The subcommittee's proposed 
written decision must be presented to the NASD Board. A Governor may 
call a suspension proceeding for review within ten days of receipt of 
the subcommittee's proposed written decision, unless the Board votes to 
extend or shorten this call for review period. If no Governor calls the 
proposed decision for review within the prescribed time, the 
subcommittee's decision becomes final and is served on the member or 
associated person. If, however, a Governor calls the suspension 
proceeding for review, the NASD Board must consider the matter not 
later than its next meeting and, within seven days of that meeting, 
serve a final written decision on the member or associated person. Any 
decision to impose a suspension must state the grounds for the 
suspension and the conditions for terminating it. A suspension, if 
imposed, becomes final upon service of the decision.
    Proposed Rule 8224 requires the Association to provide to the NASD 
membership notice of any suspension imposed pursuant to Rule 8223, and 
proposed Rule 8226 requires that the Association also serve a copy of a 
notice or decision served on a person associated with a member on such 
member.
    Proposed Rule 8225 adds a new provision for termination of the 
suspension. Upon request by the suspended member or associated person, 
the head of the appropriate NASD Regulation department or office may 
terminate a suspension if the member or associated person has fully 
complied with a notice or decision issued under the Rule 8220 Series. 
If the head of the appropriate department or office denies the request, 
the proposed Rule provides the member or associated person with the 
right to apply to the National Business Conduct Committee for relief 
from the suspension on the ground of full compliance with the notice 
issued under proposed Rule 8221 or the conditions specified in a 
decision issued under proposed Rule 8223.
    Finally, proposed Rule 8227 clarifies that any action taken under 
the Rule 8220 Series does not foreclose the Association from taking 
action against the member or associated person under any other Rule.
    With respect to the Rule 8300 Series, the NASD proposes to amend 
Rule 8310, which provides for sanctions, to conform with the proposed 
Rule 9000 Series and to make Rule 8310 shorter, clearer, and easier to 
understand. IM-8310-1, which addresses the effect of a suspension, 
revocation, or bar, is amended to add clarity and readability to the 
interpretive material. No change is proposed to IM-8310-2.45 
Rule 8320, which sets forth requirements for the payment of fines, 
other monetary sanctions, or costs, is amended to divide the provisions 
of the Rule into shorter and clearer sentences and more numerous 
paragraphs for clarity. Rule

[[Page 25245]]

8330, which addresses the assessment of costs in Rule 9000 Series 
proceedings, is amended to conform to the proposed Rule 9000 Series.
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    \45\ NASD Regulation has pending at the Commission a rule 
proposal to amend IM-8310-2 that was published for comment by the 
Commission in Securities Exchange Act Rel. No. 38380 (March 10, 
1997), 62 FR 12866 (March 18, 1997). This rule filing does not 
propose further changes to IM-8310-2.
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h. Proposed Changes to Disciplinary Proceedings in the Rule 9000 Series
(i) Summary
    In the current and proposed Rule 9000 Series, the Rule 9100 Series 
sets forth rules of general applicability to disciplinary proceedings 
and other proceedings brought against a member or a person associated 
with a member. The Rule 9200 Series sets forth the specific procedures 
for disciplinary proceedings, including settlements, letters of 
acceptance, waiver, and consent (``AWCs'') and minor rule plan 
violation letters (``MRVs''), and the Rule 9300 Series sets forth the 
appeal or review of a disciplinary proceeding.
    The Rule 9100 Series now contains seven rules, the three most 
important of which set forth a series of defined terms and provide for 
disqualification of an adjudicator in case of conflict of interest, and 
the service of complaints, decisions and notices.46 In 
contrast, the proposed Rule 9100 Series contains 20 proposed Rules, 
setting forth a variety of important procedural improvements, including 
a series of rules regarding service and notice of various papers and 
filing requirements (the proposed Rule 9130 Series), rules relating to 
the appearance of counsel, or other person authorized to act in a 
representative capacity (Proposed Rules 9141, 9142, 9150), a detailed 
rule provision prohibiting ex parte communications generally (Proposed 
Rule 9143) and a related provision regarding separation of functions 
(Proposed Rule 9144), a proposed Rule providing for a motions practice 
(Proposed Rule 9146), a provision for disqualification of an 
Adjudicator (Proposed Rule 9160),47 and a provision 
prohibiting interlocutory review (Proposed Rule 9148).48 The 
more significant proposed Rules in the Rule 9100 Series are discussed 
in greater detail below.
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    \46\ The seven rules are: Rule 9110, entitled ``Application and 
Purpose of Code''; Rule 9111, entitled ``Communications Relating to 
Grievances''; Rule 9120, entitled ``Definitions''; Rule 9131, 
entitled ``Grounds of Disqualification to Participate in 
Proceedings''; Rule 9132, entitled ``Reports and Examination of 
Books and Records''; Rule 9133, entitled ``Rulings on Procedural 
Matters'; and, Rule 9134, entitled ``Service of Complaints, 
Decisions and Other Notices.''
    \47\ The term ``Adjudicator'' means: (1) A body, board, 
committee, other group, or natural person that presides over a 
proceeding and renders a decision; (2) a body, board, committee, 
other group, or natural person that presides over a proceeding and 
renders a recommended or proposed decision which is acted upon by an 
Adjudicator described in (1); or, (3) a natural person who serves on 
a body, board, committee, or other group described in (1) or (2). 
The term includes a Subcommittee as defined in paragraph (z), an 
Extended Proceeding Committee as defined in paragraph (k), and a 
Statutory Disqualification Committee as defined in paragraph (y). 
(Proposed Rule 9120(a).)
    \48\ The proposed Rules of general applicability to all 
proceedings do not include a specific provision regarding the 
attorney-client privilege and the work-product privilege. The 
Association has an important obligation to detect and address 
violations of its rules and the federal securities laws and the 
rules and regulations thereunder, and member firms are obligated to 
cooperate in such efforts. The attorney-client privilege and the 
work-product privilege are recognized. In the context of the 
obligations and statutory responsibilities of a self-regulatory 
organization (``SRO'') and a member's agreement to abide by the 
rules of the SRO, however, the existence of such privileges does not 
limit the obligation of a member to comply with duties imposed by 
the SRO or shield a member from such obligations. (See, e.g., letter 
from Edward Kwalwasser, Executive Vice President, Regulatory Group, 
New York Stock Exchange (``NYSE''), to Robert I. Kleinberg, 
Executive Vice President, Oppenheimer & Co., January 30, 1991, 
appending 11 ``Broad Principles'' discussed by the NYSE and the 
Securities Industry Association.)
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    The Rule 9200 Series now contains 13 rules, the most important of 
which provide for: the issuance of a complaint by a District Committee, 
the Market Regulation Committee, or the NASD Board of Governors or the 
National Business Conduct Committee; the use of AWCs or MRVs to resolve 
certain disciplinary matters prior to issuing a complaint; summary 
complaint procedures; hearings; the consideration of a complaint by a 
Hearing Panel comprised of persons from a District Committee in the 
geographic area where the relevant office of the Respondent is located 
(the venue provision), the composition of Hearing Panels; evidence and 
procedure in a committee hearing; the decision of a committee; and 
settlement procedures.49
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    \49\ The rules of the current Rule 9200 Series are: Rule 9211, 
entitled ``Issuance of Complaints by Committees''; Rule 9212, 
entitled ``Form, Content, Notice and Withdrawal of Complaints''; 
Rule 9213, entitled ``Complaints Directed by the Board or the 
National Business Conduct Committee''; Rule 9214, entitled 
``Complaint Docket''; Rule 9215, entitled ``Consolidation of 
Complaints''; Rule 9216 , entitled ``Answers to Complaints''; Rule 
9217, entitled ``Acceptance, Waiver and Consent, Minor Rule 
Violations, and Summary Complaint Procedures''; Rule 9221, entitled 
``Request for Hearing''; Rule 9222, entitled ``Venue''; Rule 9223, 
entitled ``Hearing Panels''; Rule 9224, entitled ``Evidence and 
Procedure in Committee Hearings''; Rule 9225, entitled ``Decision of 
the Committee''; and Rule 9226, entitled ``Settlement Procedure.''
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    In comparison, the proposed Rule 9200 Series contains 30 proposed 
Rules. The roles of the District Committee and Market Regulation 
Committee are greatly reduced. Neither may initiate a complaint; 
instead, the Department of Enforcement may investigate a case and file 
a complaint to initiate a disciplinary proceeding. (Proposed Rule 
9211(a).) Hearing Panels or, if applicable, Extended Hearing 
Panels,50 are now selected by a Chief Hearing Officer, and 
are composed of a Hearing Officer, a professional NASD Regulation staff 
member, and two Panelists, both selected from the securities industry 
and drawn from a pool of persons including those who currently serve on 
a District Committee or who formerly served on a disciplinary hearing 
panel, and others who have served previously in certain aspects of the 
disciplinary process, including former members of the NASD Regulation 
Board, the NASD Board and the Nasdaq Board of Directors. (Proposed 
Rules 9120(o), 9120(i), 9120(n), 9120(q), 9213, 9231, and 9232.) The 
Hearing Panel, or, if applicable, the Extended Hearing Panel, issues 
the ``trial-level'' decision in a disciplinary proceeding. (Proposed 
Rule 9268.)
    A number of procedural enhancements are proposed. Proposed Rule 
9215(c) provides for the filing of a motion for a more definite 
statement (in addition to proposed Rule 9146, providing for the filing 
of motions generally), proposed Rule 9221 allows a Hearing Officer or a 
Hearing Panel to order a hearing if the Adjudicator determines a 
hearing is necessary, notwithstanding that Respondents have waived 
their rights to a hearing, and proposed Rules 9233 and 9234 set forth 
detailed disqualification provisions.
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    \50\ The Chief Hearing Officer appoints an Extended Hearing 
Panel if upon consideration of the complexity of the issues 
involved, the probable length of the hearing, or other factors, the 
Chief Hearing Officer determines that a matter shall be an Extended 
Hearing. (Proposed Rule 9120(i) and proposed Rule 9120(h).) 
Designation of a matter as an Extended Hearing provides the Chief 
Hearing Officer the ability to select, among other potential 
Panelists, persons who are retired and may have both time and 
relevant experience to bring to an Extended Hearing. (Proposed Rule 
9231(c).)
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    The proposed Rule 9240 Series and proposed Rule 9250 Series set 
forth requirements for Parties to participate in pre-hearing 
conferences, and exchange, before a hearing on the merits, documentary 
evidence, a list of witnesses and expert witnesses, and an outline of 
the case or defense. The same proposed rules also provide that a 
Complainant must provide documents to a Respondent, and set forth 
procedures for doing so. Sanctions for not complying with Rule 
requirements regarding the production of Documents, other provisions of 
the Rule 9200 Series, or an order of an Adjudicator in the Rule 9200 
Series, are set forth in proposed Rule 9280.
    At hearings, under proposed Rule 9262, a witness subject to the 
jurisdiction of the Association is required to testify under oath or

[[Page 25246]]

affirmation. Under proposed Rule 9264, rules are set forth allowing a 
Party to file a motion for summary disposition.
    In the post-hearing time frame, under proposed Rule 9266, a Hearing 
Officer may require a Party to file proposed findings of fact, 
conclusions of law, and post-hearing briefs. A Hearing Officer prepares 
a decision representing the majority of the Hearing Panel or, if 
applicable, the Extended Hearing Panel under proposed Rule 9268. 
Proposed Rule 9268(c) allows a Panelist or a Hearing Officer to write a 
dissenting opinion. Under proposed Rule 9270, the Association proposes 
to modify existing settlement procedures.
    The most important of the changes proposed to the Rule 9200 Series 
are discussed in greater detail below.
    In the current and proposed Rule 9300 Series, procedures are set 
forth for the appeal of a case by a Party or the review of a case by 
the National Business Conduct Committee, and the NASD Regulation Board 
and the NASD Board. Current Rule 9300 Series contains eight rules; 
51 the proposed Rule 9300 Series contains 19 proposed rules.
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    \51\ In the Rule 9300 Series, the eight rules are: Rule 9310, 
entitled ``Review of Disciplinary Actions by the National Business 
Conduct Committee and the Board'; Rule 9311, entitled 
``Proceedings'; Rule 9312, entitled ``Evidence in National Business 
Conduct Committee Proceedings'; Rule 9313, entitled ``Powers of the 
National Business Conduct Committee on Review'; Rule 9314, entitled 
``Decision of the National Business Conduct Committee'; Rule 9315, 
entitled ``Notification of Decision; Final Disciplinary Action'; 
Rule 9316 entitled ``Discretionary Review by the Board'; and Rule 
9317, entitled ``Application to SEC for Review.''
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    In the proposed Rule 9300 Series, important changes include the 
unlimited right of the Department of Enforcement to appeal a 
disciplinary proceeding decision issued by a Hearing Panel or, if 
applicable, an Extended Hearing Panel (Proposed Rule 9311(a)), the 
requirement that persons subject to the jurisdiction of the Association 
testify under oath or affirmation (Proposed Rule 9346(h)); and the 
requirement that members of the NASD Regulation Board or the NASD Board 
shall have at least a specific period of time to review a disciplinary 
proceeding decision in order to determine whether to call a case for 
discretionary review by such board. (Proposed Rules 9351 and 9352.) 
Proposed Rule 9360 provides that a sanction imposed in a final 
disciplinary action of the Association becomes effective not earlier 
than 30 days after the date of service of the decision. In a proposed 
change designed to reflect current practice in most cases, proposed 
Rule 9370 codifies existing practice under which sanctions, other than 
a bar or expulsion, are stayed when a person files a request for review 
of a final disciplinary action of the Association with the Commission.
    Some of the most significant proposed changes requiring greater 
explanation are discussed in detail in the discussion following.
    Currently, the Rule 9400 Series consists of two Rules, Rule 9410, 
Sanctions, and Rule 9420, Costs of Proceedings. The Association 
proposes to delete the current Rule 9400 Series because it duplicates 
provisions in the current and proposed Rule 8000 Series. The Rules 
providing for sanctions and the imposition of costs, now set forth in 
proposed Rules in the Rule 8000 Series, are discussed above in Part g, 
entitled ``Proposed Changes to Rule 8000 Series.''
(ii) The Role of the District Committees
    Under the current Rule 9000 Series, each of the District 
Committees, in addition to authorizing complaints, also (1) serves as a 
pool for the hearing panels that hear disciplinary proceedings and 
recommend decisions to the full District Business Conduct Committee; 
and (2) issues initial decisions in disciplinary proceedings brought 
against NASD members and their associated persons. (Rules 9211 through 
Rule 9216, and Rules 9221 through 9225.) Under the proposed rule 
change, a District Committee's adjudicatory role is to serve as a pool 
of persons from which the Chief Hearing Officer may select Panelists to 
serve on the adjudicatory panels. (Proposed Rules 9231 and 9232.) This 
change is designed to preserve the core of the NASD's disciplinary 
process, ``member participation and peer review,'' while eliminating 
aspects of the disciplinary process pursuant to the Undertakings. 
(Select Committee Report, p. C-16.)
    Specifically, proposed Rule 9231(b) provides, in pertinent part: 
``The Hearing Panel shall be composed of a Hearing Officer and two 
Panelists * * *.'' To serve as a Panelist for a Hearing Panel, each 
Panelist must be associated with a member and be:
    (A) A current member of a District Committee;
    (B) A person who previously served on a disciplinary hearing panel;
    (C) A former member of the National Business Conduct Committee;
    (D) A person who previously served on a disciplinary subcommittee 
of the National Business Conduct Committee, including a Subcommittee, 
an Extended Proceeding Committee, or their predecessor subcommittees; 
or
    (E) A person who previously was a Director, a member of the Nasdaq 
Board of Directors, or a Governor, but does not sit currently on any of 
the boards.(Proposed Rule 9231(b)(1) (A) through (E).) The parallel 
provision in paragraph (c) of proposed Rule 9231 provides, in pertinent 
part, that: ``The Extended Hearing Panel shall be composed of a Hearing 
Officer and two Panelists * * *.'' To serve as a Panelist for an 
Extended Hearing Panel, each Panelist must be associated with a member 
or retired therefrom. In other respects, the pool from which a Panelist 
may be drawn is identical to that described above for a Hearing Panel. 
(Compare proposed Rule 9231(b)(1) (A) through (E) and proposed Rule 
9231(c)(1) (A) through (E).)
    Generally, both Panelists will be selected from the larger pool of 
Panelists based upon whether they reside in the same geographic area in 
which the alleged misconduct occurred. (Proposed Rule 9232(c).) 
Specifically, in proposed Rule 9232(d), the Association proposes that 
the Chief Hearing Officer generally select Panelists in the following 
priority: (1) From the current members of the Primary District 
Committee; (2) from the other categories of persons eligible to serve 
as Panelists as set forth in Rule 9231(b)(1) (A) through (E) or, if 
applicable, in Rule 9231(c)(1) (A) through (E), who are located in the 
same geographic areas as the Primary District Committee; and (3) if 
applicable, and discussed in greater detail below, from current or 
former members of the Market Regulation Committee. However, the Chief 
Hearing Officer has discretion to select one or both Panelists from the 
larger, national pool. (Proposed Rule 9232 (d) and (e).)
    Proposed Rule 9232 provides, in paragraph (a)(1), that the Chief 
Hearing Officer shall determine ``which District Committee will be the 
Primary District Committee from which Panelists may be selected.'' The 
term ``Primary District Committee'' is defined in Rule 
9120(w).52 Paragraph (c) of proposed Rule 9232 sets forth 
the non-exclusive list of factors used by the Chief Hearing Officer to 
designate a Primary District Committee.53
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    \52\ The term ``Primary District Committee'' means, in a 
disciplinary proceedings, the District Committee designated by the 
Chief Hearing Officer pursuant to Rule 9232 to provide one or more 
of the Panelists to a Hearing Panel or, if applicable, to an 
Extended Hearing Panel, for such disciplinary proceedings. (Proposed 
9120(w).)
    \53\ The factors used by the Chief Hearing Officer are as 
follows:
    (1) The location of a Respondent's principal office if the 
Respondent is or was a member firm;
    (2) The location of a Respondent's office at the time of the 
alleged misconduct if the Respondent is or was an associated person;
    (3) The location of the office of a member or an associated 
person, or a former member or associated person, where the alleged 
misconduct occurred;
    (4) The location of witnesses at the time of the filing of the 
complaint, especially the location of witnesses who are or were 
customers of a Respondent;
    (5) The location, at the time of the alleged misconduct, of the 
main, branch, or other office in which supervisory personnel, who 
are or were responsible for the supervision of a Respondent, were 
employed; and
    (6) The location, at the time of the alleged misconduct, of the 
main, branch, or other office in which supervisory personnel, who 
are or were responsible for the supervision of the office, division, 
function, or segment of the member where the alleged misconduct 
occurred, were employed.
    (Proposed Rule 9232(c).)

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[[Page 25247]]

    After designating the Primary District Committee, the Chief Hearing 
Officer selects two Panelists based on expertise, the absence of any 
conflict of interest or bias, and any appearance thereof, availability, 
and the frequency with which a member has served as a Panelist on 
Hearing Panels or Extended Hearing Panels during the past two years. 
(Proposed Rule 9232(d).) However, as noted previously, proposed Rule 
9232 provides the Chief Hearing Officer flexibility to select one or 
both Panelists from the national pool of Panelists. Specifically, 
proposed Rule 9232 provides that the designation of a Primary District 
Committee ``does not preclude the Chief Hearing Officer from selecting 
one or more Panelists from other categories of eligible Panelists if 
the Chief Hearing Officer determines that one or more persons from 
other categories of eligible Panelists more clearly meet the criteria 
of paragraph (d) (1) through (4)'' (Proposed Rule 9232(e) (regarding 
expertise, absence of any conflict of interest or bias, availability, 
and frequency of service)) ``and the public interest or the 
administration of NASD Regulation's regulatory and enforcement program 
would be enhanced'' by such selection (Proposed Rule 9232(e)). 
Moreover, as discussed in greater detail below, proposed Rule 9232 
provides the Chief Hearing Officer flexibility to select one Panelist 
from the pool of Market Regulation Committee members and former 
members, if appropriate. (Proposed Rule 9232 (b) and (d).)
    In summary, the District Committees, in contrast to their current 
authority, are not allowed to initiate a disciplinary proceeding, serve 
as an evidentiary Hearing Panel for a disciplinary proceeding, issue a 
final decision, or review or approve a final decision. These revisions 
are consistent with Undertakings 3 and 4 and incorporate the 
recommendations of the Select Committee.
(iii) The Role of the Market Regulation Committee
    Under the proposed rule change, the only adjudicative role for the 
former Market Surveillance Committee, now the Market Regulation 
Committee, is to serve as a pool of Panelists to serve on a Hearing 
Panel or, if applicable, an Extended Hearing Panel. A current or former 
Market Regulation Committee member who is associated with an NASD 
member may be chosen by the Chief Hearing Officer to serve as a 
Panelist on a Hearing Committee or an Extended Hearing Committee. 
However, a current or former member of the Market Regulation Committee 
may be selected by the Chief Hearing Officer only in limited instances, 
i.e., when the Chief Hearing Officer determines that the complaint 
alleges at least one cause of action involving a violation of a statute 
or a rule within the scope of proposed Rule 9120(q),54 the 
Chief Hearing Officer, in the exercise of his or her discretion, may 
determine to appoint one of the two Panelists from within the Market 
Regulation Committee pool. (See, e.g., Rule 9232(b)(2).)
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    \54\ See supra note 9.
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    Specifically, proposed Rule 9231(b)(2) pertaining to Hearing Panel 
selection provides: ``If the complaint alleges at least one cause of 
action involving a violation of a statute or a rule described in Rule 
9120(q), the Chief Hearing Officer may select as a Panelist a current 
member of the Market Regulation Committee or a former member of the 
Market Regulation Committee who previously served on a disciplinary 
hearing panel.'' In addition, the general criteria in proposed Rule 
9231 that a Panelist be associated with a member applies to any 
Panelist drawn from the Market Regulation Committee pool.''
    The parallel provision in paragraph (c)(2) of proposed Rule 9231 
pertaining to Extended Hearing Panel selection provides: ``If the 
complaint alleges at least one cause of action involving a violation of 
a statute or a rule described in Rule 9120(q), the Chief Hearing 
Officer may select as a Panelist a current member of the Market 
Regulation Committee, or a Panelist drawn from the Market Regulation 
Committee pool.
    The parallel provision in paragraph (c)(2) of proposed Rule 9231 
pertaining to Extended Hearing Panel selection provides: ``If the 
complaint alleges at least one cause of action involving a violation of 
a statute or a rule described in Rule 9120(q), the Chief Hearing 
Officer may select as a Panelist a current member of the Market 
Regulation Committee, or a former member of the Market Regulation 
Committee, who, at the time of his or her membership on the Market 
Regulation Committee, was associated with a member of the Association. 
In order to be eligible to sit as a Panelist on an Extended Hearing 
Panel, a former member of the Market Regulation Committee shall have 
served previously on a disciplinary hearing panel.'' (Proposed Rule 
9231(c)(2).) With respect to an Extended Hearing Panel, a former member 
of the Market Regulation Committee may be chosen, if retired from the 
securities industry, only if such person has retired from such 
employment not earlier than four years before the date the complaint 
was filed. (Proposed Rule 9231(c).)
    The potential impact of Market Regulation Committee members or 
former members on a disciplinary proceeding decision is limited in two 
significant ways. First, a Market Regulation Committee member or former 
member may not be selected to serve as a Panelist unless at least one 
of the causes of action alleges a violation of a federal securities 
statute, or a rule or regulation, a Rule of the Association or a policy 
designated in proposed Rule 9120(q).55 Second, the Chief 
Hearing Officer in each case has discretion whether to select a 
Panelist from the Market Regulation Committee (Proposed Rules 9231 (b) 
and (c), and 9232 (a)(2) and (b)), and may not select more than one 
such Panelist (Proposed Rules 9231 (b)(2) and (c)(2), and 9232(a)(2) 
and (b)).
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    \55\ See supra note 9.
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    In summary, the limitations on the Market Regulation Committee 
imposed in the proposed Rule 9200 Series, in contrast to its current 
authority in disciplinary proceedings, are parallel to those 
limitations imposed on the District Committees. Thus, under the 
proposed Rule 9200 Series, the Market Regulation Committee is not 
allowed to initiate a disciplinary proceeding, serve as an evidentiary 
Hearing Panel for a disciplinary proceeding, issue a final decision, or 
review or approve a final decision. These revisions are consistent with 
Undertakings 3 and 4 and incorporate the recommendations of the Select 
Committee. In contrast to the District Committee provisions relating to 
Panelists, Market Regulation Committee Panelists will participate in 
fewer disciplinary proceedings than the Panelists drawn from the 
District Committee portion of the pool.

[[Page 25248]]

(iv) How Disciplinary Proceedings Are Initiated
    As noted above, currently, the Rule 9200 Series provides that a 
complaint to initiate a disciplinary proceeding may be initiated by a 
District Committee, the Market Regulation Committee, the National 
Business Conduct Committee, or the NASD Board. (Rule 9211 and Rule 
9213.) In contrast, proposed Rules 9211 authorizes the Department of 
Enforcement of NASD Regulation to authorize and issue complaints. 
(Proposed Rule 9211 (a) and (b).) In addition, as also provided in 
Undertaking 3 of the SEC Settlement, the Department of Enforcement may 
be directed to authorize and issue a complaint by the NASD Regulation 
Board or the NASD Board. (Proposed Rule 9211(b).) The shift in the 
allocation of the ``grand jury'' function from the District Committees 
and the Market Regulation Committee to the Department of Enforcement is 
a key element in providing the professional staff of NASD Regulation 
with the autonomy and independence required to implement a vigorous and 
evenhanded enforcement program. The Association believes proposed Rules 
9211 (a) and (b) comply fully with Undertaking 3 of the SEC Settlement 
and avoid conflicts of interest or inconsistencies in application that 
may result from the division of the ``grand jury'' function among the 
District Committees.
(v) Ex Parte Communications Prohibited
    As recommended by the Select Committee, ex parte contacts between 
the disciplinary panels and the Parties or their representatives 
(counsel and other representatives) are prohibited in the new Rule 9000 
Series disciplinary proceedings. Proposed Rule 9143 defines and 
prohibits ex parte communications. Proposed Rule 9143 is derived from 
Section 554(d) 56 and Section 557(d)(1) of the 
APA,57 SEC Rules of Practice 120,58 and ACUS 
Model Adjudication Rule 120.59 Where appropriate, the 
prohibition also applies to the other proceedings governed by the Rule 
9000 Series.
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    \56\ 5 U.S.C. 554(d).
    \57\ 5 U.S.C. 557(d)(7).
    \58\ 17 CFR 201.120.
    \59\ MAR 120.
---------------------------------------------------------------------------

    1. Persons Subject to Rule. In order to understand the scope of 
proposed Rule 9143, the four basic parts of the Rule and proposed Rule 
9120(p), the definition of ``Interested Association Staff,'' must be 
considered together. First, in paragraphs (a) (1) and (2) of proposed 
Rule 9143, three groups of people are identified (two Parties and 
persons identified with such Parties and one Adjudicator and persons 
identified with such Adjudicator). Each group is subject to the 
prohibition against making or receiving communications in a proceeding 
for the benefit of only one side or one Party. Second, in paragraphs 
(a) (1) and (2) of proposed Rule 9143 and the introductory clause of 
paragraph (a) providing ``or to the extent required for the disposition 
of ex parte matters as authorized by this Rule 9000 Series,'' the broad 
classes of communications that are subject to this prohibition are 
described and narrow exceptions are set forth. Third, in proposed Rule 
9143 (b) and (c), the remedy for an aggrieved Party and any remedial 
action to be taken by an Adjudicator when an opposing Party (or a 
person identified with such Party) has made a prohibited communication 
is set forth. Fourth, in proposed Rule 9143(d), the point in time after 
which communications in violation of the Rule could occur is 
established for disciplinary proceedings. (In various provisions in the 
proposed Rule 9400 Series and the proposed Rule 9500 Series, proposed 
Rule 9143 applies, but the point in time after which violative 
communications could occur is modified to reflect the particular 
aspects of the proceeding.)
    First, the adjudicatory group that is prohibited from making or 
receiving prohibited communications includes the Adjudicator and any 
person, such as a law clerk or other person, who is engaged in advising 
the Adjudicator. In proposed Rule 9143, these persons are:

    A Governor,60 a Director 61 or an 
Adjudicator who is participating in a decision with respect to that 
proceeding, or [to] an Association employee who is participating or 
advising in the decision of a Governor, a Director, or an 
Adjudicator with respect to that proceeding * * *.62
---------------------------------------------------------------------------

    \60\ The term ``Governor'' means a member of the NASD Board. 
(Proposed Rule 9120(l).)
    \61\ The term ``Director'' means a member of the NASD Regulation 
Board only. Nasdaq directors are excluded intentionally because they 
do not participate in disciplinary proceedings. (Proposed Rule 
9120(e).)
    \62\ Routinely, there are a number of people in addition to the 
staff of the Department of Enforcement who participate in the 
factual inquiry forming the basis for the determination that a 
complaint should be issued. For example, district offices are 
responsible for the examination of certain members. If, for example, 
the Department of Enforcement authorizes the issuance of a complaint 
against a member located in a particular district, in most cases, at 
least the following staff would be involved in the disciplinary 
process and would be considered ``Interested Association Staff': the 
examiners employed in the district office who are responsible for 
the examination of the member, the regional attorney in the 
district, and the director of the district.

(Proposed Rule 9143(a)(1).) Like ACUS Model Rule 120,63 the 
proposed rule is not intended to preclude persons acting in an 
adjudicatory role, either singly or on a committee or panel, from 
consulting with adjudicatory employees, such as attorney advisers or 
law clerks, because they are viewed as within the Adjudicator's 
group.64
---------------------------------------------------------------------------

    \63\ MAR 120.
    \64\ MAR 120, comment 1.

    The two other groups are identifiable based on their affiliation 
with either the Complainant or Respondent. Each group consists of at 
least a Party, and his or her counsel or representative. In 
disciplinary proceedings, the relevant group includes the Respondent or 
the several Respondents (each a member firm or an associated person), 
and counsel or representatives.
    The third group is the Complainant's group. The Complainant is the 
Department of Enforcement, and because of its institutional nature, 
this group is more difficult to identify. In addition to counsel or a 
representative identified with such Party, an additional group of 
persons is identified with the Complainant and also is subject to the 
ex parte prohibition. This additional group of persons, ``Interested 
Association Staff,'' is defined in proposed Rule 9120(p). ``Interested 
Association Staff'' represents other parts of the Association that have 
been involved with the Department of Enforcement in certain stages 
prior to or during the actual prosecution of the disciplinary 
proceeding (e.g., referring the case to the Department of Enforcement 
or forwarding examination reports or other relevant information or 
documents to the Department of Enforcement for use as evidence). For a 
proposed Rule 9200 Series disciplinary proceeding, for example, 
``Interested Association Staff'' means:

    (a) The Head of Enforcement;
    (b) A Department of Enforcement employee who reports to the Head 
of Enforcement;
    (c) An Association employee who directly participated in the 
authorization of the complaint; or
    (d) An Association employee who directly participated in an 
examination, investigation, prosecution, or litigation related to a 
specific disciplinary proceeding, and a district director or 
department head to whom such employee reports * * *.''

(Proposed Rule 9120(p)(1)(D).) The definition encompasses persons who 
are engaged ``in the investigative or prosecuting functions'' referred 
to in SEC Rules of Practice 120(a)(2).65 For example, 
certain Association personnel involved in examining a member may

[[Page 25249]]

be included in ``Interested Association Staff.''
---------------------------------------------------------------------------

    \65\ 17 CFR 201.120(a)(2).
---------------------------------------------------------------------------

    2. Scope. To ensure that Respondents in an Association disciplinary 
proceeding are protected from unfair ex parte communication, the 
proposed ex parte Rule prohibits the initiating Party, the Department 
of Enforcement, such Party's counsel, and all other persons within the 
Association who have had sufficient contact with the case, i.e., the 
``Interested Association Staff,'' from engaging in any prohibited 
communication with the Adjudicator (or a person identified with such 
Adjudicator).66 Proposed Rule 9143 is broader in that the 
scope of persons who are subject to the prohibition against ex parte 
communications is greater than under both Section 557 of the APA 
67 and ACUS Model Rule 120 68 because 
``Interested Association Staff,'' is broader than the term ``no 
interested person outside the agency'' used in Section 557(d)(1) (A) 
and(B) of the APA 69 and ACUS Model Rule 120.70
---------------------------------------------------------------------------

    \66\ In proceedings subject to the Rule 9000 Series other than 
disciplinary proceedings, the Department of Member Regulation 
generally initiates the specified proceeding.
    \67\ 5 U.S.C. 557.
    \68\ MAR 120.
    \69\ 5 U.S.C. 557(d)(1) (A) and (B).
    \70\ MAR 120.
---------------------------------------------------------------------------

    3. Narrow Exceptions. In Rule 9143(a) (1) and (2), all 
communications ``relative to the merits'' of a proceeding are 
prohibited between one Party (or persons identified with such Party) 
and the Adjudicator (or persons identified with the Adjudicator). 
Paragraph (a), which prohibits communication except ``to the extent 
required for the disposition of ex parte matters as authorized by the 
Rule 9000 Series,'' is intended to clarify that a communication that 
ultimately is not related to the merits of the proceeding is not 
intended to be prohibited. For example, the proposed Rule is not 
intended to prohibit communications such as inquiries about such 
matters as the status of the case, when it will be heard, and similar 
inquiries. Similar language is found in Section 554 71 and 
Section 557 of the APA 72 and ACUS Model Adjudication Rule 
120.73
---------------------------------------------------------------------------

    \71\ 5 U.S.C. 554.
    \72\ 5 U.S.C. 557.
    \73\ MAR 120, comment 2.
---------------------------------------------------------------------------

    4. Remedy. In paragraphs (b) and (c), proposed Rule 9143 provides a 
remedy for an aggrieved Party and remedial action to be taken by an 
Adjudicator when an opposing Party (or a person identified with such 
Party) has made a communication in violation of the Rule. Paragraph (b) 
of proposed Rule 9143 is parallel to the language in Section 
557(d)(1)(C) 74 of the APA and paragraph (C) of ACUS Model 
Adjudication Rule 120.75 Paragraph (c) of proposed Rule 9143 
is substantially drawn from Section 557(d)(1)(D) of the 
APA.76 Paragraph (c) of proposed Rule 9143, although 
somewhat parallel to paragraph (D) of ACUS Model Adjudication Rule 
120,77 allows an Adjudicator to apply a sanction with more 
frequency than the corresponding provision of ACUS Model Adjudication 
Rule 120.78
---------------------------------------------------------------------------

    \74\ 5 U.S.C. 557(d)(1)(C).
    \75\ MAR 120.
    \76\ 5 U.S.C. 557(d)(1)(D).
    \77\ MAR 120.
    \78\ Id.
---------------------------------------------------------------------------

    5. When Prohibition Begins. Proposed Rule 9143(d) establishes, for 
a disciplinary proceeding brought under the proposed Rule 9200 Series, 
the point in time beginning with which the prohibition applies. 
Specifically, the prohibition applies upon ``the authorization of a 
complaint * * * unless the person responsible for the communication has 
knowledge that the complaint will be authorized, in which case the 
prohibitions shall apply beginning at the time of his or her 
acquisition of such knowledge.'' 79 Section 557(d)(1)(E) of 
the APA 80 is more flexible in its application than Rule 
9143(d). Section 557(d)(1)(E) of the APA 81 provides that 
the prohibitions apply no ``later than the time at which a proceeding 
is noticed for hearing unless the person responsible for the 
communication has knowledge that it will be noticed, in which case the 
prohibitions shall apply beginning at the time of his acquisition of 
such knowledge.'' Model Adjudication Rule 120, paragraph (E), adopts a 
similar standard, providing that: ``The prohibitions of this rule shall 
apply beginning (time designated by (the AA)), but in no case shall 
they begin to apply later than the time at which a proceeding is 
noticed for hearing unless the person responsible for the communication 
has knowledge that it will be noticed, in which case the prohibitions 
shall apply beginning at the time of her/his acquisition of such 
knowledge.'' 82
---------------------------------------------------------------------------

    \79\ For example, if after a meeting among various staff members 
of NASD Regulation, a staff member who attended the meeting knew 
that a complaint would be issued and then spoke to an Adjudicator 
concerning the case, the staff member would violate the Rule 9143 
prohibition against ex parte communication.
    \80\ 5 U.S.C. 557(d)(1)(E).
    \81\ Id.
    \82\ MAR 120. In MAR 120, the term ``AA'' means ``adopting 
agency.'' The phrase ``(time designated by (the AA))'' means the 
time designated by the agency adopting the model rule.
---------------------------------------------------------------------------

    6. Waiver. Paragraph (e) of proposed Rule 9143 provides that the 
protections under the proposed rule for a Respondent, or a person 
anticipating that he or she will be named as a Respondent if potential 
charges are not resolved using alternative procedures (e.g., an AWC or 
a MRV), are waived if: (1) A Respondent submits an offer of settlement 
under Rule 9270, or (2) a member or a person associated with a member 
executes an AWC under proposed Rule 9216(a) or a MRV under proposed 
Rule 9216(b). This provision provides all persons involved in the 
settlement process or the pre-complaint resolution process with the 
flexibility to attempt to dispose of a disciplinary matter, and is 
consistent with the ex parte concepts applied in civil litigation.
    In summary, the Association believes that proposed Rule 9143 either 
parallels or provides for slightly more stringent protections against 
ex parte communications than do other standard procedural rules 
referred to above. Based on the breadth of the term ``Interested 
Association Staff'' and the other parts of proposed Rule 9143, the ex 
parte protections in the proposed Rule provide assurance that no Party 
will be able to obtain an unfair advantage by discussions with a person 
involved in adjudicating a proceeding. Finally, proposed Rule 9143 
incorporates a change specifically recommended by the Select Committee.
(vi) The Role of The Hearing Officer and Hearing Panel
    1. Establishment of Office of Hearing Officers. As recommended by 
the Select Committee and pursuant to Undertaking 3, NASD Regulation has 
established an Office of Hearing Officers (``OHO'') as an independent 
office within NASD Regulation. The OHO is headed by the Chief Hearing 
Officer, who is an Executive Vice President and reports directly to the 
President of NASD Regulation. The purpose of the OHO is to provide a 
corps of independent and professional Hearing Officers (attorneys with 
appropriate experience and training) to preside over all formal NASD 
disciplinary proceedings. The Association believes the appointment of 
such Hearing Officers is consistent with the recommendations of the 
Select Committee and complies with Undertaking 3.
    The participation of Hearing Officers will enhance dispassionate 
application of the rules and promote fairness in the disciplinary 
process. In addition, as recognized by the Select Committee, the 
participation of Hearing Officers will help ensure that complex or 
contentious

[[Page 25250]]

cases are managed effectively. All litigated disciplinary proceedings 
will be decided by a panel comprised of one Hearing Officer and two 
Panelists, i.e., the two securities industry representatives. The use 
of industry Panelists is intended to ensure that market expertise and 
judgment will continue to be brought to bear on the disciplinary 
process. Participation of a professional Hearing Officer in a 
securities industry disciplinary proceeding is not new; for example, 
the New York Stock Exchange maintains a similar procedure.83
---------------------------------------------------------------------------

    \83\ See, e.g., NYSE Rule 476.
---------------------------------------------------------------------------

    2. Assignment of Hearing Officer. Proposed Rule 9213(a) requires 
the Chief Hearing Officer to assign a Hearing Officer to preside over a 
disciplinary proceeding ``as soon as practicable after a Complainant 
has filed his or her complaint with the Office of Hearing Officers.'' 
Thus, once a complaint is filed, a Hearing Officer is appointed and 
presides over all matters relating to the proceeding. This helps ensure 
effective case management from the outset of the proceeding. For 
example, a Hearing Officer considers motions to amend a complaint 
(Proposed Rule 9212(b)) and motions by Respondents for a more definite 
statement (Proposed Rule 9215(c)).
    3. Appointment of Hearing Panel or Extended Hearing Panel, Timing, 
and Hearing Panel Composition. Proposed Rule 9213(b) requires that the 
Chief Hearing Officer appoint persons to serve as Panelists in the 
disciplinary proceeding ``[a]s soon as practicable after assigning a 
Hearing Officer'' to such proceeding. In doing so, the Chief Hearing 
Officer must determine if the case will require the appointment of a 
Hearing Panel or an Extended Hearing Panel. (Proposed Rule 9213(b).)
    Proposed Rules 9231(a) and 9231(b) set forth the composition of a 
Hearing Panel and an Extended Hearing Panel and provide that both types 
of panels are composed of two Panelists and a Hearing Officer. A 
Hearing Panel is appointed for and decides most disciplinary 
proceedings. (Proposed Rule 9231(a).) As referenced above, an Extended 
Hearing Panel is appointed if the Chief Hearing Officer determines that 
the matter should be designated an Extended Hearing because the issues 
are complex, or it is anticipated that the hearing will be lengthy, or 
based upon other material factors. (Proposed Rules 9231(b) and 
9120(h).) By designating a proceeding as an Extended Hearing, the Chief 
Hearing Officer has a larger pool of persons from which to appoint 
Panelists and may consider appointing persons who have greater time to 
donate to the disciplinary process, i.e., persons who have retired 
recently from employment in the securities industry.
    4. Hearing Officer Responsibility for Case Management. Consistent 
with the recommendations of the Select Committee, the Hearing Officer 
has the authority to and will be responsible for determining 
procedural, evidentiary, scheduling, and other matters pertaining to 
case management during the pre-hearing and hearing phase of the 
disciplinary process. In this regard, various rules setting forth the 
authority of the Hearing Officer have been incorporated in the proposed 
Rule 9000 Series. Also consistent with the recommendations of the 
Select Committee, the Hearing Officer's authority is limited to 
determining non-dispositive matters; determinations of motions for 
summary disposition require action by the Hearing Panel, or, if 
applicable, the Extended Hearing Panel. (Proposed Rule 9146(j).) 
Effective case management by the Hearing Officer will enhance the 
disciplinary process. Early, pre-hearing resolution of various 
procedural and evidentiary matters will save time and assist in 
streamlining the presentation of evidence at the hearing. Effective 
case management also will help ensure that the Parties appropriately 
satisfy their discovery and other obligations in a timely fashion, and 
will thus enhance fairness in the disciplinary process.
    Broad statements of a Hearing Officer's authority are set forth in 
proposed Rule 9235, ``Hearing Officer Authority,'' proposed Rule 9241, 
``Pre-hearing Conferences,'' proposed Rule 9242, ``Pre-hearing 
Submissions,'' and proposed Rule 9266, ``Proposed Findings of Fact, 
Conclusions of Law, and Post-Hearing Briefs.'' These proposed rules, 
along with various other proposed rules addressing specific duties of a 
Hearing Officer, delegate to a Hearing Officer responsibility for case 
management, from the institution of a proceeding to its conclusion.
    Specifically, proposed Rule 9235 provides that a Hearing Officer 
shall have authority to: hold pre-hearing and other conferences and 
require the attendance at such conferences of persons who have 
authority to negotiate on behalf of the Parties (Proposed Rule 
9235(a)(1)); regulate the course of the hearing (Proposed Rule 
9235(a)(2)); order the Parties to present oral argument at any stage of 
the disciplinary hearing (Proposed Rule 9235(a)(3)); resolve 
procedural, evidentiary, discovery, and other non-dispositive matters 
(Proposed Rule 9235(a)(4)); reopen any hearing, if necessary (Proposed 
Rule 9235(a)(5)); create and maintain the official record of the 
disciplinary proceeding (Proposed Rule 9235(a)(6)); and draft a 
decision that represents the views of the majority of the Hearing Panel 
or, if applicable, the Extended Hearing Panel assigned to the 
proceeding (Proposed Rule 9235(a)(7)).
    Proposed Rule 9235 expressly indicates that the list of powers is 
illustrative, not exhaustive; the Hearing Officer is permitted to take 
any action ``necessary and appropriate to discharge his or her 
duties.'' The proposed rule is patterned on SEC Rules of Practice 111, 
84 entitled ``Hearing Officer Authority,'' and the powers 
enumerated in proposed Rule 9235 are consistent with many of the powers 
enumerated in that rule. The powers set forth in proposed Rule 9235 are 
also consistent with certain of the powers enumerated in ACUS Model 
Adjudication Rule 111, 85 ``Adjudicator: Powers.''
---------------------------------------------------------------------------

    \84\ 17 CFR 201.111.
    \85\ MAR 111.
---------------------------------------------------------------------------

    In connection with a Hearing Officer's responsibility for case 
management, it is anticipated that through the use of pre-hearing 
conferences (Proposed Rule 9241), a Hearing Officer will assist in 
eliminating unnecessary delay and improving the quality of the hearing. 
For example, these conferences may be used to clarify and simplify the 
issues, sharpen the preparation of the case, and facilitate the pre-
hearing exchange of documents and witness lists. A Hearing Officer also 
has the authority to require the submission of a variety of pre-hearing 
materials (Proposed Rule 9242) and post-hearing findings of fact, 
conclusions of law, and post-hearing briefs (Proposed Rule 9266). These 
materials likely will be of particular assistance to the Hearing Panel, 
or, if applicable, the Extended Hearing Panel in complex or lengthy 
proceedings.
    In addition to the broad delegations of discretionary authority 
discussed above, the proposed rules specifically authorize a Hearing 
Officer to perform various functions in the pre-hearing stage and 
during the hearing. With respect to pre-hearing matters, a Hearing 
Officer is authorized to: rule on motions to amend a complaint 
(Proposed Rule 9212(b)); rule on motions for a more definite statement 
and to amend an answer (Proposed Rule 9215 (c) and (d)); issue a notice 
of hearing (Proposed Rule 9221(d)); grant the Parties' extensions of 
time for the completion of tasks and grant adjournments of a hearing 
(e.g., proposed Rule 9222); rule on motions to disqualify one or both 
of the Panelists (Proposed Rule 9234(d)); and rule on discovery issues 
(Proposed Rules 9251,

[[Page 25251]]

9252 and 9253). With respect to a hearing, a Hearing Officer is 
authorized to rule on the admission of evidence during the hearing. 
(Proposed Rule 9263.) These powers are comparable to the powers 
delegated to a hearing officer in an SEC administrative proceeding.
    Consistent with a Hearing Officer's case management 
responsibilities, a Hearing Officer is authorized to enter a default 
judgment when a Respondent fails to file an answer to the complaint 
within the prescribed time (Proposed Rule 9215(f)); or when, after 
receiving proper notice, a Respondent fails to appear at a pre-hearing 
conference (Proposed Rule 9241(f)) or at the hearing (Proposed Rule 
9269(a)). Finally, to help ensure that a Hearing Officer's efforts to 
enhance the fairness of and promote order in the disciplinary process 
are not thwarted by recalcitrant Parties, their representatives, or 
their counsel, the proposed rules empower a Hearing Officer to fashion 
discretionary sanctions for violations of an order issued by the 
Hearing Officer, Hearing Panel or, if applicable, Extended Hearing 
Panel, or for other contemptuous conduct during any stage of the 
disciplinary proceeding. (Proposed Rule 9280.)
(vii) The Role of Motions
    1. Establishment of Motions Practice. There is no rule in the 
current Rule 9000 Series explicitly governing a motions practice. As 
recommended by the Select Committee, the proposed Rule 9000 Series 
provides for a formal motions practice in NASD disciplinary 
proceedings. The purpose of the proposed change is to enhance the fair 
and efficient preparation and conduct of the hearings.
    The general provisions for and structure governing motions practice 
set forth in proposed Rule 9146 are modeled upon ACUS Model 
Adjudication Rule 170.86 Except for the treatment of motions 
for summary disposition, proposed Rule 9146 incorporates all of the 
provisions of ACUS Model Adjudication Rule 170 87 with only 
minor variations. In addition, reference was made to Rule 154 of the 
SEC Rules of Practice 88 and F.R.C.P. Rule 7(b).
---------------------------------------------------------------------------

    \86\ MAR 170.
    \87\ Id.
    \88\ 17 CFR 201.154.
---------------------------------------------------------------------------

    Consistent with ACUS Model Adjudication Rule 170,89 
proposed Rule 9146 expressly permits written and oral motions, but the 
Adjudicator may order that an oral motion be set forth in writing if 
the Adjudicator finds that a written motion is warranted by the facts 
and circumstances. Under both the ACUS Model Adjudication Rule 170 
90 and the proposed Rule 9146, a motion must state the 
specific relief requested, the basis for the motion, and it may be 
denied without awaiting a response if it is dilatory, repetitive or 
frivolous. Likewise, unless otherwise ordered, the filing of a motion 
does not stay a proceeding.
---------------------------------------------------------------------------

    \89\ MAR 170.
    \90\ Id.
---------------------------------------------------------------------------

    There are two minor dissimilarities between the proposed Rule 9146 
and ACUS Model Adjudication Rule 170.91 First, the time 
limit to respond to a written motion is longer under proposed Rule 
9146(d) than it is under ACUS Model Adjudication Rule 170: 
92 14 versus 10 days. In neither case, however, is the 
moving party granted the right to file a reply to an opposition without 
the Adjudicator's permission. Second, proposed Rule 9146(i) includes 
page limits and format requirements for written motions. Similar format 
requirements but not page limits are found in ACUS Model Adjudication 
Rule 152.93 The Association believes that the page limit is 
appropriate because in the disciplinary proceeding forum generally 
there should be a narrower range of issues and fewer contested legal 
issues than in civil litigation.
---------------------------------------------------------------------------

    \91\ Id.
    \92\ Id.
    \93\ MAR 152.
---------------------------------------------------------------------------

    2. Motion for Summary Disposition. Paragraph (a) of proposed Rule 
9264 provides that, after a Respondent's answer has been filed and 
Documents have been made available to that Respondent, the Respondent 
or Complainant may file a motion for summary disposition of some or all 
of the causes of action in the complaint without leave of the Hearing 
Officer. Such motions must be filed at least 21 days before the time 
set for the hearing on the merits. Paragraph (b) of proposed Rule 9264 
provides that, after a Complainant has completed presentation of its 
case in chief as to a Respondent, the Respondent or the Complainant, 
without leave of the Hearing Officer, may file a motion for summary 
disposition with respect to that Respondent. If a Complainant has not 
completed its case in chief, a Complainant or Respondent may move for 
summary disposition only with leave of the Hearing Officer. As noted 
previously, the current Rule 9000 Series does not provide for the 
filing of a motion for summary disposition.
    The standards for motions for summary disposition under proposed 
Rule 9264 deviate from the standards in the ACUS Model Adjudication 
Rules 94 and the SEC Rules of Practice 95 in two 
respects. First, proposed Rule 9146(j) explicitly states that a motion 
for summary disposition may only be decided by a majority vote of a 
Hearing Panel or Extended Hearing Panel'not by a Hearing Officer. This 
provision should be read in conjunction with proposed Rules 9147 and 
9235, which set out the power of a Hearing Officer to rule on 
procedural and other administrative matters arising during the course 
of a disciplinary proceeding. Proposed Rule 9235(a)(4) restricts a 
Hearing Officer's decisional authority to resolving all procedural and 
evidentiary matters, discovery requests, and other non-dispositive 
motions. Second, proposed Rule 9264 limits when a motion for summary 
disposition may be made without leave of a Hearing Officer. In this 
aspect, proposed Rule 9264 closely mirrors SEC Rules of Practice 
250,96 by restricting the filing of pre-hearing motions for 
summary disposition until after a Respondent has answered and Documents 
have been made available to the Respondent for inspection and copying 
pursuant to proposed Rule 9251. After a hearing on the merits has 
started, a motion for summary disposition may be made without leave of 
the Hearing Officer only after the Complainant in the proceeding has 
completed presentation of its case in chief.
---------------------------------------------------------------------------

    \94\ Id.
    \95\ 17 CFR 201.111.
    \96\ 17 CFR 201.250.
---------------------------------------------------------------------------

(viii) Expanded Discovery
    1. Basis for Expanded Discovery Provisions. The Select Committee 
recommended that:

    The documentary discovery rights of respondents in NASD 
disciplinary proceedings should be expanded to furnish respondents, 
at a reasonable time in advance of the initial hearing, with all 
non-privileged materials in the NASD's possession (including 
exculpatory evidence) directly relevant to the dispute.

(Select Committee Report, p. C-25.) In response to and consistent with 
the Select Committee's recommendation, proposed Rules 9251 through 9253 
provide for the discovery of non-privileged Documents 97 by 
Respondents in a disciplinary proceeding. Special attention was devoted 
to the Rule 9250 Series to assure that Documents received by the 
Department of

[[Page 25252]]

Enforcement after a Respondent had inspected and copied Documents would 
be made available expeditiously to Respondents (Proposed Rule 
9251(a)(2)) and that evidence that becomes available shortly before or 
during a hearing on the merits would be produced expeditiously to 
Respondents 98 (Proposed Rule 9252(c)). Under the proposed 
Rules, a Respondent has a right to obtain certain Documents, and the 
right to insist upon their production based upon a schedule set forth 
in the rules.
---------------------------------------------------------------------------

    \97\ ``Document'' means a writing, drawing, graph, chart, 
photograph, recording, or any other data compilation, including data 
stored by computer, from which information can be obtained. 
(Proposed Rule 9120(g).)
    \98\ Currently, the disciplinary hearing panel before whom the 
Respondent shall appear determines the extent of discovery, the 
scope and the timing of the production of documents, and other 
issues.
---------------------------------------------------------------------------

    2. Mandatory Document Disclosure Obligations of the Department of 
Enforcement. Proposed Rule 9251(a)(1) requires the Department of 
Enforcement to make available for inspection and copying to any 
Respondent Documents prepared or obtained by Interested Association 
Staff in connection with the investigation that led to the institution 
of the disciplinary proceeding. This includes, but is not limited to: 
Requests for information pursuant to Rule 8210; written requests for 
information to persons not employed by the Association and all 
Documents provided in response to such requests; all transcripts and 
transcript exhibits; and all other Documents obtained from persons not 
employed by the Association.
    Under proposed Rule 9251(d), unless otherwise ordered by a Hearing 
Officer, the Department of Enforcement must begin making these 
Documents available for inspection and copying not later than 21 days 
after the last timely answer has been filed. These Documents will be 
made available for inspection in the Association office where they are 
ordinarily maintained, unless agreed to or ordered otherwise.
    With respect to Documents obtained by the staff pursuant to Rule 
8210 after the issuance of a complaint, but under the same 
investigative file number, proposed Rule 9251(a)(2) specifies that the 
Department of Enforcement also must make those documents available to 
the Respondents for inspection and copying.
    Proposed Rule 9251(b) identifies those Documents that may be 
withheld by the Department of Enforcement. A Document need not be 
produced if it is privileged, constitutes attorney work product, is an 
examination or inspection report, or is an internal memorandum or 
writing prepared by Association staff that will not be offered in 
evidence. Documents that would disclose an examination or investigatory 
technique or the identity of a confidential source likewise, need not 
be disclosed. The proposed rule also allows the Hearing Officer to 
grant leave to withhold Documents that are not relevant or for good 
cause shown. The Hearing Officer may require the Department of 
Enforcement to submit a list of the Documents withheld, and may conduct 
an in camera inspection of any such Documents to determine whether they 
should be produced.
    Although Rule 9251(b)(1) allows the Department of Enforcement to 
withhold certain Documents from discovery, proposed Rule 9251(b)(2) 
requires the Department of Enforcement to provide a Document or a part 
of a Document that contains material exculpatory evidence.99 
For example, if a portion of an examination report includes statements 
or documentary evidence that is exculpatory, the Department of 
Enforcement is required to provide that portion of the Document. This 
is a significant enhancement over the existing rules, which contain no 
such obligation.
---------------------------------------------------------------------------

    \99\ This provision is intended to be consistent with the 
doctrine enunciated in Brady v. Maryland, 373 U.S. 83 (1963).
---------------------------------------------------------------------------

    Proposed Rule 9251 is modeled on and is substantially the same as 
SEC Rules of Practice 230 100 in that, among other things, 
the proposed Rule: Affords Respondents an automatic right to Document 
discovery from the Department of Enforcement; allows the Department of 
Enforcement to withhold privileged and certain other categories of 
Documents from discovery; requires the disclosure of material 
exculpatory evidence; and requires that the Respondents bear the cost 
of photocopying the Documents.
---------------------------------------------------------------------------

    \100\ 17 CFR 201.230.
---------------------------------------------------------------------------

    3. Respondents' Requests for Documents and Production of Witness 
Statements. Proposed Rule 9252 formally recognizes a current practice 
in disciplinary proceedings that allows Respondents to request the 
Association to compel the production of Documents or testimony for 
hearing pursuant to Rule 8210. As set forth in proposed Rule 9252, such 
requests must be made not later than 21 days prior to the scheduled 
hearing date; describe with specificity the Documents or testimony 
sought; state why the Documents or testimony are material; describe the 
Respondent's previous efforts to obtain the Documents or testimony 
through other means; and state whether the custodian of the Documents 
or each proposed witness is subject to the jurisdiction of the 
Association.
    4. Proposed Rule 9253. Proposed Rule 9253 further broadens the 
discovery procedures by establishing a procedure for Respondents to 
obtain copies of statements of any person called or to be called as a 
witness by the Department of Enforcement that pertain to that witness' 
direct testimony. Such written statements include those that would be 
required to be furnished under the Jencks Act, 18 U.S.C. 3500. This new 
requirement is consistent with SEC Rules of Practice 231.101
---------------------------------------------------------------------------

    \101\ 17 CFR 201.231.
---------------------------------------------------------------------------

(ix) Pre-hearing Procedures
    1. General Considerations. In connection with the goal of enhancing 
the fairness and efficiency of NASD disciplinary proceedings, the 
proposed rules grant the Hearing Officer discretionary authority to 
require the Parties to participate in pre-hearing conferences or to 
file a variety of informational materials in advance of the hearing. 
Effective planning and increased control over the proceeding by the 
Hearing Officer during the pre-hearing phase will assist in 
accelerating the disciplinary process. The use of pre-hearing 
procedures as a means of effective case management is consistent with 
the practice in SEC administrative proceedings and in federal district 
courts.
    2. The Uses of Pre-Hearing Conferences. Proposed Rule 9241 grants 
the Hearing Officer authority to require the Parties or their counsel 
to participate in a pre-hearing conference. As set forth in the 
proposed rule, the conference is intended, among other things, to: 
expedite the disposition of the proceeding; establish procedures to 
manage the proceeding efficiently; and improve the quality of the 
hearing through more thorough preparation. (Proposed Rule 9241(a).) At 
the discretion of the Hearing Officer, such conferences may be held 
with one or more persons participating by telephone or other remote 
means. (Proposed Rule 9241(b).)
    The proposed rule enumerates a list of subjects that the Hearing 
Officer may consider and with respect to which the Hearing Officer may 
take action at the pre-hearing conference, including: Simplification 
and clarification of the issues; exchange of witness and exhibit lists, 
and copies of exhibits; stipulations and admissions; matters of which 
official notice may be taken; the schedule for exchanging pre-hearing 
motions, if any; the method of service and filing of papers by the 
Parties; determination of hearing dates; amendments to the complaint or

[[Page 25253]]

answers; and production of documents. (Proposed Rule 9241(c).) By its 
terms, the list of enumerated subjects is not exhaustive; any ``other 
matters as may aid in the orderly and expeditious disposition of the 
proceeding'' may be considered at a pre-hearing conference. (Proposed 
Rule 9241(c)(10).) Following the conclusion of the pre-hearing 
conference, the Hearing Officer is required to enter an order or ruling 
reciting any agreements reached and any procedural determinations made 
by the Hearing Officer during the conference.
    Unless determined by the Hearing Officer to be unnecessary or 
premature, the proposed rules require that an initial pre-hearing 
conference be held within 21 days of the last-filed answer. Pursuant to 
proposed Rule 9251(d), the Department of Enforcement is required to 
commence making documents available to the Respondents for inspection 
and copying within 21 days of the last-filed answer. Consequently, the 
initial pre-hearing conference may be used to address any pending 
issues related to document availability, as well as claims of privilege 
and other matters pertaining to the Department of Enforcement's 
document production.
    Recognizing that pre-hearing conferences are important in 
contributing to effective case management, the proposed Rule provides 
for the imposition of sanctions, i.e., entry of a default judgment 
against a Party who, after receiving proper notice, fails to appear at 
a pre-hearing conference. (Proposed Rule 9241(f).)
    Proposed Rule 9241 is consistent with the intent and concepts 
underlying SEC Rules of Practice 221; 102 F.R.C.P. Rule 16, 
entitled ``Pre-trial Conferences; Scheduling; Management;'' and ACUS 
Model Adjudication Rule 221,103 entitled ``Pre-hearing, 
Settlement, and Other Conferences.'' In addition, the provisions 
included in proposed Rule 9241 are substantially the same as certain 
provisions in SEC Rules of Practice 221,104 specifically, 
those that set forth the purpose of pre-hearing conferences, the 
subjects to be addressed at such conferences, the entry of a default 
judgment for failure to attend such conferences, and the necessity of 
issuing an order or ruling reciting any agreements reached and 
determinations made during such conferences. For example, each of the 
pre-hearing conference subjects enumerated in proposed Rule 9241(c) is 
included in SEC Rules of Practice 221.105
---------------------------------------------------------------------------

    \102\ 17 CFR 201.221.
    \103\ MAR 221.
    \104\ 17 CFR 201.221.
    \105\ Id.
---------------------------------------------------------------------------

    3. Pre-hearing Submissions. As part of the pre-hearing process, the 
proposed rules also contemplate that the Hearing Officer may, in the 
exercise of his or her discretion, order the Parties to file one or 
more types of pre-hearing submissions. (Proposed Rule 9242.) Among the 
possible pre-hearing submissions that may be required are: An outline 
or narrative summary of the case or defense; the legal theories upon 
which the parties will rely; a list of documents and copies of 
documents that the Parties intend to introduce at the hearing; a list 
of the Parties' anticipated witnesses, including the witnesses' names, 
occupations, addresses, and brief summary of their expected testimony; 
and, with respect to an expert witness, a statement of the expert's 
qualifications, a listing of other proceedings in which the witness has 
given expert testimony, a list of the expert's publications, and copies 
of those publications that are not readily available. (Proposed Rule 
9242(a) (1)-(5).)
    Proposed Rule 9242 is modeled on SEC Rules of Practice 222 
106 and also is consistent with ACUS Model Adjudication Rule 
220,107 entitled ``Pre-hearing Statement.'' The descriptive 
list of pre-hearing submissions in proposed Rule 9242 (a)(1)-(a)(5) is 
virtually identical to that set forth in SEC Rules of Practice 
222.108 It also reflects the concept underlying ACUS Model 
Adjudication Rule 220,109 which suggests that the Parties, 
in advance of hearing, file a statement setting forth the issues 
involved in the adjudication, the facts in dispute, and the identity of 
witnesses and exhibits to be presented at the hearing.
---------------------------------------------------------------------------

    \106\ 17 CFR 201.222.
    \107\ MAR 220.
    \108\ 17 CFR 201.222.
    \109\ MAR 220.
---------------------------------------------------------------------------

(x) Pro Se Respondents
    Enhancing the Rule 9000 Series to formalize requirements regarding 
the filing of papers and service of such papers upon Parties, the 
timely production to Respondents of relevant evidence, the use of 
motions and to incorporate other procedural protections should improve 
the fairness and efficiency of a disciplinary proceeding, but could 
disadvantage some pro se Respondents.
    The NASD, through the NASD Regulation's Office of Dispute 
Resolution and the Chief Hearing Officer, is committed to providing a 
fair forum for all Parties. Thus, the Chief Hearing Officer and all 
Hearing Officers shall adopt as a practice the flexible approach 
adopted in state and federal judicial proceedings. Pro se Respondents 
shall be granted waivers from certain procedural requirements 
110 or otherwise be excused from fully or partially 
complying with certain procedural or technical rules to the extent that 
the Adjudicator may allow and still: (i) Provide fair notice to other 
Parties of the issues before the Adjudicator; (ii) provide the Parties 
an opportunity to respond to the issues; and (iii) establish and 
maintain a record for any appeal of the matter.
---------------------------------------------------------------------------

    \110\ For example, in certain circumstances it would be 
appropriate to excuse a pro se Respondent from complying with 
certain requirements in Rule 9146. NASD Regulation anticipates that 
with respect to several of the proposed rules, pro se Respondents 
will be treated with good faith, fairness, and flexibility.
---------------------------------------------------------------------------

    The Association believes that this approach will be fairer for all 
Parties and more effective in promoting the efficient administration of 
disciplinary proceedings than adopting a general waiver of one or more 
procedural rules for the benefit of a pro se Respondent. The Hearing 
Officers will be trained and instructed to provide flexibility to pro 
se Respondents to further fairness, which is a fundamental principle 
guiding the revision of the proposed Rule 9000 Series.
(xi) Offers of Settlement, AWCs and MRVs
    As set forth in proposed Rule 9216(a), an AWC is a letter that a 
person or a member who perceives he or it will be the subject of a 
complaint initiating a disciplinary proceeding agrees to execute to 
resolve the matter in a pre-complaint environment. As set forth in 
proposed Rule 9216(b), an MRV is a letter that a person or a member who 
perceives he or it will be the subject of a complaint initiating a 
disciplinary proceeding agrees to execute to resolve the matter prior 
to the issuance of a complaint.111 As set forth in proposed

[[Page 25254]]

Rule 9270, an offer of settlement is an offer made by a Respondent 
prior to a determination on the merits after a hearing, which a person 
or a member makes in order to resolve the matter prior to the issuance 
of a decision on the merits. Each of these proceedings exists in the 
current Code. (Rules 9217 and 9226.)
---------------------------------------------------------------------------

    \111\ Current MRV procedures are set forth in Rule 9217(b) and 
Rule IM-9217. Current Rule IM-9217 also includes Rules 2847(b) and 
(c), Rules 4615 and 4616, the Rule 4650 Series, Rules 6620 and 6420, 
Rules 4613(d), and the Rule 6700 Series.
    By this filing, the Association proposes to amend IM-9216 by 
removing trade reporting violations from the list. As amended, 
proposed Rule IM-9216, listing those violations appropriate for 
disposition under the minor rule violations plan, includes only the 
following violations:
     Rule 2210 (b) and (c), and Rule 2220(b) and (c)--
Failure to have advertisements and sales literature approved by a 
principal prior to use, failure to maintain separate files of 
advertisements and sales literature containing required information, 
and failure to file advertisements with the Association within the 
required time limits.
     Rule 3360--Failure to timely file reports of short 
positions on Form NS-1.
     Rule 3110--Failure to keep and preserve books, 
accounts, records, memoranda and correspondence in conformance with 
all applicable laws, rules, regulations and statements of policy 
promulgated thereunder and with the Rules of the Association.
    Thus, only certain types of violations may be resolved pursuant 
to an MRV.
---------------------------------------------------------------------------

    In proposing Rules 9216 and 9270 relating to AWC, MRVs, and offers 
of settlement, the NASD recognizes that such actions taken voluntarily 
by a Respondent, or a person about to be named as a Respondent, create 
different conditions under which the involved persons may act. Thus, in 
proposed Rules 9216 and 9270, to go forward with such procedures, a 
Party (or a potential Party) must agree to waive the protections 
offered against ex parte communications and the separation of function 
concept expressed in proposed Rule 9144. (Proposed Rules 9216 (a)(2) 
and (b)(2), and 9270(d)(3).) However, if the AWC, MRV, or offer of 
settlement is not accepted by the final arbiter, the rejected document 
does not constitute a part of the record in any proceeding. (See, e.g., 
Proposed Rules 9270(h), 9216(a)(4), and 9216(b)(4).)
    The Select Committee recommended that the Association seek to 
reduce the workload of the National Business Conduct Committee by 
limiting its review of certain cases, including certain settlements and 
related types of voluntary, negotiated resolutions of disputed matters, 
such as AWCs and MRVs. To achieve this goal, NASD and NASD Regulation, 
by resolution, have delegated to the General Counsel of NASD Regulation 
the authority of the National Business Conduct Committee to accept or 
refer to the National Business Conduct Committee for its consideration 
AWCs, MRVs, and offers of settlement, and have delegated to the Chair 
and the Vice Chair of the National Business Conduct Committee the 
authority of the National Business Conduct Committee to accept or 
reject such AWCs, MRVs, and offers of settlement. Proposed Rule 9216 
and proposed Rule 9270(e)(2) codify these delegations. However, a 
contested offer of settlement and order of acceptance may be accepted 
or rejected only by either the full National Business Conduct Committee 
or the Chair and Vice Chair, as provided in proposed Rule 9270(f)(2). 
The Association believes these delegations will allow the National 
Business Conduct Committee to concentrate on contested disciplinary 
matters and those matters raising policy questions.
(xii) National Business Conduct Committee Appeals or Review of 
Disciplinary Proceedings and Discretionary Review By the NASD 
Regulation Board or the NASD Board
    Like the current Rule 9300 Series, proposed Rule 9312 through 
proposed Rule 9349 provide that the National Business Conduct Committee 
may review any disciplinary proceeding for which a first or ``trial-
level'' decision has been rendered.112 Also, like current 
Rule 9310(a), proposed Rule 9311 provides that a Respondent may appeal 
any ``trial level'' decision, including a default 
decision.113 Proposed Rule 9311(a) also contains a new 
right--the right of the Department of Enforcement (or any other 
Complainant) to appeal as a matter of right. This provision recognizes 
that, following the complete separation of the adjudicative function 
from the Department of Enforcement and the complete segregation of the 
prosecutorial function within the Department of Enforcement, it is 
appropriate to permit the Department of Enforcement staff to make an 
independent, professional judgment as to whether an appeal should be 
filed.
---------------------------------------------------------------------------

    \112\ In the current rules, such decisions are rendered by a 
Hearing Committee or an Extended Hearing Committee. (Rule 9223 (a) 
and (b).) As noted earlier, under the proposed rules such decisions 
would be rendered by a Hearing Panel, or, if applicable, an Extended 
Hearing Panel.
    \113\ A Respondent may not ``appeal'' any final action contained 
in an AWC, an MRV or an offer of settlement and an order of 
acceptance that has been accepted by any of the General Counsel of 
NASD Regulation, the Chair and the Vice Chair of the National 
Business Conduct Committee, or the National Business Conduct 
Committee. (Proposed Rules 9216 (a) and (b), and 9270.)
---------------------------------------------------------------------------

    There are very few other changes of significance to the review 
procedures used by the National Business Conduct Committee. Proposed 
Rule 9311(c) and proposed Rule 9312(c) now explicitly set forth the 
information required for a Party to file a notice of appeal and the 
National Business Conduct Committee to file a notice of review. 
Further, proposed Rule 9311 provides for the right of a Party to cross-
appeal.
    In proposed Rule 9312(a)(1), the National Business Conduct 
Committee's decision whether to call a case for review rests with a 
National Business Conduct Committee Review Subcommittee. The Review 
Subcommittee is composed of two to four persons who are current members 
of the National Business Conduct Committee, and must include a balance 
of Non-Industry Directors and Industry Directors, or, if not balanced, 
shall include a majority of Non-Industry Directors. (Proposed Rule 
9312(a)(1).)
    Proposed Rule 9312(a)(2), codifies existing delegations to the 
General Counsel of NASD Regulation of the authority of the National 
Business Conduct Committee to determine if a default decision issued 
pursuant to Rule 9269 should be reviewed by the National Business 
Conduct Committee. The provision reflects another part of the decision 
of the NASD Board to reduce the work of the National Business Conduct 
Committee and the related Select Committee's recommendation.
    Subcommittees 114 and Extended Proceeding Committees 
115 continue to act as the appeal forum to which the Parties 
present arguments, and if allowed, any new evidence. (Proposed Rule 
9346.) Proposed Rule 9346(h) contains the new requirement that any 
person testifying in such a hearing will do so under oath or by 
affirmation, except in unusual circumstances.
---------------------------------------------------------------------------

    \114\ The term ``Subcommittee'' means an appellate body that is 
appointed by the National Business Conduct Committee: (1) 
Constituted by Rule 9331(a) to participate in the National Business 
Conduct Committee's consideration of a disciplinary proceeding 
pursuant to the Rule 9300 Series; or (2) constituted under the Rule 
9400 Series or Rule 9500 Series to conduct a review proceeding. 
(Proposed Rule 9120(z).)
    \115\ The terms ``Extended Proceeding Committee'' means an 
appellate body that is appointed by the National Business Conduct 
Committee and constituted under Rule 9331(a)(2) to participate in 
the National Business Conduct Committee's consideration of a 
disciplinary proceeding that is classified as an ``Extended 
Proceeding'' and governed by the Rule 9300 Series. (Proposed rule 
9120(k).)
---------------------------------------------------------------------------

    A Subcommittee or, if applicable, an Extended Proceeding Committee 
transmits a written, recommended decision to the National Business 
Conduct Committee. (Proposed Rule 9345.) The National Business Conduct 
Committee receives the recommended decision in writing not later than 
seven days before the meeting of the National Business Conduct 
Committee at which the disciplinary proceeding is considered. (Proposed 
Rule 9345.) At the same time, all other Directors who sit on the NASD 
Regulation Board also receive the written recommended decision. 
(Proposed Rule 9345.)
    Pursuant to proposed Rule 9349, the National Business Conduct 
Committee, after considering all matters presented in the appeal or 
review, and the written recommended decision of the Subcommittee, or, 
if applicable, the

[[Page 25255]]

Extended Proceeding Committee, may affirm, modify, or reverse the 
decision of the Hearing Panel, or, if applicable, the Extended Hearing 
Panel, and may affirm, modify, reverse, increase, or reduce any 
sanction, or impose any other fitting sanction. Alternatively, the 
National Business Conduct Committee may remand the disciplinary 
proceeding with instructions.
    Although proposed Rule 9346 provides that the National Business 
Conduct Committee may hear the Parties present arguments, and consider 
and rule upon motions for leave to introduce new evidence, the 
Association anticipates these functions will be performed by the 
appointed Subcommittee or Extended Proceeding Committee as provided 
explicitly in Rule 9331(b). Thus, the inclusion of the National 
Business Conduct Committee in certain procedural rules (e.g., proposed 
Rules 9341, 9342, 9343, 9346, and 9347) is intended to provide 
flexibility to the whole National Business Conduct Committee in 
extraordinary circumstances.116
---------------------------------------------------------------------------

    \116\ For example, Respondent in a simple case may unearth clear 
new documentary evidence which may alter the disposition of the case 
and submit a motion for consideration of such new evidence after the 
Subcommittee or the Extended Proceeding Committee has transmitted a 
recommended decision to the National Business Conduct Committee, but 
before the National Business Conduct Committee had prepared a 
proposed written decision. The National Business Conduct Committee 
generally would request that the Subcommittee or the Extended 
Proceeding Committee consider the motion, but, using the flexibility 
provided in Rule 9346, could consider and decide the motion itself.
---------------------------------------------------------------------------

    After reaching its conclusions on the issues, the National Business 
Conduct Committee prepares a proposed written decision.117 
(Proposed Rule 9349(b).) Under proposed Rule 9351 and proposed Rule 
9352, the proposed written decision of the National Business Conduct 
Committee may be called for review by, respectively, any Director of 
the NASD Regulation Board, and any Governor of the NASD Board. The 
opportunity for a Director or Governor to call a case for review occurs 
sequentially.
---------------------------------------------------------------------------

    \117\ Specifically, the decision must include:
    (1) A statement describing the investigative or other origin of 
the disciplinary proceeding;
    (2) The specific statutory or rule provisions that were alleged 
to have been violated;
    (3) A statement setting forth the findings of fact with respect 
to any act or practice the Respondent was alleged to have committed 
or omitted;
    (4) The conclusions as to whether the Respondent violated any 
provision alleged in the complaint;
    (5) A statement in support of the disposition of the principal 
issues raised in the proceeding; and
    (6) A statement describing any sanction imposed, the reasons 
therefore, and, pursuant to Rule 9360, the date upon which such 
sanction shall become effective.
    (Proposed Rule 9349(b) (1)-(6).)
---------------------------------------------------------------------------

    Each Director receives a summary of the National Business Conduct 
Committee's decisions at the NASD Regulation Board meeting the day 
after the National Business Conduct Committee meeting at which the 
written recommended decisions of the Subcommittees or the Extended 
Proceeding Committees are considered. As discussed above, each Director 
previously will have received the full text of such written recommended 
decisions of the Subcommittees and the Extended Proceeding Committees. 
Any Director may call a case for review at the NASD Regulation Board 
meeting next following the National Business Conduct Committee meeting.
    Second, the National Business Conduct Committee transmits the full 
text of its proposed written decisions and summaries to each of the 
NASD Regulation Board Directors immediately after the Board meeting 
following the National Business Conduct Committee meeting at which the 
written recommended decisions of the Subcommittees and the Extended 
Proceeding Committees are considered by the National Business Conduct 
Committee.118 If no Director calls the case for review 
during the second seven day call for review period provided in Rule 
9351(b), then the National Business Conduct Committee proposed written 
decision is transmitted to each Governor of the NASD Board. If no 
Governor calls the case for review during the period provided in Rule 
9352(b), then the proposed written decision of the National Business 
Conduct Committee is served upon the Parties and is the final 
disciplinary action of the Association for purposes of SEC Rule 19d-
1(c)(1). (Proposed Rule 9349(c).)
---------------------------------------------------------------------------

    \118\ Because the National Business Conduct Committee sometimes 
changes the written recommended decisions of the Subcommittees (or, 
if applicable, those of the Extended Proceeding Committees), the 
second call-for-review period gives each Director a chance to 
carefully consider whether these changes to the Subcommittees' (or, 
if applicable, the Extended Proceeding Committees'') written 
recommended decisions, which each Director receives seven days 
before the NASD Regulation Board meeting, suggest the need for a 
call for review.
---------------------------------------------------------------------------

    If a proposed written decision of the National Business Conduct 
Committee is called for review by a Director of the NASD Regulation 
Board, the disciplinary proceeding is placed on the agenda for the next 
scheduled meeting of the NASD Regulation Board and the NASD Regulation 
Board considers the disciplinary proceeding at that meeting. (Proposed 
Rule 9351(c).) The NASD Regulation Board then prepares a proposed 
written decision, which becomes the final disciplinary action of the 
Association for purposes of SEC Rule 19d-1(c)(1), unless the NASD Board 
exercises its right to call the disciplinary proceeding for review 
(Proposed Rules 9351(e) and 9352(b)(1)), or unless the proceeding is 
remanded (Proposed Rule 9351(e)).
    As referenced earlier, proposed Rule 9352 provides for the NASD 
Board to call for review, and thereafter review at its next meeting, 
either a proposed written decision of the National Business Conduct 
Committee, or, if the NASD Regulation Board reviewed the disciplinary 
proceeding, a proposed written decision of the NASD Regulation Board. 
(Proposed Rule 9352(b) (1) and (2).) The review procedures of the NASD 
Board in other respects follow those described above with respect to 
review by the NASD Regulation Board. (Proposed Rule 9352.)
(xiii) Recusal or Disqualification
    There are four provisions in the proposed Rule 9000 Series dealing 
with the recusal or disqualification of an Adjudicator in the event the 
Adjudicator in a disciplinary or other proceeding, at the ``trial 
level'' or in a subsequent appeal or review of such proceeding, has a 
conflict of interest or a bias. (Proposed Rules 9160, 9233, 9234, and 
9332.) In the Rule 9000 Series, the standard set forth under which an 
Adjudicator must recuse himself or herself or may be disqualified by 
motion is: ``a conflict of interest or bias, or circumstances otherwise 
exist where the * * * [the Adjudicator's] fairness might reasonably be 
questioned.''
    The standard borrows heavily from the conflict of interest standard 
applicable to federal judges. Under 28 U.S.C. 455(a) ``[a]ny justice, 
judge, or magistrate of the United States shall disqualify himself in 
any proceeding in which his impartiality might reasonably be 
questioned.'' In addition, the Association has also looked to the APA. 
Section 556(b) of the APA provides that ``[a] presiding or 
participating employee may at any time disqualify himself. On the 
filing in good faith of a timely and sufficient affidavit of personal 
bias or other disqualification of a presiding or participating 
employee, the agency shall determine the matter * * * .''
    The proposed standard will be interpreted in a manner that accords 
with the operation of a self-regulatory disciplinary system in which 
members of the industry are intended to serve as Adjudicators. The 
judicial interpretation of 28 U.S.C. 455(a) provides a basis for

[[Page 25256]]

such an interpretation because the judicial interpretation relies upon 
additional objective factors used to determine a disputed claim of 
bias. The Association intends to rely on such judicial interpretation 
of the clause ``in which his impartiality might reasonably be 
questioned'' in 28 U.S.C. 455(a), in interpreting the proposed clause, 
``if circumstances otherwise exist where * * * [the Adjudicator's] 
fairness might reasonably be questioned.'' The notions of impartiality 
and fairness are inextricably linked in an analysis of whether an 
Adjudicator fairly judges a proceeding.
    In Pepsico, Inc. v. McMillan, 764 F.2d 458, 460 (7th Cir.1985), the 
Seventh Circuit said: ``[t]he test for an appearance of partiality is * 
* * whether an objective, disinterested observer fully informed of the 
facts underlying the grounds on which recusal was sought would 
entertain a significant doubt that justice would be done in the case.'' 
Cases in the Second, Eighth and Eleventh Circuits set forth similar 
interpretive language. The Second Circuit stated, in United States v. 
Lovaglia, 954 F.2d 811, 815 (2d Cir. 1992), that in interpreting the 
statutory standard, a person would be required to ask: ``Would a 
reasonable person, knowing all the facts, conclude that the trial 
judge's impartiality could reasonably be questioned?'' See also United 
States v. Walker, 920 F.2d 513, 517 (8th Cir. 1990) (after considering 
public and private circumstances, would a reasonable, uninvolved 
observer question the judge's impartiality, and would an objective, 
disinterested observer fully informed of facts underlying the ground on 
which recusal is sought entertain significant doubt that justice would 
be done); Parker v. Connors Steel Co., 855 F.2d 1510, 1524 (11th Cir.), 
cert. denied, 490 U.S. 1066 (1988) (Section 455(a) embodies an 
objective standard; ``whether an objective, disinterested, lay observer 
fully informed of the facts underlying the grounds on which recusal was 
sought would entertain a significant doubt about the judge's 
impartiality'').
    The general provision for disqualification is set forth in proposed 
Rule 9160, and refers to each of the various persons or groups that may 
act as an Adjudicator under the proposed Rule 9000 Series. Each of the 
rules contemplates that an Adjudicator shall exercise good faith and 
recuse himself or herself as necessary.
    Consistent with the Select Committee Report, proposed Rules 9233 
and 9234 expressly provide a procedure for a Party to seek the 
disqualification of a Hearing Officer or a Hearing Panelist. The 
purpose of these proposed changes is to formalize the existing practice 
of permitting such challenges so that they can be dealt with 
expeditiously.
    In addition, the Association proposes to authorize the Chief 
Hearing Officer to disqualify a Panelist of a Hearing Panel or an 
Extended Hearing Panel. (Proposed Rule 9234(b).) This provision was 
added to assure that if a Hearing Officer or any other person became 
aware of a factual basis for the disqualification of a Panelist, the 
Chief Hearing Officer could act even if the Parties did not, and the 
Panelist or Hearing Officer had not recused himself or herself.
    Proposed Rules 9233 and 9234 governing the disqualification of a 
Hearing Officer or one or both Panelists of a Hearing Panel or an 
Extended Hearing Panel draw, in part, on the basic provisions found in 
Model Adjudication Rule 112 119 and SEC Rules of Practice 
112. 120 But rather than relying on the challenged 
Adjudicator to make the initial decision regarding disqualification, 
the proposed rules initially place that decision with the Chief Hearing 
Officer when the challenge is to the impartiality or fairness of a 
Hearing Officer (Proposed Rule 9233(c)), or to the Hearing Officer 
appointed to a disciplinary proceeding if the challenge is to the 
impartiality or fairness of one or both of the other Panelists 
(Proposed Rule 9234 (c) and (d)). If a person challenges the 
composition of the entire Hearing Panel, or Extended Hearing Panel, the 
Chief Hearing Officer decides whether one or all three members of the 
Hearing Panel or Extended Hearing Panel shall be disqualified. 
(Proposed Rule 9234(e).) In all cases a written ruling must be issued 
on the motion, which will facilitate review of the decision.
---------------------------------------------------------------------------

    \119\ MAR 112.
    \120\ 17 CFR 201.112.
---------------------------------------------------------------------------

    Proposed Rule 9332, providing for the disqualification of Panelists 
appointed to one of the two panels or committees used in the appeal or 
review process by the National Business Conduct Committee, the 
Subcommittee or an Extended Proceeding Committee, as described above, 
is substantively the same as proposed Rules 9233 and 9234, except that 
under proposed Rule 9332 the Chair or the Vice Chair of the National 
Business Conduct Committee shall determine a motion for the 
disqualification of a Panelist, and appoint a replacement Panelist. 
(Proposed Rule 9332 (c) and (d).)
(xiv) Contemptuous Conduct
    The Select Committee recognized that NASD disciplinary proceedings 
have become increasingly more ``contentious,'' which presents a 
``growing need for the power to sanction frivolous practice or 
contumacious conduct.'' (Select Committee Report, p. R-24.) The Select 
Committee broadly recommended rule revisions ``to discipline parties or 
counsel on either side who engage in such behavior.'' (Id.) The 
prospect of potential sanctions can be an important impetus toward 
compliance with otherwise unenforceable orders.
    Proposed Rule 9280 is responsive to the Select Committee's 
recommendation. The proposed rule suggests a variety of sanctions that 
may be imposed for conduct that violates orders of a Hearing Officer, a 
Hearing Panel or, if applicable, an Extended Hearing Panel, and for 
other contemptuous conduct during a hearing.
    Under Proposed Rule 9280(b)(1), The Hearing Officer, Hearing Panel, 
or, if applicable, an Extended Hearing Panel can sanction contemptuous 
conduct by ruling, among other things, that: the subject matter of the 
violated order or any other designated facts be taken as established 
for purposes of the proceeding; the violator or contemptuous Party be 
precluded from supporting or opposing certain claims or defenses, or 
precluded from introducing evidence on certain matters; and particular 
pleadings or parts thereof be stricken.
    Proposed Rule 9280(b)(2) provides for the imposition of sanctions 
for a Party's unjustified refusal to make disclosures required by the 
proposed Rule 9250 Series, or otherwise required by order of a Hearing 
Officer, Hearing Panel, or, if applicable, an Extended Hearing Panel. 
Unless the failure to make disclosures is harmless, the recalcitrant 
Party is precluded from using any of the information withheld or the 
testimony of the witness that was not disclosed as evidence at the 
hearing, or otherwise relying on such information or testimony. This 
sanction may be imposed in addition to, or in lieu of, the various 
restrictions on the conduct of the case authorized by proposed Rule 
9280(b)(1). Further, under Proposed Rule 9280(c), absent reasonable 
basis, a Party's failure to admit the genuineness of a document that is 
later found to be genuine may also be subject to the sanctions listed 
in proposed Rule 9280(b)(1).
    Proposed Rule 9280, read in conjunction with proposed Rule 9150, 
also authorizes a Hearing Officer,

[[Page 25257]]

Hearing Panel, or, if applicable, an Extended Hearing Panel to exclude 
an offending attorney or person acting in a representative capacity 
from functioning as such in the particular proceedings. In this regard, 
proposed Rule 9141(b) also makes clear that the right to representation 
in a disciplinary proceeding is subject to the power to exclude a 
Party's representative or attorney under proposed Rules 9150 and 9280. 
Under proposed Rule 9280(c), an attorney or representative who is 
excluded from participating in a disciplinary proceeding may seek 
immediate review of the exclusion order by the National Business 
Conduct Committee by filing a motion to vacate within five days after 
service of the order. The filing of such a motion operates to stay all 
aspects of the disciplinary proceeding, pending expedited consideration 
and a prompt decision by the National Business Conduct Committee.
    Proposed Rule 9280 is, in part, modeled on SEC Rules of Practice 
180. 121 SEC Rule 180, 122 also entitled 
``Contemptuous Conduct,'' similarly authorizes excluding the violator 
from the proceeding and/or suspending that person from representing 
others in it. Under SEC Rule 180(b), 123 any filing which 
fails to comply with SEC rules or with any order issued in the 
proceeding can be rejected. In addition, under SEC Rule 180(c), 
124 a failure to make a required filing or to cure a 
deficiency within the time ordered can lead to dismissal or default, or 
to orders limiting or restricting the offending party's evidentiary 
opportunities. The Association believes the discretionary sanctioning 
powers granted to hearing officers in SEC administrative proceedings 
are comparable to those authorized by proposed Rule 9280.
---------------------------------------------------------------------------

    \121\ 17 CFR 201.180.
    \122\ Id.
    \123\ 17 CFR 201.180(b).
    \124\ 17 CFR 201.180(c).
---------------------------------------------------------------------------

    The sanctions set forth in proposed Rule 9280(b)(1) are also drawn 
from F.R.C.P. 37(b)(2), which authorizes federal district courts to 
impose a variety of sanctions for violations of the courts' discovery 
orders. As reflected in SEC Rule 180(c) 125 and ACUS Model 
Rule 111(L), 126 F.R.C.P. 37-type sanctions may be 
appropriate for other contemptuous conduct, in addition to discovery 
violations. Comment 5 to ACUS Model Rule 111(L) lists possible 
appropriate sanctions: ``Refusing to allow the support or opposition to 
a defense, prohibiting the introduction of disputed matters into 
evidence, excluding testimony or expelling a party or person from the 
hearing.'' 127 As noted, these are among the sanctions set 
forth in proposed Rule 9280.
---------------------------------------------------------------------------

    \125\ Id.
    \126\ See MAR 111(L), which authorizes the Adjudicator to impose 
``appropriate sanctions'' for disobeying orders.
    \127\ Id.
---------------------------------------------------------------------------

i. Proposed Changes to Proceedings in the Rule 9500 Rule Series and the 
Rule 9600 Series
(i) General
    The Association is requesting temporary approval of the proposed 
Rule 9400 and 9500 Series as an interim step to give the Association 
the opportunity to review comprehensively these Rules, consider the 
consolidation of the procedures covered by these Rules, and propose a 
revision of these Rules based upon this review. The Association will 
submit this proposed revision as an amendment to this filing. Temporary 
approval of the changes proposed in this filing will give the 
Commission time to publish for comment and consider approval of this 
amendment.
    In this rule filing, in addition to renumbering the Rules (the 
current Rules are found in the Rule 9500 and 9600 Series), the 
Association proposes to amend the Rules only as necessary to conform 
the procedures to the Association's revised organizational structure 
and to the changes being made to the proposed Rule 9200 and 9300 
Series. In addition, the Association proposes to delete Rule 9520 
(Expedited Remedial Proceedings) because these proceedings, as 
currently designed, do not serve their intended purpose. The 
Association intends to submit a separate rule filing proposing a 
different approach to expedited remedial proceedings after submitting 
the amendment proposing the comprehensive revision of the other Rule 
9500-9600 Series proceedings.
(ii) Proposed Rule 9410 Series
    The current Rule 9510 Series sets forth procedures to limit the 
business operations of a member that is experiencing financial or 
operational difficulty as specified in Rules 3130 and 3131. Rule 3130 
was adopted in connection with the adoption of regulatory changes by 
the SEC to reduce net capital requirements, in order to permit the 
Association to be able to respond quickly to a firm's deteriorating 
financial or operational conditions. At the time Rule 3130 was adopted, 
the New York Stock Exchange and other stock exchanges had long-
established rules to reduce or restrict the business activities of 
their members under certain circumstances.
    Rule 3130 applies to members for which the NASD is the designated 
self-regulatory organization, but excludes certain brokers that 
generally do not carry customer accounts, certain broker/dealers 
engaged solely in the sale of redeemable shares of registered 
investment companies and certain other share accounts, and any other 
broker/dealer that is exempt from SEC Rule 15c3-1. Rule 3130 addresses 
two levels of possible financial or operational difficulties. First, it 
restricts a member from expanding its business whenever certain early 
warning financial criteria relating to minimum net capital ratio 
requirements are met, or scheduled capital withdrawals are exceeded. 
Second, Rule 3130 covers a deteriorating situation in which another set 
of warning criteria with lower tolerances are exceeded.
    Rule 3131 was recently adopted to provide the Association with 
similar authority with respect to certain members of the Association 
that are registered with the Commission under Section 15C of the Act as 
government securities brokers and dealers.
    Under the current Rule 9510 Series, a District Surveillance 
Committee notifies a member if limitations are to be imposed pursuant 
to Rule 3130. The member may request a hearing before the District 
Surveillance Committee, which issues a written decision. The decision 
may be appealed by the member or called for review by the NASD Board.
    The Association proposes to renumber this Rule Series as the Rule 
9410 Series and to conform it to other changes made in the Rule 9000 
Series. Under the proposed Rule 9410 Series, the Department of Member 
Regulation notifies a member if limitations are to be imposed under 
Rule 3130 or Rule 3131. The limitations may go into effect seven days 
after service of the notice unless the member requests a hearing. The 
member may request a hearing before the Department of Member 
Regulation, which then issues a written decision. The member may 
request review of the Department of Member Regulation's decision by the 
National Business Conduct Committee, or a member of the National 
Business Conduct Committee or the Review Subcommittee (described in the 
discussion of proposed Rule 9312) may call such a decision for review. 
Ex parte rules apply when Association staff has knowledge that the 
member intends to file a request for a review with the National 
Business Conduct Committee or that the National Business Conduct 
Committee intends to

[[Page 25258]]

call the decision of the Department of Member Regulation for review. If 
oral argument is requested, the National Business Conduct Committee 
appoints a Subcommittee to hear it and take any evidence that the 
member can show good cause for not previously submitting. The 
Subcommittee recommends a decision to the full National Business 
Conduct Committee. The National Business Conduct Committee may affirm, 
modify, or reverse the Department of Member Regulation's decision or 
remand it with instructions. The contents of the National Business 
Conduct Committee's proposed decision, which must be in writing, are 
specified in proposed Rule 9414(c)(2). The National Business Conduct 
Committee's proposed decision is subject to discretionary review by the 
NASD Regulation Board and the NASD Board. If the proceeding is not 
called for review, the National Business Conduct Committee's proposed 
written decision becomes final and is issued upon expiration of the 
discretionary review periods specified in the proposed Rule. The call 
for review procedures for the NASD Regulation Board and the NASD Board 
are parallel to the procedures set forth in proposed Rules 9351 and 
9352.
(iii) Proposed Rule 9420 Series
    The current Rule 9520 Series sets forth procedures for implementing 
Rule 3140, which requires a member to seek approval of a change in its 
business operations that will result in a change in its exemptive 
status under SEC Rule 15c3-3. Rule 15c3-3 generally sets forth minimum 
requirements for reserves and custody of securities. Rule 15c3-3 
exempts broker/dealers that engage in transactions limited to certain 
investment company securities and that do not hold customer securities 
or accounts, clearing broker/dealers that do not carry margin accounts 
or hold customer securities or funds, and introducing broker/dealers 
that clear on a fully disclosed basis. The purpose of Rule 3140 is to 
require any firm that intends to begin holding customer funds or 
securities or clearing its own transactions, and thereby change its 
exemptive status, to notify the Association so that the Association can 
determine if the firm has adequate procedures to safeguard customer 
funds and securities.
    Under the current Rule 9520 Series, a member must file an 
application seeking the approval of the District Office staff prior to 
making the type of change noted above. If the application is denied in 
whole or in part, the member may request a hearing before the District 
Business Conduct Committee. The written decision of the District 
Business Conduct Committee may be appealed or called for review by the 
NASD Board.
    The Association proposes to renumber this Rule Series as the Rule 
9420 Series and to conform it to other changes made in the Rule 9000 
Series. Under the proposed Rule 9420 Series, the member files the 
application with the Department of Member Regulation at the NASD 
Regulation district office. The Department of Member Regulation issues 
a written decision on the application. If the application is denied in 
whole or part by the Department of Member Regulation, the member may 
request review by the National Business Conduct Committee, or a member 
of the National Business Conduct Committee or the Review Subcommittee 
may call the decision for review. Ex parte rules apply when Association 
staff has knowledge that the member intends to file a request for 
review or that the National Business Conduct Committee intends to call 
the decision of the Department of Member Regulation for review. If 
review is requested, the National Business Conduct Committee appoints a 
Subcommittee to hear oral argument and take any evidence that the 
member can show good cause for not previously submitting. The 
Subcommittee recommends a decision to the full National Business 
Conduct Committee. The National Business Conduct Committee may affirm, 
modify, or reverse the Department of Member Regulation's decision. The 
National Business Conduct Committee's proposed decision must be in 
writing, and the contents of the decision are specified in proposed 
Rule 9423(c)(2).
    The National Business Conduct Committee's proposed decision is 
subject to discretionary review by the NASD Regulation Board and the 
NASD Board. If the proceeding is not called for review, the National 
Business Conduct Committee's proposed written decision becomes final 
and is issued upon expiration of the discretionary review periods 
specified in the proposed Rule. The call for review procedures for the 
NASD Regulation Board and the NASD Board are parallel to the procedures 
set forth in proposed Rules 9351 and 9352.
(iv) Proposed Rule 9510 Series
    Summary suspension procedures are authorized by Section 15A(h)(3) 
of the Act. The Act permits summary suspension if: (1) A member or 
person associated with a member has been and is expelled or suspended 
from any self-regulatory organization or barred or suspended from being 
associated with a member of any self-regulatory organization; or (2) a 
member is in such financial or operating difficulty that the 
Association determines and so notifies the Commission that the member 
cannot be permitted to continue to do business as a member with safety 
to investors, creditors, other members, or the Association. The Act 
also permits a summary limitation or prohibition against any person 
with respect to access to services of the Association if the person is 
subject to a summary suspension under (1) or (2) or, in the case of a 
person who is not a member, if the Association determines that such 
person does not meet the qualification requirements or other 
prerequisites for such access and such person cannot be permitted to 
continue to have such access with safety to investors, creditors, other 
members, or the Association. The Act requires that any person aggrieved 
by the summary action be promptly afforded an opportunity for a 
hearing.
    Under the current Rule 9610 Series, the NASD Board Executive 
Committee may authorize the staff to issue a notice of summary 
suspension to a member or person on any of the three grounds set forth 
in the Act. The suspension is effective immediately. The member or 
person may request a hearing before a Hearing Panel of the NASD Board, 
which issues a written decision. The decision may be appealed to or 
called for review by the full Board.
    The Association proposes to amend the Rule 9610 Series and renumber 
it as the Rule 9510 Series. Under the proposed Rule 9510 Series, the 
NASD Board may authorize the President of NASD Regulation or Nasdaq to 
issue a summary suspension to a member or person on the three grounds 
listed in Section 15A(h)(3) of the Act. 128 Under the 
proposed rule change, as under the current rule, the suspension is 
effective immediately. The member or person may request a hearing on 
the summary suspension before a Hearing Panel of the NASD Board. The 
Hearing Panel is composed of two or more members, one of whom must be a 
current NASD Board member. The other members of the Hearing Panel must 
be current or former members of the NASD Regulation, Nasdaq, or NASD 
Boards. The Hearing Panel determines whether the summary suspension 
should be affirmed or reversed. The Hearing Panel's proposed decision 
must be in writing, and the contents of the proposed decision are 
specified in proposed Rule 9513(c)(2).

[[Page 25259]]

The proposed written decision is subject to discretionary review by the 
NASD Board. If the NASD Board does not call the proceeding for review, 
the Hearing Panel's proposed decision becomes final and is issued upon 
expiration of the discretionary review period specified in the Rule. 
The call for review procedures for the NASD Board are essentially 
parallel to the procedures set forth in proposed Rule 9352.
---------------------------------------------------------------------------

    \128\ In a subsequent rule filing, the Association intends to 
propose to divide the authority to initiate a summary suspension on 
the grounds set forth in the Act between NASD Regulation and Nasdaq 
and set forth the procedures for each subsidiary in separate rule 
series for clarity.
---------------------------------------------------------------------------

(v) Proposed Rule 9520 Series
    Under the current Rule 9620 Series, ``revocation'' procedures 
provide a rapid means to cancel or suspend the membership of a member 
or bar or suspend a person from being associated with a member for the 
following reasons: Ineligibility for membership or association; failure 
to make a required payment of fees, dues, assessments, or other 
charges; failure to submit a required report or information related to 
such a payment; failure to comply with an arbitration award; failure to 
comply with a settlement agreement obtained in connection with an 
arbitration or mediation; or failure to file or submit on request any 
report, document, or other information required to be filed with or 
requested by the Association.
    Under the current Rule 9620 Series, a ``revocation'' proceeding is 
initiated by sending the affected member or associated person a notice. 
If the member or associated person wants a hearing, he must request one 
within five to 15 days of the notice (depending on which Article of the 
NASD By-Laws authorizes the notice). The request stays the effective 
date of the revocation. A hearing is held before a Hearing Panel of the 
NASD Board, which issues a final decision. There is no appeal or call 
for review by the full Board.
    Under the proposed Rule 9520 Series, revocation procedures are 
renamed ``Non-Summary Suspension, Cancellation, and Bar Procedures'' to 
describe better the specific actions that the Association may take 
under this Rule Series and to differentiate these procedures from other 
similar procedures set forth in the Rules of the Association. Under the 
proposed Rule 9520 Series, Association staff initiates a non-summary 
cancellation, suspension, or bar proceeding by sending a notice to the 
affected member or associated person. The member or associated person 
may request a hearing before a Hearing Panel of the NASD Board. Ex 
parte rules apply when the Association staff has knowledge that the 
member or associated person intends to request a hearing on the notice. 
As under the current Rule, the request stays the effective date of the 
cancellation, suspension, or bar set forth in the notice. The Hearing 
Panel is composed of two or more current or former members of the NASD 
Regulation Board. The Hearing Panel decides whether a cancellation, 
suspension, or bar should be imposed. The Hearing Panel's proposed 
decision must be in writing, and the contents of the proposed decision 
are specified in the proposed Rule 9523(g). The proposed written 
decision is subject to discretionary review by the NASD Board. There is 
no call for review by the full NASD Regulation Board in order to 
expedite the resolution of the proceeding. If the NASD Board does not 
call the proceeding for review, the Hearing Panel's proposed written 
decision is issued as the final decision upon expiration of the 
discretionary review period specified in the Rule. The call for review 
procedures for the NASD Board is essentially parallel to the call for 
review procedures in proposed Rule 9352.
(vi) Proposed Rule 9530 Series
    The eligibility procedures in the current Rule 9640 Series provide 
another means to cancel the membership of a member or bar a person from 
association with a member when a statutory disqualification exists or a 
member or person otherwise becomes ineligible for membership or 
association (e.g., when there is a similarity of membership names). 
Typically, a cancellation or bar proceeding is used when the ground for 
statutory disqualification is serious (e.g., conviction of a financial 
crime) and the Association needs to take quick action. An eligibility 
proceeding, which moves more slowly, is used when the ground for the 
statutory disqualification does not raise immediate customer protection 
concerns (e.g., a drunk driving conviction). An eligibility proceeding 
can be initiated by the Association or by a member when it determines 
that a statutory disqualification exists (as to itself, which is less 
common, or as to one of its current registered representatives, which 
is more often the case) or when the member wishes to associate with a 
person subject to a statutory disqualification.
    Under the current Rule 9640 Series, an eligibility proceeding may 
be initiated by the Association sending a notice to a member or by a 
member filing an application for relief from the Association's 
membership or eligibility requirements. A hearing on the application 
may be held before a Hearing Panel of the NASD Board, which makes a 
recommendation to the full NASD Board. The Board issues a written 
decision, which may include conditions on the member and person.
    Under the proposed Rule 9530 Series, the Department of Member 
Regulation may initiate an eligibility proceeding by sending a notice 
to the affected member or person if the Department of Member Regulation 
has reason to believe that a statutory disqualification exists. The 
notice specifies that a member may file a written application for 
relief on its own behalf and on behalf of its associated person, as 
applicable. Alternatively, a member may initiate an eligibility 
proceeding by submitting a written application for relief. Ex parte 
rules apply when the Department of Member Regulation initiates the 
proceeding and Association staff has knowledge that the member intends 
to file a written application for relief. If a member files an 
application for relief, a National Business Conduct Committee Hearing 
Panel is appointed. The Hearing Panel is composed of at least two 
current or former members of the NASD Regulation Board or former 
members of the NASD Board. The Hearing Panel holds a hearing and 
provides a recommended written decision on the application for relief 
to the Statutory Disqualification Committee. The Statutory 
Disqualification Committee, which reviews the Hearing Panel's 
recommendation to ensure consistency in the disposition of requests for 
relief, then forwards a recommended written decision to the full 
National Business Conduct Committee. The National Business Conduct 
Committee decides whether to grant the request for relief. The National 
Business Conduct Committee's proposed decision must be in writing, and 
the contents of the decision are specified in the proposed Rule. The 
National Business Conduct Committee's proposed written decision is 
subject to discretionary review by the NASD Regulation Board and the 
NASD Board. If neither Board calls the eligibility proceeding for 
review, the National Business Conduct Committee's proposed decision is 
issued as the final decision upon expiration of the discretionary 
review periods specified in the Rule. The call for review procedures 
for the NASD Regulation Board and the NASD Board are parallel to the 
call for review procedures in proposed Rules 9351 and 9352.
2. Statutory Basis
    The NASD believes the proposed rule change is consistent with 
section 15A(b)(7), 15 U.S.C. 78o-3(b)(7), and Section 15A(b)(8), 15 
U.S.C. 78o-3(b)(8), under the Act. In pertinent part, Section 15A(b)(7) 
mandates that a national securities association establish rules

[[Page 25260]]

providing that ``its members and persons associated with its members 
shall be appropriately disciplined for violation of any provision of 
this title, the rules or regulations thereunder, the rules of the 
Municipal Securities Rulemaking Board, or the rules of the association, 
by expulsion, suspension, limitation of activities, functions, and 
operations, fine, censure, being suspended or barred from being 
associated with a member, or any other fitting sanction.'' In pertinent 
part, section 15A(b)(8) mandates that a national securities association 
establish rules providing for ``a fair procedure for the disciplining 
of members and persons associated with members, the denial of 
membership to any person seeking membership therein, the barring of any 
person from becoming associated with a member thereof, and the 
prohibition or limitation by the association of any person with respect 
to access to services offered by the association or a member thereof.'' 
The NASD believes the proposed rule changes will further the goals of 
Sections 15A(b) (7) and (8).

B. Self-Regulatory Organization's Statement on Burden on Competition

    The NASD does not believe 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

    The NASD has neither solicited nor received written comments.

III. Date of Effectiveness of the Proposed Rule Change and Timing 
for Commission Action

    Within 35 days of the publication of this notice in the Federal 
Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve the proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing. In addition to general comments 
concerning the Association's proposal, the Commission requests 
particular comments addressing whether the proposal would result in any 
burdens on competition and whether the proposal would promote 
efficiency, competition and capital formation. Furthermore, the 
Commission invites interested persons to comment on the following 
specific issues:

    (a) Currently, the NASD By-Laws require applicants for NASD 
membership to agree to waive the liability of the NASD, Nasdaq and 
NASD Regulation Boards, committee members, officers, and employees 
for action taken within the scope of their authority, except for 
willful malfeasance. As proposed, the amended By-Laws will maintain 
this waiver of liability provision. Prospective members will still 
be required to sign an agreement to waive this liability as a 
condition of membership in the NASD.
    (b) The proposed By-Laws and Rules 1012, 9160, 9233, 9234, and 
9332 prohibit Governors, Directors, and members of the NBCC or a 
subcommittee thereof from participating in a matter if they have ``a 
conflict of interest or bias, or if circumstances otherwise exist 
where [their] fairness might reasonably be questioned.'' This 
standard is derived from 28 U.S.C. 455(a).
    (c) The proposed revisions to the procedures relating to 
election of the members of the NASD Board of Governors, the NASD 
Regulation Board of Directors and the Nasdaq Board of Directors.
    (d) The proposed By-Laws incorporate the Delegation Plan 
provision permitting ``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'' to serve as Non-
Industry Governors, Directors and/or Committee Members. Commenters 
are asked to address whether a specific standard for materiality 
would be appropriate and if so, what such a standard should be.

    The Commission seeks comment on whether the proposal, given the 
unique nature of the Association as a self-regulatory organization, 
adequately promotes the goals of the Act.
    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. Sec. 552, will 
be available for inspection and copying at the Commission's Public 
Reference Room. Copies of such filing will also be available for 
inspection and copying at the principal office of the Association. 
Comments also may be submitted electronically at the following E-mail 
address: [email protected]. File Number SR-NASD-97-28 should be 
included on the subject line if E-mail is used to submit a comment 
letter. Electronically submitted comment letters will be posted on the 
Commission's Internet web site (http://www.sec.gov).
    All submissions should refer to File No. SR-NASD-97-28 and should 
be submitted by June 9, 1997.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.129
---------------------------------------------------------------------------

    \129\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.

Exhibit 1

    Additions are italicized; deletions are bracketed.

By-Laws of the National Association of Securities Dealers, Inc.

Article I
Definitions
    When used in these By-Laws,[ and any rules of the Corporation,] 
unless the context otherwise requires, the term: (a) ``Act'' means the 
Securities Exchange Act of 1934, as amended; (b) ``bank'' means (1) a 
banking institution organized under the laws of the United States, (2) 
a member bank of the Federal Reserve System, (3) any other banking 
institution, whether incorporated or not, doing business under the laws 
of any State or of the United States, a substantial portion of the 
business of which consists of receiving deposits or exercising 
fiduciary powers similar to those permitted to national banks under the 
authority of the Comptroller of the Currency pursuant to the first 
section of Public Law 87-722 (12 U.S.C. Sec. 92a), and which is 
supervised and examined by a State or Federal authority having 
supervision over banks, and which is not operated for the purpose of 
evading the provisions of the Act, and (4) a receiver, conservator, or 
other liquidating agent of any institution or firm included in clauses 
(1), (2), or (3) of this subsection; (c) ``Board'' means the Board of 
Governors of the [Corporation.] NASD;
    [(d) ``Boards'' means the Board of Governors of the Corporation and 
the Boards of Directors of The Nasdaq Stock Market, Inc. and NASD 
Regulation, Inc.;
    (e)](d) ``branch office'' means an office defined as a branch 
office in [NASD Rule 3010;] the Rules of the Association;

[[Page 25261]]

    [(f)](e) ``broker'' means any individual, corporation, partnership, 
association, joint stock company, business trust, unincorporated 
organization, or other legal entity engaged in the business of 
effecting transactions in securities for the account of others, but 
does not include a bank;
    [(g)](f) ``Commission'' means the Securities and Exchange 
Commission;
    [(h) ``Corporation'' means the National Association of Securities 
Dealers, Inc.;]
    [(i) ``Corporations'' means the National Association of Securities 
Dealers, Inc. (``NASD''), and its subsidiaries, The Nasdaq Stock 
Market, Inc. (``Nasdaq'') and NASD Regulation, Inc. (``NASD 
Regulation'');]
    (g) ``day'' means calendar days;
    [(j)](h) ``dealer'' means any individual, corporation, partnership, 
association, joint stock company, business trust, unincorporated 
organization, or other legal entity engaged in the business of buying 
and selling securities for [his] such individual's or entity's own 
account, through a broker or otherwise, but does not include a bank, or 
any person insofar as [he] such person buys or sells securities for 
[his] such person's own account, either individually or in some 
fiduciary capacity, but not as part of a regular business;
    [(k) ``delegation] (i) ``Delegation Plan'' means the ``Plan of 
Allocation and Delegation of Functions by NASD to Subsidiaries'' as 
approved by the Commission, and as amended from time to time;
    (j) ``district'' means a district established by the NASD 
Regulation Board pursuant to the NASD Regulation By-Laws;
    [(l)](k) ``government securities broker'' shall have the same 
meaning as in Section 3(a)(43) of the Act except that it shall not 
include financial institutions as defined in Section 3(a)(46) of the 
Act;
    [(m)](l) ``government securities dealer'' shall have the same 
meaning as in Section 3(a)(44) of the Act except that it shall not 
include financial institutions as defined in Section 3(a)(46) of the 
Act;
    [(n)](m) ``Governor'' means a member of the Board[.];
    (n) ``Industry Director'' means a Director of the NASD Regulation 
Board (excluding the President of NASD Regulation) or a Director of the 
Nasdaq Board (excluding the President of Nasdaq) who: (1) is an 
officer, director, or employee of a broker or dealer or has been 
employed in any such capacity at any time within the prior three years; 
or (2) has a consulting or employment relationship with or provides 
professional services to the NASD, NASD Regulation, or Nasdaq or has 
had any such relationship or provided any such services at any time 
within the prior three years;
    (o) ``Industry Governor'' or ``Industry committee member'' means a 
Governor (excluding the Chief Executive Officer of the NASD) or 
committee member who (1) is an officer, director, or employee of a 
broker or dealer or has been employed in any such capacity at any time 
within the prior three years; and (2) has a consulting or employment 
relationship with or provides professional services to the NASD, NASD 
Regulation, or Nasdaq or has had any such relationship or provided any 
such services at any time within the prior three years;
    [(o)](p) ``investment banking or securities business'' means the 
business, carried on by a broker, dealer, or municipal securities 
dealer (other than a bank or department or division of a bank), or 
government securities broker or dealer, of underwriting or distributing 
issues of securities, or of purchasing securities and offering the same 
for sale as a dealer, or of purchasing and selling securities upon the 
order and for the account of others;
    [(p)](q) ``member'' means any broker or dealer admitted to 
membership in the [Corporation] NASD;
    [(q)](r) ``municipal securities'' means securities which are direct 
obligations of, or obligations guaranteed as to principal or interest 
by, a State or any political subdivision thereof, or any agency or 
instrumentality of a State or any political subdivision thereof, or any 
municipal corporate instrumentality of one or more States, or any 
security which is an industrial development bond as defined by Section 
3(a)(29) of the Act;
    [(r)](s) ``municipal securities broker'' means a broker, except a 
bank or department or division of a bank, engaged in the business of 
effecting transactions in municipal securities for the account of 
others;
    [(s)](t) ``municipal securities dealer'' means any person, except a 
bank or department or division of a bank, engaged in the business of 
buying and selling municipal securities for [his] such person's own 
account, through a broker or otherwise, but does not include any person 
insofar as [he] such person buys or sells securities for [his] such 
person's own account either individually or in some fiduciary capacity, 
but not as a part of a regular business;
    (u) ``NASD'' means the National Association of Securities Dealers, 
Inc.;
    (v) ``NASD Regulation'' means NASD Regulation, Inc.;
    (w) ``NASD Regulation Board'' means the Board of Directors of NASD 
Regulation;
    (x) ``Nasdaq'' means The Nasdaq Stock Market, Inc.;
    (y) ``Nasdaq Board'' means the Board of Directors of Nasdaq;
    (z) ``National Nominating Committee'' means the National Nominating 
Committee appointed pursuant to Article VII, Section 9 of these By-
Laws;
    (aa) `` Non-Industry Director'' means a Director of the NASD 
Regulation Board or Nasdaq Board who is (1) a Public Director; (2) an 
officer or employee of an issuer of securities listed on Nasdaq or 
traded in the over-the-counter market; (3) a person affiliated with a 
broker or a dealer that operates solely to assist the securities-
related activities of the business of a non-member affiliate (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); (4) an employee of an entity that is 
affiliated with a broker or a dealer that does not account for a 
material portion of the revenues of the consolidated entity, and who is 
primarily engaged in the business of the non-member entity; or (5) any 
other individual who would not be an Industry Director;
    (bb) ``Non-Industry Governor'' or ``Non-Industry committee member'' 
means a Governor or committee member who is (1) a Public Governor or 
committee member; (2) an officer or employee of an issuer of securities 
listed on Nasdaq or traded in the over-the-counter market; (3) a person 
affiliated with a broker or dealer that operates solely to assist the 
securities-related activities of the business of a non-member affiliate 
(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); (4) an employee of an entity that is 
affiliated with a broker or a dealer that does not account for a 
material portion of the revenues of the consolidated entity, and who is 
primarily engaged in the business of the non-member entity; or (5) any 
other individual who would not be an Industry Governor or committee 
member;
    [(t)](cc) ``person associated with a member'' or ``associated 
person of a member'' means every sole proprietor, partner, officer, 
director, or branch manager of any member, or any natural person 
occupying a similar status or performing similar functions, or any 
natural person engaged in the investment banking or securities

[[Page 25262]]

business who is directly or indirectly controlling or controlled by 
such member, whether or not any such person is registered or exempt 
from registration with the [Corporation] NASD pursuant to these By-Laws 
or the Rules of the Association;
    (dd) `` Public Director'' means a Director of the NASD Regulation 
Board or Nasdaq Board who has no material business relationship with a 
broker or dealer or the NASD, NASD Regulation, or Nasdaq;
    (ee) ``Public Governor'' or ``Public committee member'' means a 
Governor or committee member who has no material business relationship 
with a broker or dealer or the NASD, NASD Regulation, or Nasdaq;
    [(u)](ff) ``registered broker, dealer, municipal securities broker 
or dealer, or government securities broker or dealer'' means any 
broker, dealer, municipal securities broker or dealer, or government 
securities broker or dealer which is registered with the Commission 
under the Act; and
    [(v) ``rules of the Corporation'' means all rules of the 
Corporation (which rules may be referred to as ``NASD Rules''), 
Certificate of Incorporation, By-Laws,] (gg) `` Rules of the 
Association[, any other rules, and any interpretations thereunder.]'' 
or ``Rules'' means the numbered rules set forth in the NASD Manual 
beginning with the Rule 0100 Series, as adopted by the Board pursuant 
to these By-Laws, as hereafter amended or supplemented.

Article II

Offices

Location

    Sec. 1. The address of the registered office of the NASD in the 
State of Delaware and the name of the registered agent at such address 
shall be: The Corporation Trust Company, 1209 Orange Street, 
Wilmington, Delaware 19801. The NASD also may have offices at such 
other places both within and without the State of Delaware as the Board 
may from time to time designate or the business of the NASD may 
require.

Change of Location

    Sec. 2. In the manner permitted by law, the Board or the registered 
agent may change the address of the NASD's registered office in the 
State of Delaware and the Board may make, revoke, or change the 
designation of the registered agent.

Article [II] III

Qualifications of Members and Associated Persons

Persons Eligible to [become] Become Members and Associated Persons 
of Members

    Sec. 1. (a) Any registered broker, dealer, municipal securities 
broker or dealer, or government securities broker or dealer authorized 
to transact, and whose regular course of business consists in actually 
transacting, any branch of the investment banking or securities 
business in the United States, under the laws of the United States, 
shall be eligible for membership in the [Corporation] NASD, except such 
registered brokers, dealers, or municipal securities brokers or 
dealers, or government securities brokers or dealers which are excluded 
under the provisions of [Sections 3 (a) or (b) of this Article] Section 
3.
    (b) Any person shall be eligible to become an associated person of 
a member, except such persons who are excluded under the provisions of 
Section 3[(b) of this Article].

Authority of Board to Adopt Qualification Requirements

    Sec. 2. (a) The Board [of Governors] shall have authority to adopt 
rules and regulations applicable to applicants for membership, members, 
and persons associated with applicants or members establishing 
specified and appropriate standards with respect to the training, 
experience, competence, and such other qualifications as the Board [of 
Governors] finds necessary or desirable, and in the case of an 
applicant for membership or a member, standards of financial 
responsibility and operational capability.
    (b) In establishing and applying such standards, the Board [of 
Governors] may classify members and persons associated with such 
members, taking into account relevant matters, including the nature, 
extent, and type of business being conducted and of securities sold, 
dealt in, or otherwise handled. The Board [of Governors] may specify 
that all or any portion of such standards shall be applicable to any 
such class and may require the persons in any such class to be 
registered with the [Corporation] NASD.
    (c) The Board [of Governors] may from time to time make changes in 
such rules, regulations, and standards as it deems necessary or 
appropriate.

Ineligibility of Certain Persons for Membership or Association

    Sec. 3. (a) No registered broker, dealer, municipal securities 
broker or dealer, or government securities broker or dealer shall be 
admitted to membership, and no member shall be continued in membership, 
if such broker, dealer, municipal securities broker or dealer, 
government securities broker or dealer, or member fails or ceases to 
satisfy the qualification requirements established under Section 2 [of 
this Article], if applicable, or if such broker, dealer, municipal 
securities broker or dealer, government securities broker or dealer, or 
member is or becomes subject to a disqualification under Section 4 [of 
this Article], or if such member fails to comply with the requirement 
that all forms filed pursuant to these By-Laws be filed via electronic 
process or such other process the [Corporation] NASD may prescribe.
    (b) No person shall become associated with a member, continue to be 
associated with a member, or transfer association to another member, if 
such person fails or ceases to satisfy the qualification requirements 
under Section 2 [of this Article], if applicable, or if such person is 
or becomes subject to a disqualification under Section 4 [of this 
Article]; and no broker, dealer, municipal securities broker or dealer, 
or government securities broker or dealer shall be admitted to 
membership, and no member shall be continued in membership, if any 
person associated with it is ineligible to be an associated person 
under this subsection.
    (c) If it deems appropriate, the Board [of Governors], upon notice 
and opportunity for a hearing, may cancel the membership of a member if 
it becomes ineligible for continuance in membership under subsection 
(a) [hereof], may suspend or bar a person [for] from continuing to be 
associated with any member if such person is or becomes ineligible for 
association under subsection (b) [hereof], and may cancel the 
membership of any member who continues to be associated with any such 
ineligible person.
    (d) Any [broker, dealer, municipal securities dealer, or government 
securities broker or dealer which is ineligible for admission into 
membership, or any member which] member that is ineligible for 
continuance in membership[,] may file with the Board [of Governors] an 
application requesting relief from the ineligibility pursuant to 
[procedures adopted by the Board of Governors and contained in the 
Corporation's Procedural Rules. The Board of Governors] the Rules of 
the Association. A member may file such application on its own behalf 
and on behalf of a current or prospective associated person. The Board 
may, in its discretion, approve

[[Page 25263]]

the [admission] continuance in membership, and may also approve the 
association or continuance of [an applicant or member, or the] 
association [of any person], if the Board determines that such approval 
is consistent with the public interest and the protection of investors. 
Any approval hereunder may be granted unconditionally or on such terms 
and conditions as the Board considers necessary or appropriate. In the 
exercise of the authority granted hereunder, the Board [of Governors] 
may[: (1)] conduct such inquiry or investigation into the relevant 
facts and circumstances as it, in its discretion, considers necessary 
to its determination, which, in addition to the background and 
circumstances giving rise to the failure to qualify or 
disqualification, may include the proposed or present business of [an 
applicant for membership or of] a member and the conditions of 
association of any current or prospective associated person. 
[prospective or presently] associated person, among other matters; (2) 
permit, in limited types of situations, a membership or association 
with a member pending completion of its inquiry or investigation, and 
its final determination, based upon a consideration of relevant 
factors, and may classify situations taking into account the status of 
brokers, dealers, municipal securities brokers and dealers and 
government securities brokers and dealers as applicants or existing 
members and of persons as prospective or presently associated persons 
of members; the type of disqualification or failure to qualify; whether 
a member or associated person has been the subject of a previous 
approval and the terms and conditions thereof; and any other relevant 
factors; and
    (3) delegate any of its functions and authority under this 
subsection (d) to appropriate committees of the Corporation or to 
Corporation staff members.]
    (e) An application filed under subsection (d) [hereof] shall not 
foreclose any action which the Board [of Governors] is authorized to 
take under subsection (c) [hereof] until approval has been granted.
    (f) Approval by the Board of [Governors of] an application made 
under subsection (d) shall be subject to whatever further action the 
Commission may take pursuant to authority granted to the Commission 
under the Act.
    (g) The Board may delegate its authority under this Section in a 
manner not inconsistent with the Delegation Plan.

Definition of Disqualification

    Sec. 4. A person is subject to a ``disqualification'' with respect 
to membership, or association with a member, if such person:
    (a) has been and is expelled or suspended from membership or 
participation in, or barred or suspended from being associated with a 
member of, any self-regulatory organization, foreign equivalent of a 
self-regulatory organization, foreign or international securities 
exchange, contract market designated pursuant to Section 5 of the 
Commodity Exchange Act, or foreign equivalent of a contract market 
designated pursuant to any substantially equivalent foreign statute or 
regulation, or futures association registered under Section 17 of the 
Commodity Exchange Act or a foreign equivalent of a futures association 
designated pursuant to any substantially equivalent foreign statute or 
regulation, or has been and is denied trading privileges on any such 
contract market or foreign equivalent;
    (b) is subject to--
    (1) an order of the Commission, other appropriate regulatory 
agency, or foreign financial regulatory authority:
    (i) denying, suspending for a period not exceeding 12 months, or 
revoking [his] such person's registration as a broker, dealer, 
municipal securities dealer, government securities broker, or 
government securities dealer, or limiting [his] such person's 
activities as a foreign person performing a function substantially 
equivalent to any of the above; or
    (ii) barring or suspending for a period not exceeding 12 months 
[his] such person being associated with a broker, dealer, municipal 
securities dealer, government securities broker, government securities 
dealer, or foreign person performing a function substantially 
equivalent to any of the above;
    (2) an order of the Commodity Futures Trading Commission denying, 
suspending, or revoking [his] such person's registration under the 
Commodity Exchange Act (7 U.S.C. Sec. 1 et seq.); or
    (3) an order by a foreign financial regulatory authority denying, 
suspending, or revoking the person's authority to engage in 
transactions in contracts of sale of a commodity for future delivery or 
other instruments traded on or subject to the rules of a contract 
market, board of trade, or foreign equivalent thereof;
    (c) by [his] such person's conduct while associated with a broker, 
dealer, municipal securities dealer, government securities broker, or 
government securities dealer, or while associated with an entity or 
person required to be registered under the Commodity Exchange Act, has 
been found to be a cause of any effective suspension, expulsion, or 
order of the character described in [subsections] subsection (a) or (b) 
of this Section;
    (d) by [his] such person's conduct while associated with any 
broker, dealer, municipal securities dealer, government securities 
broker, government securities dealer, or any other entity engaged in 
transactions in securities, or while associated with an entity engaged 
in transactions in contracts of sale of a commodity for future delivery 
or other instruments traded on or subject to the rules of a contract 
market, board of trade, or foreign equivalent thereof, has been found 
to be a cause of any effective suspension, expulsion, or order by a 
foreign or international securities exchange or foreign financial 
regulatory authority empowered by a foreign government to administer or 
enforce its laws relating to financial transactions as described in 
subsection (a) or (b) of this Section;
    (e) has associated with him or her any person who is known, or in 
the exercise of reasonable care should be known, to him or her to be a 
person described in [subsections] subsection (a), (b), (c), or (d) of 
this Section;
    (f) has willfully made or caused to be made in any application for 
membership in a self-regulatory organization, or to become associated 
with a member of a self-regulatory organization, or in any report 
required to be filed with a self-regulatory organization, or in any 
proceeding before a self-regulatory organization, any statement which 
was at the time, and in light of the circumstances under which it was 
made, false or misleading with respect to any material fact, or has 
omitted to state in any such application, report, or proceeding any 
material fact which is required to be stated therein;
    (g)(1) has been convicted within ten years preceding the filing of 
any application for membership in the [Corporation] NASD, or to become 
associated with a member of the [Corporation] NASD, or at any time 
thereafter, of any felony or misdemeanor or of a substantially 
equivalent crime by a foreign court of competent jurisdiction which:
    (i) involves the purchase or sale of any security, the taking of a 
false oath, the making of a false report, bribery, perjury, burglary, 
any substantially equivalent activity however denominated by the laws 
of the relevant

[[Page 25264]]

foreign government, or conspiracy to commit any such offense;
    (ii) arises out of the conduct of the business of a broker, dealer, 
municipal securities dealer, government securities broker, government 
securities dealer, investment adviser, bank, insurance company, 
fiduciary, transfer agent, foreign person performing a function 
substantially equivalent to any of the above, or any entity or person 
required to be registered under the Commodity Exchange Act or any 
substantially equivalent foreign statute or regulation;
    (iii) involves the larceny, theft, robbery, extortion, forgery, 
counterfeiting, fraudulent concealment, embezzlement, fraudulent 
conversion, or misappropriation of funds or securities, or 
substantially equivalent activity however denominated by the laws of 
the relevant foreign government; or
    (iv) involves the violation of Sections 152, 1341, 1342, or 1343 or 
Chapters 25 or 47 of Title 18, United States Code, or a violation of a 
substantially equivalent foreign statute;
    (2) has been convicted within ten years preceding the filing of any 
application for membership in the [Corporation] NASD, or to become 
associated with a member of the [Corporation] NASD, or at any time 
thereafter of any other felony;
    (h) is permanently or temporarily enjoined by order, judgment, or 
decree of any court of competent jurisdiction from acting as an 
investment adviser, underwriter, broker, dealer, municipal securities 
dealer, government securities broker, government securities dealer, 
transfer agent, foreign person performing a function substantially 
equivalent to any of the above, entity or person required to be 
registered under the Commodity Exchange Act, or any substantially 
equivalent foreign statute or regulation, or as an affiliated person or 
employee of any investment company, bank, insurance company, foreign 
entity substantially equivalent to any of the above, or entity or 
person required to be registered under the Commodity Exchange Act or 
any substantially equivalent foreign statute or regulation, or from 
engaging in or continuing any conduct or practice in connection with 
any such activity, or in connection with the purchase or sale of any 
security;
    (i) has been found by a foreign financial regulatory authority to 
have--
    (1) made or caused to be made in any application for registration 
or report required to be filed with a foreign financial regulatory 
authority, or in any proceeding before a foreign financial regulatory 
authority with respect to registration, any statement that was at the 
time and in the light of the circumstances under which it was made 
false or misleading with respect to any material fact, or has omitted 
to state in any application or report to the foreign financial 
regulatory authority any material fact that is required to be stated 
therein;
    (2) violated any foreign statute or regulation regarding 
transactions in securities, or contracts of sale of a commodity for 
future delivery, traded on or subject to the rules of a contract market 
or any board of trade; or
    (3) aided, abetted, counseled, commanded, induced, or procured the 
violation by any person of any provision of any statutory provisions 
enacted by a foreign government, or rules or regulations thereunder, 
empowering a foreign financial regulatory authority regarding 
transactions in securities, or contracts of sale of a commodity for 
future delivery, traded or subject to the rules of a contract market or 
any board of trade, or has been found, by a foreign financial 
regulatory authority, to have failed reasonably to supervise, with a 
view to preventing violations of such statutory provisions, rules, and 
regulations, another person who commits such a violation, if such other 
person is subject to [his] such person's supervision.

Article [III] IV

Membership

Application for Membership

    Sec. 1. (a) Application for membership in the [Corporation] NASD, 
properly signed by the applicant, shall be made to the [Corporation] 
NASD via electronic process or such other process the [Corporation] 
NASD may prescribe, on the form to be prescribed by the [Corporation] 
NASD, and shall contain: (1) an [acceptance of and an agreement to 
abide by, comply with, and adhere to, all the provisions, conditions, 
and covenants of the Restated Certificate of Incorporation, the By-
Laws] agreement to comply with the federal securities laws, the rules 
and regulations [of the Corporation as they are or may from time to 
time be adopted, changed or amended,] thereunder, the rules of the 
Municipal Securities Rulemaking Board and the Treasury Department, the 
By-Laws of the NASD, NASD Regulation, and NASDaq, the Rules of the 
Association, and all rulings, orders, directions, and decisions [of,] 
issued and sanctions imposed [by, the Board of Governors or any duly 
authorized committee, and the provisions of the federal securities 
laws, including the rules and regulations adopted thereunder, including 
the rules of the Municipal Securities Rulemaking Board and the Treasury 
Department, provided, however, that such an agreement shall not be 
construed as a waiver by the applicant of any right to appeal as 
provided in the Act;] under the Rules of the Association;
    (2) an agreement to pay such dues, assessments, and other charges 
in the manner and amount as [shall from time to time be fixed by the 
Board of Governors pursuant to these By-Laws;] from time to time shall 
be fixed pursuant to the NASD By-Laws, Schedules to the NASD By-Laws, 
and the Rules of the Association;
    (3) an agreement that [none of] neither the [Corporations, or] 
NASD, nor any officer[,] or employee[, or] thereof, nor any member of 
the Board [or committees of the Corporations] of Governors or of any 
district or other committee, shall be liable, except for willful 
malfeasance, to the applicant or to any member of the [Corporation] 
NASD or to any other person, for any action taken by such officer or 
member of the [Boards] Board of Governors or of any district or other 
committee, in his official capacity, or by any employee of the 
[Corporations] NASD while acting within the scope of his employment or 
under instruction of any officer, [Board] board, or committee of the 
[Corporations] NASD, in connection with the administration or 
enforcement of any of the provisions of the [rules] Rules of the 
[Corporation] Association as they are or may from time to time be 
adopted, or amended, or any ruling, order, directive, decision of, or 
penalty imposed by, the [Boards] Board of Governors or any duly 
authorized committee [thereof], [or] the provisions of the federal 
securities laws, including the rules and regulations adopted 
thereunder, [and] including the rules of the Municipal Securities 
Rulemaking Board and the Treasury Department; and
    (4) such other reasonable information with respect to the applicant 
as the [Corporation] Board of Governors may require. (b) Any 
application for membership received by the [Corporation] NASD shall be 
processed in the manner set forth in the [Procedural] Rules of the 
[Corporation] Association. (c) Each member shall ensure that the 
member's membership application with the [Corporation] NASD is kept 
current at all times by supplementary amendments via electronic process 
or such other process the [Corporation] NASD may prescribe to the 
original application. Such amendments to the application shall be filed 
with the [Corporation] NASD not later than [thirty (30) calendar] 30 
days

[[Page 25265]]

after learning of the facts or circumstances giving rise to the 
amendment.

Similarity of Membership Names

    Sec. 2. (a) No person or firm shall be admitted to or continued in 
membership in the [Corporation] NASD having a name [which] that is 
identical to the name of another member appearing on the membership 
roll of the [Corporation] NASD or a name so similar to any such name as 
to tend to confuse or mislead. (b) No member may change its name 
without prior approval of the [Corporation] NASD.

Executive Representative

    Sec. 3. Each member shall appoint and certify to the Secretary of 
the [Corporation one ``executive] NASD one ``executive representative'' 
who shall represent, vote, and act for the member in all the affairs of 
the [Corporation] NASD, except that other executives of a member may 
also hold office in the [Corporation] NASD, serve on the Board [of 
Governors] or committees of the [Corporation] NASD, or otherwise take 
part in the affairs of the [Corporation] NASD. A member may change its 
executive representative upon giving notice thereof via electronic 
process or such other process the [Corporation] NASD may prescribe to 
the Secretary, or may, when necessary, appoint, by notice via 
electronic process to the Secretary, a substitute for its executive 
representative. An executive representative of a member or a substitute 
shall be a member of senior management and registered principal of the 
member.

Membership Roll

    Sec. 4. The Secretary of the [Corporation] NASD shall keep a 
currently accurate and complete membership roll, containing the name 
and address of each member, and the name and address of the executive 
representative of each member. In any case where a membership has been 
terminated, such fact shall be recorded together with the date on which 
the membership ceased. The membership roll of the [Corporation] NASD 
shall at all times be available to all members of the [Corporation] 
NASD, to all governmental authorities, and to the general public.

Resignation of Members

    Sec. 5. Membership in the [Association] NASD may be voluntarily 
terminated only by formal resignation. Resignations of members must be 
filed via electronic process or such other process the [Corporation] 
NASD may prescribe and addressed to the [Corporation] NASD. Any member 
may resign from the [Corporation] NASD at any time. Such resignation 
shall not take effect until [thirty (30) calendar] 30 days after 
receipt thereof by the [Corporation] NASD and until all indebtedness 
due the [Corporation] NASD from such member shall have been paid in 
full and so long as any complaint or action is pending against the 
member under the [Procedural] Rules of the Association. The 
[Corporation] NASD, however, may in its discretion declare a 
resignation effective at any time.

Retention of Jurisdiction

    Sec. 6. A resigned member or a member that has had its membership 
canceled or revoked shall continue to be subject to the filing of a 
complaint under the [Procedural] Rules of the Association based upon 
conduct which commenced prior to the effective date of the member's 
resignation from the [Corporation] NASD or the cancellation or 
revocation of its membership. Any such complaint, however, shall be 
filed within two [(2)] years after the effective date of resignation, 
cancellation, or revocation.

Transfer and Termination of Membership

    Sec. 7. (a) Except as provided hereinafter, no member of the 
[Corporation] NASD may transfer its membership or any right arising 
therefrom and the membership of a corporation, partnership, or any 
other business organization which is a member of the [Corporation] NASD 
shall terminate upon its liquidation, dissolution, or winding up, and 
the membership of a sole proprietor which is a member shall terminate 
at death, provided that all obligations of membership under the By-Laws 
and the [other rules] Rules of the [Corporation] Association have been 
fulfilled.
    (b) The consolidation, reorganization, merger, change of name, or 
similar change in any corporate member shall not terminate the 
membership of such corporate member provided that the member or 
surviving organization, if any, shall be deemed a successor to the 
business of the corporate member, and the member or the surviving 
organization shall continue in the investment banking and securities 
business, and shall possess the qualifications for membership in the 
[Corporation] NASD. The death, change of name, withdrawal of any 
partner, the addition of any new partner, reorganization, 
consolidation, or any change in the legal structure of a partnership 
member shall not terminate the membership of such partnership member 
provided that the member or surviving organization, if any, shall be 
deemed a successor to the business of the partnership member, and the 
member or surviving organization shall continue in the investment 
banking and securities business and shall possess the qualifications 
for membership in the [Corporation] NASD. If the business of any 
predecessor member is to be carried on by an organization deemed to be 
a successor organization by the [Corporation] NASD, the membership of 
such predecessor member shall be extended to the successor organization 
subject to the notice and review requirements of the Rules of the 
Association and the right of the NASD to place restrictions on the 
successor organization pursuant to the Rules of the Association; 
otherwise, any surviving organization shall be required to satisfy all 
of the membership application requirements of [the] these By-Laws and 
the Rules of the Association.

Registration of Branch Offices

    Sec. 8. (a) Each branch office of a member of the [Corporation] 
NASD shall be registered with and listed upon the membership roll of 
the [Corporation] NASD, and shall pay such dues, assessments, and other 
charges as shall be fixed from time to time by the Board [of Governors] 
pursuant to Article [V of the By-Laws] VI. (b) Each member of the 
[Corporation] NASD shall promptly advise the [Corporation] NASD via 
electronic process or such other process the [Corporation] NASD may 
prescribe of the opening, closing, relocation, change in designated 
supervisor, or change in designated activities of any branch office of 
such member not later than [thirty (30) calendar] 30 days after the 
effective date of such change.
Article [IV] V
Registered Representatives and Associated Persons

Qualification Requirements

    Sec. 1. No member shall permit any person associated with [such] 
the member to engage in the investment banking or securities business 
unless the member determines that such person [has complied with the 
applicable provisions under Article II of the By-Laws.] satisfies the 
qualification requirements established under Article III, Section 2 and 
is not subject to a disqualification under Article III, Section 4.

[[Page 25266]]

Application for Registration

    Sec. 2. (a) Application by any person for registration with the 
[Corporation] NASD, properly signed by the applicant, shall be made to 
the [Corporation] NASD via electronic process or such other process the 
[Corporation] NASD may prescribe, on the form to be prescribed by the 
[Corporation] NASD and shall contain:
    (1) [an acceptance of and] an agreement to comply with the [all the 
provisions of the rules of the Corporation as they are or may from time 
to time be adopted or amended,] federal securities laws, the rules and 
regulations thereunder, the rules of the Municipal Securities 
Rulemaking Board and the Treasury Department, the By-Laws of the NASD, 
NASD Regulation, and Nasdaq, the Rules of the Association, and all 
rulings, orders, directions [and decisions of, and penalties imposed 
by, the Board of Governors or any duly authorized committee, and the 
provisions of the federal securities laws, including the rules and 
regulations adopted thereunder, and the rules of the Municipal 
Securities Rulemaking Board and the Treasury Department, provided, 
however, that such an agreement shall not be construed as a waiver by 
the applicant of any right to appeal as provided in the Act;], and 
decisions issued and sanctions imposed under the Rules of the 
Association;
    (2) an agreement that [none of] neither the [Corporations, or] 
NASD, nor any officer[,] or employee[, or] thereof, nor any member of 
the [Boards or committees of the Corporation] Board of Governors or of 
any district or other committee, shall be liable except for willful 
malfeasance, to the applicant or to any member of the [Corporation] 
NASD or to any other person, for any action taken by such officer, 
member of the [Boards] Board of Governors or of any district or other 
committee in his official capacity, or by any employee of the 
[Corporation] NASD while acting within the scope of his employment, or 
under instruction of any officer, [Board] board, or committee of the 
[Corporations] NASD, in connection with the administration or 
enforcement of any of the provisions of the By-Laws, any [rules] Rules 
of the [Corporation] Association as they are or may from time to time 
be adopted or amended, any ruling, order, direction, decision of, or 
penalty imposed by the [Boards] Board of Governors or any duly 
authorized committee [thereof], [and] the provisions of the federal 
securities laws, including the rules and regulations adopted thereunder 
including the rules of the Municipal Securities Rulemaking Board and 
the rules of the Treasury Department; and
    (3) such other reasonable information with respect to the applicant 
as the [Corporation] NASD may require.
    (b) The [Corporation] NASD shall not approve an application for 
registration of any person who is not eligible to be an associated 
person of a member under the provisions of Article III, Section 3[(b) 
of Article II of these By-Laws].
    (c) Every application for registration filed with the [Corporation] 
NASD shall be kept current at all times by supplementary amendments via 
electronic process or such other process the [Corporation] NASD may 
prescribe to the original application. Such amendment to the 
application shall be filed with the [Corporation] NASD not later than 
[thirty (30) calendar] 30 days [of] after learning of the facts or 
circumstances giving rise to the amendment. If such amendment involves 
a statutory disqualification as defined in Section 3(a)(39) and Section 
15(b)(4) of the Act, such amendment shall be filed not later than ten 
[(10) calendar] days after such disqualification occurs.

Notification by Member to [Corporation] the NASD and Associated Person 
of Termination; Amendments to Notification

    Sec. 3. (a) Following the termination of the association with a 
member of a person who is registered with it, such member shall not 
later than [thirty (30) calendar] 30 days after such termination, give 
notice of the termination of such association to the [Corporation] NASD 
via electronic process or such other process the [Corporation] NASD may 
prescribe on a form designated by the [Corporation] NASD, and 
concurrently shall provide to the person whose association has been 
terminated a copy of said notice as filed with the [Corporation.] NASD. 
A member [which] that does not submit such notification, and provide a 
copy to the person whose association has been terminated, within the 
time period prescribed, shall be assessed a late filing fee as 
specified by the [Corporation] NASD. Termination of registration of 
such person associated with a member shall not take effect so long as 
any complaint or action under the [rules] Rules of the [Corporation] 
Association is pending against a member and to which complaint or 
action such person associated with a member is also a respondent, or so 
long as any complaint or action is pending against such person 
individually under the [rules] Rules of the [Corporation. The 
Corporation] Association. The NASD, however, may in its discretion 
declare the termination effective at any time.
    (b) The member shall notify the [Corporation] NASD via electronic 
process or such other process the [Corporation] NASD may prescribe by 
means of an amendment to the notice filed pursuant to subsection 
[paragraph] (a) [above] in the event that the member learns of facts or 
circumstances causing any information set forth in said notice to 
become inaccurate or incomplete. Such amendment shall be filed with the 
[Corporation] NASD via electronic process or such other process the 
[Corporation] NASD may prescribe and a copy provided to the person 
whose association with the member has been terminated not later than 
[thirty (30) calendar] 30 days after the member learns of the facts or 
circumstances giving rise to the amendment.

Retention of Jurisdiction

    Sec. 4. A person whose association with a member has been 
terminated and is no longer associated with any member of the 
[Corporation] NASD or a person whose registration has been revoked or 
canceled shall continue to be subject to the filing of a complaint 
under the [rules] Rules of the [Corporation] Association based upon 
conduct which commenced prior to the termination [or], revocation, or 
cancellation or upon such person's failure, while subject to the 
[Corporation's] NASD's jurisdiction as provided herein, to provide 
information requested by the [Corporation] NASD pursuant to [NASD Rule 
8210] the Rules of the Association, but any such complaint shall be 
filed within:
    (a) two [(2)] years after the effective date of termination of 
registration pursuant to Section 3 [above], provided, however that any 
amendment to a notice of termination filed pursuant to Section 3(b) 
that is filed within two years of the original notice which discloses 
that such person may have engaged in conduct actionable under any 
applicable statute, rule, or regulation shall operate to recommence the 
running of the two-year period under this [paragraph] subsection;
    (b) two [(2)] years after the effective date of revocation or 
cancellation of registration pursuant to [NASD Rule 8320] the Rules of 
the Association; or
    (c) in the case of an unregistered person, within two [(2)] years 
after the date upon which such person ceased to be associated with the 
member.

[[Page 25267]]

Article [V] VI

Dues, Assessments, and Other Charges

Power of [Corporation] the NASD to Fix and Levy Assessments

    Sec. 1. The [Corporation] NASD shall prepare an estimate of the 
funds necessary to defray reasonable expenses of administration in 
carrying on the work of the [Corporation] NASD each fiscal year, and on 
the basis of such estimate, shall fix and levy the amount of admission 
fees, dues, assessments, and other charges to be paid by members of the 
[Corporation] NASD and issuers and any other persons using any facility 
or system which the [Corporation] NASD, NASD Regulation, or Nasdaq 
operates or controls. Fees, dues, assessments, and other charges shall 
be called and payable as determined by the [Corporation] NASD from time 
to time; provided, however, that such admission fees, dues, 
assessments, and other charges shall be equitably allocated among 
members and issuers and any other persons using any facility or system 
which the [Corporation] NASD operates or controls. The [Corporation] 
NASD may from time to time make such changes or adjustments in such 
fees, dues, assessments, and other charges as it deems necessary or 
appropriate to assure equitable allocation of dues among members. In 
the event of termination of membership or the extension of any 
membership to a successor organization during any fiscal year for which 
an assessment has been levied and become payable, the [Corporation] 
NASD may make such adjustment in the fees, dues, assessments, or other 
charges payable by any such member or successor organization or 
organizations during such fiscal years as it deems fair and appropriate 
in the circumstances.

Reports of Members

    Sec. 2. Each member, issuer, or other person shall promptly furnish 
all information or reports requested by the [Corporation] NASD in 
connection with the determination of the amount of admission fees, 
dues, assessments, or other charges.

Suspension or Cancellation of Membership or Registration

    Sec. 3. The [Corporation] NASD after [fifteen (15)] 15 days notice 
in writing, may suspend or cancel the membership of any member or the 
registration of any person in arrears in the payment of any fees, dues, 
assessments, or other charges or for failure to furnish any information 
or reports requested pursuant to Section 2 [of this Article], or for 
failure to comply with an award of arbitrators properly rendered 
pursuant to [Section 41] the Rules of the [Code of Arbitration 
Procedure] Association, where a timely motion to vacate or modify such 
award has not been made pursuant to applicable law or where such a 
motion has been denied, or for failure to comply with a written and 
executed settlement agreement obtained in connection with an 
arbitration or mediation submitted for disposition pursuant to the 
[procedures specified by the Corporation] Rules of the Association.

Reinstatement of Membership or Registration

    Sec. 4. Any membership or registration suspended or canceled under 
this Article may be reinstated by the [Corporation] NASD upon such 
terms and conditions as it shall deem just; provided, however, that any 
applicant for reinstatement of membership or registration shall possess 
the qualifications required for membership or registration in the 
[Corporation.] NASD.

Delegation

    Sec. 5. The NASD may delegate its authority under this Article in a 
manner not inconsistent with the Delegation Plan.

Article [VI] VII

Board of Governors

Powers and Authority of Board

    Sec. 1. (a) The Board [of Governors] shall be the governing body of 
the [Corporation] NASD and, except as otherwise provided by applicable 
law, the Restated Certificate of Incorporation, or these By-Laws, shall 
be vested with all powers necessary for the management and 
administration of the affairs of the [Corporation] NASD and the 
promotion of the [Corporation's] NASD's welfare, objects, and purposes. 
In the exercise of such powers, the Board [of Governors] shall have the 
authority to:
    [(1)](i) adopt for submission to the membership, as hereinafter 
provided, such By-Laws and changes or additions thereto as it deems 
necessary or appropriate;
    [(2)](ii) adopt such other [rules] Rules of the [Corporation] 
Association and changes or additions thereto as it deems necessary or 
appropriate, provided, however, that the Board may at its option submit 
to the membership any such adoption, change, or addition to such 
[rules] Rules;
    [(3)](iii) make such regulations, issue such orders, resolutions, 
interpretations, including interpretations of these By-Laws and the 
[rules] Rules of the [Corporation] Association, and directions, and 
make such decisions as it deems necessary or appropriate;
    [(4)](iv) prescribe [a code of arbitration procedure providing] 
rules for the required or voluntary arbitration of controversies 
between members and between members and customers or others as it shall 
deem necessary or appropriate;
    [(5)](v) establish rules and procedures to be followed by members 
in connection with the distribution of securities issued by members and 
affiliates thereof;
    [(6)](vi) require all over-the-counter transactions in securities 
between members, other than transactions in exempted securities as 
defined in Section 3(a)(12) of the Act, to be cleared and settled 
through the facilities of a clearing agency registered with the 
Commission pursuant to the Act, which clears and settles such over-the-
counter transactions in securities;
    [(7)](vii) organize and operate automated systems to provide 
qualified subscribers with securities information and automated 
services. The systems may be organized and operated by a division or 
subsidiary company of the [Corporation] NASD or by one or more 
independent firms under contract with the [Corporation] NASD as the 
Board [of Governors] may deem necessary or appropriate. The Board [of 
Governors] may adopt rules for such automated systems, establish 
reasonable qualifications and classifications for members and other 
subscribers, provide qualification standards for securities included in 
such systems, require members to report promptly information in 
connection with securities included in such systems, and establish 
charges to be collected from subscribers and others;
    [(8)](viii) require the prompt reporting by members of such 
original and supplementary trade data as the Board deems appropriate. 
Such reporting requirements may be administered by the [Corporation] 
NASD, a division or subsidiary thereof, or a clearing agency registered 
under the Act; and
    [(9)](ix) engage in any activities or conduct necessary or 
appropriate to carry out the [Corporation's] NASD's purposes under its 
Restated Certificate of Incorporation and the federal securities laws.
    (b) In the event of the refusal, failure, neglect, or inability of 
any member of the Board [of Governors] to discharge [his] such member's 
duties, or for any cause affecting the best interests of the 
[Corporation] NASD the sufficiency of which the Board [of Governors] 
shall be

[[Page 25268]]

the sole judge, the Board shall have the power, by the affirmative vote 
of two-thirds of the Governors then in office, to remove such member 
and declare [his] such member's position vacant and that it shall be 
filled in accordance with the provisions of Section 6 [of this 
Article].
    (c) To the fullest extent permitted by applicable law, the Restated 
Certificate of Incorporation [and applicable law, the Corporation], and 
these By-Laws, the NASD may delegate any power of the [Corporation or 
the Board of Governors to any person or entity, including a subsidiary 
of the Corporation; provided that such delegation is] NASD or the Board 
to a committee appointed pursuant to Article IX, Section 1, the NASD 
Regulation Board, the Nasdaq Board, or NASD staff in a manner not 
inconsistent with the Delegation Plan.

Authority to Cancel or Suspend for Failure to Submit Required 
Information

    Sec. 2. (a) The Board [of Governors] shall have authority, upon 
notice and opportunity for a hearing, to cancel or suspend the 
membership of any member or suspend the association of any person 
associated with a member for failure to file, or to submit on request, 
any report, document, or other information required to be filed with or 
requested by the [Corporation.] NASD pursuant to these By-Laws or the 
Rules of the Association. 
    (b) Any membership or association suspended or canceled pursuant to 
this Section may be reinstated by the NASD pursuant to the Rules of the 
Association.
    [(b)](c) The Board [of Governors] is authorized to delegate [the 
authority hereinabove granted to the Chief Executive Officer of the 
Corporation; provided, however, that the Executive Committee of the 
Board of Governors shall be notified in writing of any such 
contemplated action by the Chief Executive Officer.] its authority 
under this Section in a manner not inconsistent with the Delegation 
Plan and otherwise in accordance with the Rules of the Association.

Authority To Take Action Under Emergency or Extraordinary Market 
Conditions

    Sec. 3. The Board [of Governors], or such person or persons as may 
be designated by the Board, in the event of an emergency or 
extraordinary market conditions, shall have the authority to take any 
action regarding[;]:
    [(1)](a) the trading in or operation of the over-the-counter 
securities market, the operation of any automated system owned or 
operated by the [Corporations] NASD, NASD Regulation, or Nasdaq, and 
the participation in any such system of any or all persons or the 
trading therein of any or all securities; and
    [(2)](b) the operation of any or all member firms' offices or 
systems, if, in the opinion of the Board or the person or persons 
hereby designated, such action is necessary or appropriate for the 
protection of investors or the public interest or for the orderly 
operation of the marketplace or the system.

Composition [and Qualifications] of the Board

    Sec. 4. (a) The Board [of Governors] shall be composed of [five or 
more members] at least nine and not more than thirteen Governors, the 
number thereof to be determined [from time to time by the Board of 
Governors, and shall include at all times the] by the Board prior to 
each annual election of the Governors. Any new Governor position 
created as a result of an increase in the size of the Board shall be 
filled as part of the annual election conducted under Sections 9 
through 13. The Chief Executive Officer [and such Industry, Non-
Industry, and Public Governors as shall be determined from time to time 
by the Board of Governors, both of which determinations shall be 
consistent with the Delegation Plan and Section 15A(b)(4) of the Act. 
The criteria for the categories of Industry, Non-Industry and Public 
Governors, as used herein, shall be established by the Board of 
Governors from time to time, which criteria shall be consistent with 
the Delegation Plan.] of the NASD shall be a Governor, and a majority 
of the remaining Governors shall be Non-Industry Governors, including 
at least two Public Governors. In the event that the Board shall 
consist of eleven or more Governors, at least three Governors shall be 
Public Governors.
    (b) As soon as practicable, following the annual election of 
members to the Board [of Governors], the Board [of Governors] shall 
elect from the members of the Board [of Governors a Chairman,] a Chair 
and such other persons having such titles as it shall deem necessary or 
advisable, to serve until the next annual election or until their 
successors are chosen and qualify. The persons so elected shall have 
such powers and duties as may be determined from time to time by the 
Board [of Governors]. The Board [of Governors, by affirmative vote of], 
by resolution adopted by a majority of [its members] the Governors then 
in office, may remove any such person from such position at any time.

Term of Office of Governors

    Sec. 5. Each Governor, except as otherwise provided by the Restated 
Certificate of Incorporation or these By-Laws, shall hold office for a 
term of not more than three years, such term to be fixed by the Board 
at the time of the nomination or certification of such Governor, or 
until [his] a successor is elected and qualified, or until [his] death, 
resignation, disqualification, or removal. Except for the Chief 
Executive Officer, no Governor may serve more than two consecutive 
terms[,]; provided, however, that if a Governor is appointed to fill a 
term of less than one year, such Governor may serve up to two 
consecutive terms following the expiration of such Governor's [current] 
initial term. The Chief Executive Officer of the [Corporation] NASD 
shall serve as a member of the Board until [his] a successor is 
selected and qualified, or until [his] death, resignation, 
disqualification, or removal.

Disqualification

    Sec. 6. A Governor shall immediately resign or be automatically 
removed from office if the Board determines by a majority vote of the 
remaining Governors that (a) the Governor no longer satisfies the 
classification (Industry, Non-Industry, or Public Governor) for which 
the Governor was elected; (b) failure to remove the Governor would 
violate the compositional requirements of the Board set forth in 
Section 4; and (c) the Governor has a remaining term of office of more 
than six months.

Filling of Vacancies

    Sec. [6.] 7. [(a) Any vacancy in the office of] If a Governor 
position becomes vacant, whether [occurring by reason] because of 
death, disability, disqualification, removal, or resignation, [other 
than a vacancy by reason of an increase in the size of the Board, shall 
be filled] the National Nominating Committee shall nominate, and the 
Board shall elect by majority vote of the remaining Governors then in 
office [and any person elected to fill such vacancy shall satisfy the 
qualifications and criteria], a person satisfying the classification 
(Industry, Non-Industry, or Public Governor) for the governorship 
[being filled] as provided in Section 4 [of this Article.] to fill such 
vacancy, except that if the remaining term of office for the vacant 
Governor position is not more than six months, no replacement shall be 
required. If the remaining term of office for the vacant Governor 
position is more than one year, the Governor elected by the Board to 
fill such position shall stand for election in the next annual election 
pursuant to this Article.

[[Page 25269]]

    [(b) Any vacancy in the office of a Governor occurring by reason of 
an increase in the size of the Board shall be filled by majority vote 
of the Board and any person elected to fill such vacancy shall satisfy 
the criteria for such newly created governorship as shall be 
established by resolution of the Board, provided that the filling of 
any such vacancy shall not be inconsistent with any other provisions of 
these By-Laws or the Delegation Plan.]

Meetings of Board; Quorum; Required Vote

    Sec. 8. Meetings of the Board shall be held at such times and 
places, upon such notice, and in accordance with such procedure as the 
Board [of Governors] in its discretion may determine. At all meetings 
of the Board, unless otherwise set forth in these By-Laws or required 
by law, a quorum [of the Board of Governors] for the transaction of 
business shall consist of a majority of the [total number of Governors 
of the Corporation and any] Board, including not less than 50 percent 
of the Non-Industry Governors. Any action taken by a majority vote at 
any meeting at which a quorum is present, except as otherwise provided 
in the Restated Certificate of Incorporation or these By-Laws, shall 
constitute the action of the Board [of Governors]. Members of the Board 
[of Governors], or any committee [appointed] designated by the Board 
[of Governors] or any other committee of the [Corporation] NASD, may 
participate in a meeting thereof by means of communications facilities 
that ensure all persons participating in the meeting can hear and speak 
to each other, and participation in a meeting pursuant to this By-Law 
shall constitute presence in person at such meeting. No member of the 
Board [of Governors] shall vote by proxy at any meeting of the Board.

The National Nominating Committee

    [(b)] Sec. 9. (a) The National Nominating Committee shall [have 
such powers and shall perform such functions as shall be determined by 
resolution of the Board of Governors from time to time, consistent with 
the Delegation Plan.] nominate Industry, Non-Industry, and Public 
Governors for each vacant or new Governor position on the NASD Board 
and Industry, Non-Industry, and Public Directors for each vacant or new 
position on the NASD Regulation Board and the Nasdaq Board.
    (b) The National Nominating Committee shall [consist of six or more 
persons who shall have such qualifications, and who shall be selected 
in such manner, as shall be determined by resolution of the Board of 
Governors from time to time, which qualifications and manner of 
selection shall be consistent with the Delegation Plan.] be composed of 
at least six and not more than nine members, the number thereof to be 
determined by the Board from time to time.
    (c) The members of the National Nominating Committee shall be 
equally balanced between Industry and Non-Industry committee members, 
including at least two Public committee members. If the Nominating 
Committee shall consist of seven or more members, at least three 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 NASD, NASD Regulation, or Nasdaq shall serve as a member of the 
National Nominating Committee in any voting or non-voting capacity. The 
NASD Regulation Board and the Nasdaq Board each shall select two 
members of the National Nominating Committee, and the NASD Board shall 
select the remaining committee members. Not more than three of the 
committee members and not more than two of the Industry committee 
members shall be current members of the Board, the NASD Regulation 
Board, or the Nasdaq Board. A National Nominating Committee member may 
not simultaneously serve on the National Nominating Committee and the 
Board, the NASD Regulation Board, or the Nasdaq Board, unless such 
member is in his or her final year of service on any such board, and 
following that year, that member may not stand for election to the 
Board, the NASD Regulation Board, or the Nasdaq Board until such time 
as he or she is no longer a member of the National Nominating 
Committee.
    (d) Members of the National Nominating Committee shall be appointed 
annually by the Board and may be removed for cause by a majority vote 
of the Board. The Board shall ensure that the composition of the 
National Nominating Committee meets the requirements of subsection (c). 
If the selection of a National Nominating Committee member by the NASD 
Regulation Board or Nasdaq Board would violate the compositional 
requirements of subsection (c), the Board shall request that the NASD 
Regulation Board or Nasdaq Board select another member such that the 
compositional requirements of subsection (c) are met.
    (e) The Secretary of the NASD shall collect from each nominee for 
Governor of the NASD Board and each nominee for Director of the NASD 
Regulation Board or Nasdaq Board such information as is reasonably 
necessary to serve as the basis for a determination of the nominee's 
classification as an Industry, Non-Industry, or Public Governor or 
Director, and the Secretary shall certify to the National Nominating 
Committee each nominee's classification.

Procedure for Nomination of Governors

    [(c)] Sec. 10. At least 90 days prior to a meeting of members for 
the election of Governors pursuant to Section 13, the [Corporation] 
NASD shall notify the members of the date, place, and time of such 
meeting and shall set forth in such notice the names of each nominee 
[(a ``Nominee''),] as selected by the National Nominating Committee[,] 
for each governorship up for election, [and shall further provide in 
such notice the qualifications ]the category of governorship (Industry, 
Non-Industry, or Public Governor) for which the nominee is nominated, 
the qualifications of each nominee, and such other information 
regarding each [such Nominee] nominee as the National Nominating 
Committee deems pertinent. A person who has not been so nominated may 
be included on the ballot for the election of Governors if [(1)](a) at 
least 60 days prior to the scheduled date for the meeting of members, 
such person [complies with the requirements and procedures for 
nomination set forth in the Delegation Plan and (2) the person is 
certified] presents duly executed petitions to the Secretary of the 
NASD demonstrating that such person has the support of three percent of 
the members, one-half of which must have their principal place of 
business outside of the district in which the person is employed; and 
(b) the Secretary certifies that (i) the petitions are duly executed by 
the requisite number of members; and (ii) the person satisfies the 
classification (Industry, Non-Industry, or Public Governor) of the 
governorship to be filled, based on such information provided by the 
person as is reasonably necessary to make the certification. The 
Secretary shall not unreasonably withhold or delay the certification. 
Upon certification, the election shall be deemed a contested election.

Communication of Views

    Sec. 11. The NASD, the Board, the National Nominating Committee, a 
committee appointed pursuant to Article IX, Section 1, and NASD staff 
shall not take any position publicly or with a member or person 
associated with or employed by a member with respect to any candidate 
in a contested

[[Page 25270]]

election or nomination held pursuant to these By-Laws or the NASD 
Regulation By-Laws. A Governor or a member of the National Nominating 
Committee or any other committee may communicate his or her views with 
respect to any candidate if such Governor or committee member acts 
solely in his or her individual capacity and disclaims any intention to 
communicate in any official capacity on behalf of the NASD, the NASD 
Board, the National Nominating Committee or any other committee. Except 
as provided herein, any candidate and his or her representatives may 
communicate support for the candidate to a membership or person 
associated with or employed by a member.

Administrative Support

    Sec. 12. The Secretary shall provide administrative support to the 
candidates in a contested election under this Article by sending to 
NASD members eligible to vote up to two mailings of materials prepared 
by the candidates. The NASD shall pay the postage for the mailings. The 
materials shall be prepared on the personal stationery of each 
candidate and shall state that the materials represent the opinions of 
the candidate. A candidate nominated by the National Nominating 
Committee may identify himself or herself as such in his or her 
materials. Any candidate may send additional materials to NASD members 
at the candidate's own expense. Except as provided in this Article, the 
NASD, the Board, any committee, and NASD staff shall not provide any 
other administrative support to a candidate in a contested election 
conducted under this Article or a contested election or nomination 
conducted under the NASD Regulation By-Laws.

Election of Board Members

    Sec. [7.(a)] 13 The members of the Board [of Governors] shall be 
elected by a plurality of the votes of the members of the [Corporation] 
NASD present in person or represented by proxy at the annual meeting of 
the [Corporation] NASD and entitled to vote thereat. The annual meeting 
of the [Corporation] NASD shall be on such date and at such place as 
the Board [of Governors] shall designate. Any Governor so elected must 
be nominated or certified by the National Nominating Committee 
[described in subsection (b) below or certified] pursuant to 
[subsection (c) below and must satisfy the other qualifications for 
Governors set forth in Section 4 of this Article or as established by 
resolution of the Board of Governors from time to time, which 
qualifications shall be consistent with the Delegation Plan] Section 
10.

Maintenance of Compositional Requirements of the Board

    Sec. 14. Each Governor shall update the information submitted under 
Section 9(e) regarding his or her classification as an Industry, Non-
Industry, or Public Governor at least annually and upon request of the 
Secretary, and shall report immediately to the Secretary any change in 
such classification.

Article [VII] VIII

Officers, Agents, and Employees

Officers

    Sec. 1. The Board [of Governors] shall [elect] select a Chief 
Executive Officer, who shall be responsible for the management and 
administration of its affairs and shall be the official representative 
of the [Corporation] NASD in all public matters and who shall have such 
powers and duties in the management of the [Corporation] NASD as may be 
prescribed in a resolution by the Board [of Governors], and which 
powers and duties shall not be inconsistent with the Delegation Plan. 
The Board shall elect a Secretary, who shall have such powers and 
duties conferred by these By-Laws and such other duties and powers as 
may be prescribed in a resolution by the Board. The Board may provide 
for such other executive or administrative officers as it shall deem 
necessary or advisable, including, but not limited to, Executive Vice 
[-]President, Senior Vice [-]President, Vice [-]President, [Secretary,] 
and Treasurer of the [Corporation] NASD. All such officers shall have 
such titles, [such] powers, and duties, and shall be entitled to such 
compensation, as shall be determined from time to time by the Board [of 
Governors]. Each such officer shall hold office until [his] a successor 
is elected and qualified or until [his] such officer's earlier 
resignation or removal. Any officer may resign at any time upon written 
notice to the [Corporation.] NASD. The Board [of Governors] may remove 
any officer, with or without cause, at any time, but such removal shall 
be without prejudice to the contractual rights of such officer, if any, 
with the [Corporation] NASD. Any number of offices may be held by the 
same person. Any vacancy occurring in any office of the [Corporation] 
NASD by death, resignation, removal, or otherwise may be filled for the 
unexpired portion of the term by the Board [of Governors] at any 
meeting.

Absence of Chief Executive Officer

    Sec. 2. In the case of the absence or inability to act of the 
[President] Chief Executive Officer of the [Corporation,] NASD, or in 
the case of a vacancy in such office, the Board [of Governors] may 
appoint its [Chairman] Chair or such other person as it may designate 
to act as such officer pro tem, who shall assume all the functions and 
discharge all the duties of the [President.] Chief Executive Officer.

Agents and Employees

    Sec. 3. The Board may employ or authorize the employment and 
prescribe the powers and duties of such agents and employees as it 
deems necessary or advisable. The employment and compensation of such 
agents and employees shall be at the pleasure of the Board, provided 
that such determinations are not inconsistent with the requirements of 
the Delegation Plan. Agents and employees of the NASD shall be under 
the supervision and control of the officers of the NASD, unless the 
Board, by resolution, provides that an agent or employee shall be under 
the supervision and control of the Board.

Employment of Counsel

    Sec. [3.] 4. The Board [of Governors] may retain or authorize the 
employment of counsel, with such powers, titles, duties, and authority 
as it shall deem necessary or advisable.

Administrative Staff

    Sec. 4. The Board of Governors may employ or authorize the 
employment and prescribe the powers and duties of such an 
administrative staff as it deems necessary or advisable. The employment 
and compensation of such administrative staff of the Corporation shall 
be at the pleasure of the Board of Governors, provided that such 
determinations are not inconsistent with the requirements of the 
Delegation Plan.]

Delegation of Duties of Officers

    Sec. 5. The Board may delegate the duties and powers of any officer 
of the NASD to any other officer or to any Governor for a specified 
period of time and for any reason that the Board may deem sufficient.

Resignation and Removal of Officers

    Sec. 6. (a) Any officer may resign at any time upon written notice 
of resignation to the Board, the President, or the Secretary. Any such 
resignation shall take effect upon receipt of such notice or at any 
later time specified therein. The acceptance of a resignation

[[Page 25271]]

shall not be necessary to make the resignation effective.
    (b) Any officer of the NASD may be removed, with or without cause, 
by resolution adopted by a majority of the Governors then in office at 
any regular or special meeting of the Board or by a written consent 
signed by all of the Governors then in office. Such removal shall be 
without prejudice to the contractual rights of the affected officer, if 
any, with the NASD.

Bond

    Sec. 7. The NASD may secure the fidelity of any or all of its 
officers, agents, or employees by bond or otherwise.

Article [VIII] IX

Committees

Appointment

    Sec. 1. Subject to Article VII, Section 1(c), the Board may appoint 
such committees or subcommittees as it deems necessary or desirable, 
and it shall fix their powers, duties [and terms of office; provided 
that such determinations are not inconsistent with requirements of the 
Delegation Plan], and terms of office. Any such committee or 
subcommittee consisting solely of one or more Governors, to the extent 
provided by these By-Laws or by resolution of the Board, shall have and 
may exercise all powers and authority of the Board in the management of 
the business and affairs of the [Corporation.] NASD.

Maintenance of Compositional Requirements of Committees

    Sec. 2. Upon request, each prospective committee member who is not 
a Governor shall provide to the Secretary of the NASD such information 
as is reasonably necessary to serve as the basis for a determination of 
the prospective committee member's classification as an Industry, Non-
Industry, or Public committee member, and the Secretary shall certify 
to the Board each prospective committee member's classification. Each 
committee member shall update the information submitted under this 
Section at least annually and upon request of the Secretary of the 
NASD, and shall report immediately to the Secretary any change in such 
classification.

Removal of Committee Member

    Sec. [2] 3. Any member of any committee or subcommittee appointed 
pursuant to this Article [VIII] may be removed from such committee or 
subcommittee only by a majority vote of the whole Board, after 
appropriate notice, for refusal, failure, neglect, or inability to 
discharge [his] such member's duties, or for any cause the sufficiency 
of which shall be decided by the Board.

[Resolution of the Board of Governors

Interpretations and Explanations

    The Executive Committee be and hereby is authorized and directed to 
consider and make recommendations to the Board of Governors with 
respect to such interpretative questions, having to do with the 
Certificate of Incorporation, By-Laws, Rules of Fair Practice and Code 
of Procedure of the Association, as may from time to time be submitted 
to the Committee by the Board of Governors or the President.
    Where a decision is required as to which reasonable men, equally 
well informed, might well not differ, the ruling shall be deemed to be 
an explanation. Where a decision is required where reasonable men, 
equally well informed, might well differ, the ruling shall be deemed to 
be an interpretation.
    Where in the judgment of the President and upon advice of Counsel, 
any question involves an answer clearly in the nature of an 
explanation, such question may be answered in the Office of the 
President.
    Where in the judgment of the President and upon advice of Counsel, 
any question involves an answer in the nature of an interpretation, the 
President shall present such question to the Executive Committee.
    The President may, after consultation with and upon advice of 
Counsel, give an office opinion. Such office opinion shall state that 
it reflects only the opinion of the office of the President and it is 
provisional and subject to the approval of the Board of Governors.
    District Committees, District Business Conduct Committees, Counsel 
or staff thereof, are hereby directed not to issue any interpretations 
of the Certificate of Incorporation, By-Laws, Rules of Fair Practice or 
Code of Procedure, either in oral or written form without presentation 
of the question to the President and in such case, if the questions 
presented appear to be an interpretation with the meaning of this 
resolution the matter shall be presented in writing to the Executive 
Committee.]

Executive Committee

    Sec. 4. The Board may appoint an Executive Committee, which shall, 
to the fullest extent permitted by the General Corporation Law and 
other applicable law, have and be permitted to exercise all the powers 
and authority of the Board in the management of the business and 
affairs of the NASD between meetings of the Board and which may 
authorize the seal of the NASD to be affixed to all papers that may 
require it. The Chief Executive Officer of the NASD shall be a member 
of the Executive Committee, and with respect to the remaining members, 
the Executive Committee shall have a percentage of Non-Industry 
Governors at least as great as the percentage of Non-Industry Governors 
on the whole Board, and a percentage of Public Governors at least as 
great as the percentage of Public Governors on the whole Board.

Audit Committee

    Sec. 5. (a) The Board shall appoint an Audit Committee. The Audit 
Committee shall be composed of four or five Governors, none of whom 
shall be officers or employees of the Association. The Audit Committee 
shall include at least one Public Governor who shall serve as Chair of 
the Committee. If the Audit Committee is composed of five Governors, it 
shall have not more than two Industry Governors. If the Committee is 
composed of four Governors, it shall have not more than one Industry 
Governor. If the size of the NASD Board shall at any time consist of 11 
or more members, the Audit Committee shall include two Public 
Governors. The NASD Regulation Board and the Nasdaq Board each shall 
designate a Public Director of its Board as a liaison to the Audit 
Committee. The Audit Committee may consult with such liaisons on issues 
relating to the functions of NASD Regulation and Nasdaq, but neither 
the liaisons nor any officer or employee of the NASD, NASD Regulation, 
or Nasdaq shall serve on the Audit Committee in any voting or non-
voting capacity.
    (b) The Audit Committee shall perform the following functions: (1) 
ensure the existence of adequate controls and the integrity of the 
financial reporting process of the NASD; (2) recommend to the NASD 
Board, and monitor the independence and performance of, the certified 
public accountants retained as outside auditors by the NASD; and (3) 
direct and oversee all the activities of the NASD's internal review 
function, including but not limited to management's responses to the 
internal review function.
    (c) 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 such Audit

[[Page 25272]]

Committee member 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. Audit Committee members shall consult with the General 
Counsel of the NASD to determine if recusal is necessary. If a member 
of the Audit 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 Audit Committee.
    (d) The Audit Committee shall have exclusive authority to: (1) hire 
or terminate the Director of Internal Review; (2) determine the 
compensation of the Director of Internal Review; and (3) 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 the Audit Committee 
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.

Article X

Compensation of Board and Committee Members

    [Sec. 5.] The Board may provide for reasonable compensation of the 
Chair[man] of the Board, the Governors, and the members of any 
committee [of the Board from the Corporation]. The Board may also 
provide for reimbursement of reasonable expenses incurred by such 
persons in connection with the business of the [Corporation] NASD.

Article [IX] XI

Rules

    To promote and enforce just and equitable principles of trade and 
business, to maintain high standards of commercial honor and integrity 
among members of the [Corporation] NASD, to prevent fraudulent and 
manipulative acts and practices, to provide safeguards against 
unreasonable profits or unreasonable rates of commissions or other 
charges, to protect investors and the public interest, to collaborate 
with governmental and other agencies in the promotion of fair practices 
and the elimination of fraud, and in general to carry out the purposes 
of the [Corporation] NASD and of the Act, the Board [of Governors] is 
hereby authorized to adopt such [Rules of Fair Practice] rules for the 
members and persons associated with members, and such amendments 
thereto as it may, from time to time, deem necessary or appropriate. If 
any such [Rules] rules or amendments thereto are approved by the 
Commission as provided in the Act, they shall become effective Rules of 
the Association as of such date as the Board [of Governors] may 
prescribe. The Board [of Governors] is hereby authorized, subject to 
the provisions of the By-Laws and the Act, to administer, enforce, 
suspend, or cancel any Rules of [Fair Practice] the Association adopted 
hereunder.

Article [X] XII

Disciplinary Proceedings

    Sec. 1. The Board [of Governors] shall have authority to establish 
procedures relating to disciplinary proceedings involving members and 
their associated persons.
    Sec. 2. Except as otherwise permitted under these By-Laws or the 
Act, in any disciplinary proceeding [before the Corporation] under the 
Rules of the Association, any member or person associated with a member 
shall be given the opportunity to have a hearing at which [he] such 
member or person associated with a member shall be entitled to be heard 
in person [and/or by counsel] or by counsel or by a representative as 
provided in the Rules of the Association. Such persons may present any 
relevant material in accordance with the Rules of the Association. In 
any such proceeding against a member or against a person associated 
with a member to determine whether the member [and/or] or the person 
associated with a member shall be disciplined:
    (a) specific charges shall be brought;
    (b) such member or person associated with a member shall be 
notified of and be given an opportunity to defend against such charges;
    (c) a record shall be kept; and
    (d) any determination shall include a statement setting forth:
    (1) any act or practice, in which such member or person associated 
with a member may be found to have engaged or which such member or 
person associated with a member may be found to have omitted;
    (2) the rule, regulation, or statutory provision of which any such 
act or practice, or omission to act, is deemed to be in violation;
    (3) the basis upon which any findings are made; and
    (4) the [penalty] sanction imposed.

Article [XI] XIII

Powers of Board to [Prescribe] Impose Sanctions

    Sec. 1. The Board is hereby authorized to [prescribe] impose 
appropriate sanctions applicable to members, including censure, fine, 
suspension, or expulsion from membership, suspension or bar from being 
associated with all members, limitation of activities, functions, and 
operations of a member, or any other fitting sanction, and to 
[prescribe] impose appropriate sanctions applicable to persons 
associated with members, including censure, fine, suspension or barring 
a person associated with a member from being associated with all 
members, limitation of activities, functions, and operations of a 
person associated with a member, or any other fitting sanction, for:
    (a) breach by a member or a person associated with a member of any 
covenant with the [Corporation] NASD or its members;
    (b) violation by a member or a person associated with a member of 
any of the terms, conditions, covenants, and provisions of the [rules 
of the Corporation] By-Laws of the NASD, NASD Regulation, or Nasdaq, 
the Rules of the Association, or the federal securities laws, including 
the rules and regulations adopted thereunder, [and including] the rules 
of the Municipal Securities Rulemaking Board, and the rules of the 
Treasury Department;
    (c) failure by a member or person associated with a member to 
submit a dispute for arbitration [under the Code of Arbitration 
Procedure (``Arbitration Code'')] as required by the [Arbitration Code] 
Rules of the Association, or to fail to appear or to produce any 
document in [their] the member's or person's possession or control as 
directed pursuant to provisions of the [Arbitration Code] Rules of the 
Association, or to fail to [honor] comply with an award of arbitrators 
properly rendered pursuant to the [Arbitration Code] Rules of the 
Association, where a timely motion [has not been made] to vacate or 
modify such award has not been made pursuant to applicable law or where 
such a motion has been denied or for failure to comply with a written 
and executed settlement agreement obtained in connection with an 
arbitration or mediation submitted for disposition pursuant to the 
Rules of the Association;
    (d) refusal by a member or person associated with a member to abide 
by an official ruling of the Board or any committee exercising powers 
assigned by the Board with respect to any

[[Page 25273]]

transaction which is subject to the Uniform Practice Code; or
    (e) failure by a member or person associated with a member to 
adhere to any ruling, order, direction, or decision of[,] or to pay any 
[penalty,] sanction, fine, or costs[,] imposed by the Board[, or any 
committee exercising powers assigned by the Board] or any entity to 
which the Board has delegated its powers in accordance with the 
Delegation Plan.
    Sec. 2. The Board may delegate its authority under this Article in 
accordance with the Delegation Plan.

Article [XII] XIV

Uniform Practice Code

Authority to Adopt Code

    Sec. 1. The Board [of Governors] is hereby authorized to adopt a 
Uniform Practice Code and amendments, interpretations and explanations 
thereto, designed to make uniform, where practicable, custom, practice, 
usage, and trading technique in the investment banking and securities 
business with respect to such matters as trade terms, deliveries, 
payments, dividends, rights, interest, reclamations, exchange of 
confirmations, stamp taxes, claims, assignments, powers of 
substitution, computation of interest and basis prices, due-bills, 
transfer fees, ``when, as and if issued'' trading, ``when, as and if 
distributed'' trading, marking to the market, and close-out procedure, 
all to the end that the transaction of day-to-day business by members 
may be simplified and facilitated, that business disputes and 
misunderstandings, which arise from uncertainty and lack of uniformity 
in such matters, may be eliminated, and that the mechanisms of a free 
and open market may be improved and impediments thereto removed.

Administration of Code

    Sec. 2. The administration of any Uniform Practice Code, or any 
amendment thereto, adopted by the Board [of Governors] pursuant to 
Section 1 [of this Article], shall be vested in the Board [of 
Governors], and the Board is hereby granted such powers as are 
reasonably necessary to achieve its effective operation. In the 
exercise of such powers, the Board may issue explanations and 
interpretations and make binding rulings with respect to the 
applicability of the provisions of the Uniform Practice Code to 
situations in which there is no substantial disagreement as to the 
facts involved. [The] In accordance with the Delegation Plan, the Board 
may delegate to [appropriate committees such of its powers,] the NASD 
Regulation Board and the Nasdaq Board such of the Board's powers 
hereunder as it deems necessary and appropriate to achieve effective 
administration and operation of the Uniform Practice Code.

Transactions Subject to Code

    Sec. 3. All over-the-counter transactions in securities by members, 
except transactions in securities which are exempted under Section 
3(a)(12) of the Act, or are municipal securities as defined in Section 
3(a)(29) of the Act, are subject to the provisions of the Uniform 
Practice Code and to the provisions of Section 2 [of this Article] 
unless exempted therefrom by the terms of the Uniform Practice Code.

Article [XIII] XV

Limitation of Powers

Prohibitions

    Sec. 1. Under no circumstances shall the Board [of Governors] or 
any officer, employee, or member of the [Corporation] NASD have the 
power to:
    (a) make any donation or contribution from the funds of the 
[Corporation] NASD or to commit the [Corporation] NASD for the payment 
of any donations or contributions for political or charitable purposes; 
or
    (b) use the name of the facilities of the [Corporation] NASD in aid 
of any political party or candidate for any public office.

Use of Name of [Corporation] the NASD by Members

    Sec. 2. No member shall use the name of the [Corporation] NASD 
except to the extent that may be [authorized by the Board of Governors] 
permitted by the Rules of the Association.

[Resolution of the Board of Governors

Limitations Upon Use of the Association Name

    Members are permitted, in conformity with Article XVI, Section 2 of 
the Association's By-Laws, and within the limitations prescribed by 
this Resolution, to indicate membership in the Association in the 
following manner:
    1. Solely as a matter of record in recognized trade directories or 
other similar types of business listings.
    2. Solely in conjunction with the identifying use of the firm name 
on letterheads, booklet covers, sales literature headings, in the 
masthead of market letters and on other similar types of circular 
material, so long as this use is exclusively for identification 
purposes, is separate and apart from the regular text of the literature 
and is always in a smaller size type and with lesser emphasis than that 
used for the firm name.
    3. The Association's name may be used in institutional or any other 
type of general print and/or electronic advertising media so long as 
such use is solely and exclusively for identifying the firm as a 
member, used only in proximity to and in conjunction with the firm 
name, carries no implied or specific indication of Association approval 
of the securities or services discussed in the advertisement, is 
separate and apart from the primary text material in the advertisement, 
and is always in a smaller size type and of lesser emphasis than that 
used for the firm name.
    4. The following language may be used on confirmation forms, ``this 
transaction (if over-the-counter) has been executed in conformity with 
the rules and regulations of the Uniform Practice Code of the National 
Association of Securities Dealers, Inc.''
    5. The name of the Association may be used on the door or entrance 
way of a member's principal office or any registered branch office in 
the following manner: ``Member, (of the) National Association of 
Securities Dealers, Inc.''
    6. Each member shall be entitled to receive upon request to the 
Association an appropriate certification of membership which may be 
displayed in the principal office or any registered branch office of 
the member. Such certification shall be and remain the property of the 
Association and shall be returned by a member upon request of the Board 
of Governors or the President of the Association.
    No member or person associated with a member shall use the name of 
the Association in a fraudulent or misleading manner in connection with 
the promotion or sale of any specific security or in connection with 
any other aspect of the member's business; or imply orally, visually or 
in writing that the Association endorses, indemnifies or guarantees any 
member's business practices, selling methods or class or type of 
securities offered.
    Any improper, fraudulent or misleading use of the Association's 
name by a member or person associated with a member shall be deemed 
conduct inconsistent with high standards of commercial honor and just 
and equitable principles of trade in violation of Article III, Section 
1 of the Association's Rules of Fair Practice.]

Unauthorized Expenditures

    Sec. 3. No officer, employee, member of the Board [of Governors] or 
of any committee[,] shall have any power to

[[Page 25274]]

incur or contract any liability on behalf of the [Corporation] NASD not 
authorized by the Board [of Governors]. The Board may delegate to the 
Chief Executive Officer of the [Corporation or his delegate] NASD or 
the Chief Executive Officer's delegate, such authority as it deems 
necessary to contract on behalf of the [Corporation] NASD or to satisfy 
unanticipated liabilities during the period between Board meetings.

Conflicts of Interest

    Sec. 4. [A ](a) A Governor or a member of [the Board of Governors 
or of any] a committee [of the Corporation] shall not directly or 
indirectly participate in any adjudication of the interests of any 
party if such [participation would violate the] Governor or committee 
member has a conflict of interest [provisions of the Procedural Rules 
of the Corporation.] or bias, or if circumstances otherwise exist where 
his or her fairness might reasonably be questioned. In any such case, 
the Governor or committee member shall recuse himself or herself or 
shall be disqualified in accordance with the Rules of the Association. 
(b) No contract or transaction between the NASD and one or more of its 
Governors or officers, or between the NASD and any other corporation, 
partnership, association, or other organization in which one or more of 
its Governors or officers are directors or officers, or have a 
financial interest, shall be void or voidable solely for this reason 
if: (i) the material facts pertaining to such Governor's or officer's 
relationship or interest and the contract or transaction are disclosed 
or are known to the Board or the committee, and the Board or committee 
in good faith authorizes the contract or transaction by the affirmative 
vote of a majority of the disinterested Governors; or (ii) the material 
facts are disclosed or become known to the Board or committee after the 
contract or transaction is entered into, and the Board or committee in 
good faith ratifies the contract or transaction by the affirmative vote 
of a majority of the disinterested Governors. Only disinterested 
Governors may be counted in determining the presence of a quorum at the 
portion of a meeting of the Board or of a committee that authorizes the 
contract or transaction.

Municipal Securities

    Sec. 5. The provisions of the By-Laws conferring rulemaking 
authority upon the Board [of Governors] shall not be applicable to the 
municipal securities activities of members or persons associated with 
members to the extent that the application of such authority would be 
inconsistent with Section 15B of the Act.
[Government Securities
    Sec. 6. The provisions of the By-Laws governing qualifications of 
members and persons associated with members and conferring rulemaking 
authority upon the Board of Governors shall not be applicable to the 
Government securities activities of members or persons associated with 
members to the extent that the application of such provisions or 
authority would be inconsistent with Section 15A(f) of the Act.]

Article [XIV] XVI

Procedure for Adopting Amendments to By-Laws

    [Any member of the Board of Governors by resolution, any District 
Committee by resolution, or any twenty-five members of the Corporation 
by petition signed by such members,] A Governor, a committee of the 
Board, the NASD Regulation Board, and the Nasdaq Board by resolution 
may propose amendments to these By-Laws. [Every proposed amendment 
shall be presented in writing to the Board of Governors and a record 
shall be kept thereof. The board of Governors may adopt any proposed 
amendment to these By-Laws by affirmative vote of a majority of the 
members of the Board of Governors then in office. The Board of 
Governors, upon adoption of any such amendment to these By-Laws, except 
as otherwise provided in these By-Laws shall forthwith cause a copy to 
be sent to and voted upon by each member of the Corporation.] Any 25 
members of the NASD by petition signed by such members may propose 
amendments to these By-Laws. The Chief Executive Officer of the NASD, 
the President of NASD Regulation, and the President of Nasdaq may 
propose amendments to these By-Laws. Every proposed amendment shall be 
presented in writing to the Board and a record shall be kept thereof. 
The Board may adopt any proposed amendment to these By-Laws [is 
approved by ]by affirmative vote of a majority of the members [voting 
within thirty (30)] of the Board then in office. The Board, upon 
adoption of any such amendment to these By-Laws, except as otherwise 
provided in these By-Laws, shall forthwith cause a copy to be sent to 
and voted upon by each member of the NASD. If such amendment to these 
By-Laws is approved by a majority of the members voting within 30 days 
after the date of submission to the membership, and is approved by the 
Commission as provided in the Act, it shall become effective as of such 
date as the Board [of Governors] may prescribe.

Article [XV] XVII

Corporate Seal

    [Sec. 1.] The corporate seal shall have inscribed thereon the name 
of the [Corporation] NASD, the year of its organization and the words 
``Corporate Seal, Delaware.'' Said seal may be used by causing it or a 
facsimile thereof to be imposed or affixed or reproduced or otherwise.

Article [XVI] XVIII

Checks
    All checks or demands for money and notes of the [Corporation] NASD 
shall be signed by such officer or officers or such other person or 
persons as the Board [of Governors] may from time to time designate.

Article [XVII] XIX

Annual Financial Statement

    As soon as practicable after the end of each fiscal year, the Board 
[of Governors] shall send to each member of the [Corporation] NASD a 
reasonably itemized statement of receipts and expenditures of the 
[Corporation] NASD for such preceding fiscal year.
* * * * *

By-Laws of NASD Regulation, Inc.

Article I

Definitions

    When used in these By-Laws, unless the context otherwise requires, 
the term:
    (a) ``Act'' means the Securities Exchange Act of 1934, as amended;
    (b) ``Board'' means the Board of Directors of NASD Regulation;
    (c) ``broker'' means any individual, corporation, partnership, 
association, joint stock company, business trust, unincorporated 
organization, or other legal entity engaged in the business of 
effecting transactions in securities for the account of others, but 
does not include a bank;
    (d) ``Commission'' means the Securities and Exchange Commission;
    (e) ``day'' means calendar day;
    (f) ``dealer'' means any individual, corporation, partnership, 
association, joint stock company, business trust, unincorporated 
organization, or other legal entity engaged in the business of buying 
and selling securities for such individual's or entity's own account, 
through a broker or otherwise, but does not include a bank, or any 
person insofar as such person buys or sells securities for such 
person's own

[[Page 25275]]

account, either individually or in some fiduciary capacity, but not as 
part of a regular business;
    (g) ``Delaware law'' means the General Corporation Law of the State 
of Delaware;
    (h) ``Delegation Plan'' means the ``Plan of Allocation and 
Delegation of Functions by NASD to Subsidiaries'' as approved by the 
Commission, and as amended from time to time;
    (i) ``Director'' means a member of the Board, excluding the Chief 
Executive Officer of the NASD;
    (j) ``district'' means a district established by the Board pursuant 
to Article VIII, Section 8.1 of these By-Laws;
    (k) ``District Committee'' means a District Committee elected 
pursuant to Article VIII of these By-Laws;
    (l) ``District Director'' means an NASD Regulation staff member who 
heads a district office;
    (m) ``District Nominating Committee'' means a District Nominating 
Committee elected pursuant to Article VIII of these By-Laws;
    (n) ``district office'' means an office of NASD Regulation located 
in a district;
    (o) ``Executive Representative'' means the executive representative 
of an NASD member appointed pursuant to Article IV, Section 3 of the 
NASD By-Laws;
    (p) ``Independent Agent'' means a corporation or entity selected by 
the Secretary of NASD Regulation to assist NASD Regulation with 
nomination and election procedures under Articles VI and VIII of these 
By-Laws and the representatives of such corporation or entity;
    (q) ``Industry Director'' or ``Industry committee member'' means a 
Director (excluding the President of NASD Regulation) or a committee 
member who (1) is an officer, director, or employee of a broker or 
dealer or has been employed in any such capacity at any time within the 
prior three years; or (2) has a consulting or employment relationship 
with or provides professional services to the NASD, NASD Regulation, or 
Nasdaq or has had any such relationship or provided any such services 
at any time within the prior three years;
    (r) ``NASD'' means the National Association of Securities Dealers, 
Inc.;
    (s) ``NASD Board'' means the NASD Board of Governors;
    (t) ``NASD member'' means any broker or dealer admitted to 
membership in the NASD;
    (u) ``NASD Regulation'' means NASD Regulation, Inc.;
    (v) ``National Nominating Committee'' means the National Nominating 
Committee appointed pursuant to Article VII, Section 9 of the NASD By-
Laws;
    (w) ``Non-Industry Director'' or ``Non-Industry committee member'' 
means a Director or a committee member who is (1) a Public Director or 
committee member; (2) an officer or employee of an issuer of securities 
listed on Nasdaq or traded in the over-the-counter market; (3) a person 
affiliated with a broker or dealer that operates solely to assist the 
securities-related activities of the business of a non-member affiliate 
(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); (4) an employee 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 is 
primarily engaged in the business of the non-member entity; or (5) any 
other individual who would not be an Industry Director or committee 
member;
    (x) ``Public Director'' or ``Public committee member'' means a 
Director or committee member who has no material business relationship 
with a broker or dealer or the NASD, NASD Regulation, or Nasdaq;
    (y) ``Regional Nominating Committee'' means a Regional Nominating 
Committee that nominates to the National Nominating Committee a 
candidate for the Board to represent a geographical region as provided 
in Article VI of these By-Laws; and
    (z) ``Rules of the Association'' or ``Rules'' means the numbered 
rules set forth in the NASD Manual beginning with the Rule 0100 Series, 
as adopted by the NASD Board pursuant to the NASD By-Laws, as hereafter 
amended or supplemented.

Article [I] II

Offices

Location

    Sec. [1.1] 2.1  The address of the registered office of [the 
Corporation] NASD Regulation in the State of Delaware and the name of 
the registered agent at such address shall be: The Corporation Trust 
Company, 1209 Orange [St.,] Street, Wilmington, [DE] Delaware 19801. 
[The Corporation may] NASD Regulation also may have offices at such 
other places both within and without the State of Delaware as the Board 
[of Directors] may from time to time designate or the business of [the 
Corporation] NASD Regulation may require.

Change of Location

    Sec. [1.2] 2.2  In the manner permitted by law, the Board [of 
Directors] or the registered agent may change the address of [the 
Corporation's] NASD Regulation's registered office in the State of 
Delaware and the Board [of Directors] may make, revoke, or change the 
designation of the registered agent.

Article [II] III

Meetings of Stockholders

[Annual Meeting

    Sec. 2.1  The annual meeting of stockholders of the Corporation for 
the election of Directors and for the transaction of such other 
business as may properly come before the meeting shall be held on such 
date, and at such time, and place, within or without the State of 
Delaware, as may be fixed, from time to time, by the Board of 
Directors.]

[Special Meetings

    Sec. 2.2  Special meetings of stockholders of the Corporation, 
unless otherwise prescribed by law, may be called at any time by the 
Chair of the Board, by the President or by order of a majority of the 
Board of Directors. Special meetings of stockholders prescribed by law 
for the election of directors shall be called by the Board of 
Directors, the President, or the Secretary. Special meetings of 
stockholders shall be held at such place within or without the State of 
Delaware as shall be designated in the notice of meeting.]

[Notice of Meetings

    Sec. 2.3  (a) Whenever stockholders are required or permitted to 
take any action at a meeting, they shall be given written notice 
stating the place, date and hour of the meeting, and, in the case of a 
special meeting, the purpose or purposes thereof. Unless otherwise 
required by law, the Certificate of Incorporation or these By-Laws, 
written notice shall be delivered or mailed at least ten but not more 
than sixty days before such meeting date to each stockholder entitled 
to vote at such meeting. If mailed, such notice shall be deposited in 
the United States mail, postage prepaid, directed to each stockholder 
at the address that appears on the records of the Corporation.
    [(b) When a meeting of stockholders is adjourned to another time or 
place, notice need not be given of the adjourned meeting if the time 
and place thereof are announced at the meeting at which the adjournment 
is taken. At the adjourned meeting, the Corporation may transact any 
business that might have been transacted at the original meeting. If, 
however, the adjournment is for more than thirty days from the date of 
the

[[Page 25276]]

original meeting, or if, after the adjournment, a new record date is 
set for the adjourned meeting, notice of the adjourned meeting shall be 
given to each stockholder of record entitled to vote at the meeting in 
the manner prescribed above in subsection (a).]

[Quorum

    Sec. 2.4  Except as otherwise provided by law, the Certificate of 
Incorporation or these By-Laws, at each meeting of stockholders the 
presence in person or by proxy of the holders of record of a majority 
of the outstanding shares of capital stock entitled to vote or act at 
such a meeting shall constitute a quorum for the transaction of any 
business. In the absence of a quorum, the stockholders so present may 
by majority rule, adjourn any meeting until a quorum shall be present. 
When a quorum is once present to organize a meeting, the quorum cannot 
be destroyed by the subsequent withdrawal or revocation of the proxy of 
any stockholder.]

[Voting

    Sec. 2.5  (a) At any meeting of stockholders, each stockholder as 
of the record date is entitled to one vote for each such share of stock 
having voting power, upon the matter in question, except as otherwise 
provided in the Certificate of Incorporation. Each stockholder entitled 
to vote at a meeting of stockholders or to express consent or dissent 
to corporate action in writing without a meeting may authorize another 
person or persons to act for him by proxy, provided that no proxy shall 
be voted or acted upon after three years from its date, unless the 
proxy provides for a longer period. A duly executed proxy shall be 
irrevocable if it states that it is irrevocable and if, and only so 
long as, it is coupled with an interest sufficient in law to support an 
irrevocable power. A stockholder may revoke any proxy that is not 
irrevocable by attending the meeting and voting in person or by filing 
an instrument in writing revoking the proxy or by delivering a proxy in 
accordance with applicable law bearing a later date to the Secretary of 
the Corporation.]
    [(b) Directors of the Corporation shall be elected by a plurality 
of the votes cast at a meeting of stockholders pursuant to Sec. 2.5 of 
these By-Laws. Corporate action other than the election of directors 
shall be authorized by a majority of the votes cast at a meeting of 
stockholders, except as otherwise required by law, the Certificate of 
Incorporation or these By-Laws.]
    [(c) Upon the demand of any stockholder entitled to vote, the 
election of directors or a vote on any other matter at a meeting of 
stockholders shall be by written ballot; otherwise, the method of 
voting and the manner in which votes are counted at such a meeting 
shall be discretionary with the presiding officer of the meeting.]

[Presiding Officer and Secretary

    Sec. 2.6  At every meeting of stockholders, the Chair, or in his/
her absence, the President, or in his/her absence, the appointee of the 
meeting, shall preside. The Secretary, or in his/her absence, the 
appointee of the presiding officer of the meeting, shall act as 
Secretary of the meeting.]

Action by Consent of Stockholder[s]

    Sec. [2.7] 3.1  Any action required[,] or permitted by law to be 
taken at any meeting of the stockholder[s] of [the Corporation] NASD 
Regulation may be taken without a meeting, without prior notice and 
without a vote, if a consent in writing, setting forth the action so 
taken, is signed by the holder[s] of the outstanding stock. [having not 
less than the minimum number of votes that would be necessary to 
authorize or take such action at a meeting at which all shares entitled 
to vote thereon were present and voted. Prompt notice of the taking of 
corporate action without a meeting and by less than unanimous written 
consent shall be given to those stockholders who have not consented in 
writing.]

Article [III] IV

Board of Directors

General Powers

    Sec. [3.1] 4.1  The property, business, and affairs of [the 
Corporation] NASD Regulation shall be managed by or under the direction 
of the Board [of Directors]. The Board [of Directors] may exercise all 
such powers of [the Corporation] NASD Regulation and have the authority 
to perform all such lawful acts as are permitted by law, the Restated 
Certificate of Incorporation [or], these By-Laws, or the Delegation 
Plan to assist the [National Association of Securities Dealers, Inc.] 
NASD in fulfilling its self-regulatory responsibilities as set forth in 
Section 15A of the [Securities Exchange Act of 1934, and] Act, and to 
support such other initiatives as the Board [of Directors] may deem 
appropriate. To the fullest extent permitted by applicable law, the 
Restated Certificate of Incorporation, and these By-Laws, the Board may 
delegate any of its powers to a committee appointed pursuant to Section 
4.14 or to NASD Regulation staff in a manner not inconsistent with the 
Delegation Plan.

Number of Directors

    Sec. [3.2] 4.2  [The Board of Directors of the Corporation shall 
consist of one or more members; the exact number of directors that 
shall constitute the whole Board of Directors shall be fixed from time 
to time by resolution adopted by the whole Board of Directors. After 
fixing the number of directors constituting the whole Board of 
Directors, the Board of Directors may, by resolution adopted by the 
whole Board of Directors, from time to time change the number of 
directors constituting the whole Board of Directors; provided that such 
determination shall be consistent with the Plan of Allocation and 
Delegation of Functions by NASD to Subsidiaries (the ``Delegation 
Plan'').] The Board shall be composed of at least 21 and not more than 
25 Directors, the number thereof to be determined by the Board prior to 
the annual election of Directors. Any new Director position created as 
a result of an increase in the size of the Board shall be filled as 
part of the annual election conducted under Section 4.4. 

Qualifications

    Sec. [3.3]4.3  (a) Directors need not be stockholders of [the 
Corporation. The Board of Directors shall include at all times the 
President of the Corporation and such Industry, Non-Industry, and 
Public Governors as shall be determined from time to time by the Board 
of Directors, which determination shall be consistent with the 
Delegation Plan. The criteria for the categories of Industry, Non-
Industry, and Public Directors, as used herein, shall be established by 
the Board of Directors from time to time, which criteria shall be 
consistent with the Delegation Plan.] NASD Regulation. The President of 
NASD Regulation shall be a Director, and the remaining Directors 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 Directors. The Board shall include at least ten 
Industry Directors, who shall represent a geographic region designated 
by the Board pursuant to Article VI, Section 6.1, or who shall 
represent the industry at-large. The Board shall include at least ten 
Non-Industry Directors, including at least three Public Directors. In 
the event that the Board shall consist of more than 22 Directors, at 
least four shall be Public Directors. The Board shall include 
representatives of an issuer of

[[Page 25277]]

investment company shares or an affiliate of such an issuer and an 
insurance company or an affiliated NASD member. The Chief Executive 
Officer of the NASD shall be an ex-officio non-voting member of the 
Board.
    (b) As soon as practicable, following the annual election of 
Directors, the Board shall elect from its members a Chair and a Vice 
Chair, and such other persons having such titles as it shall deem 
necessary or advisable, to serve until the next annual election or 
until their successors are chosen and qualify. The persons so elected 
shall have such powers and duties as may be determined from time to 
time by the Board. The Board, by resolution adopted by a majority of 
Directors then in office, may remove any such person from such position 
at any time.
    (c) Each Director shall update the information submitted to the 
Secretary of NASD pursuant to Article VII, Section 9(e) of the NASD By-
Laws regarding the Director's classification as an Industry, Non-
Industry, or Public Director at least annually and upon request of the 
Secretary of the NASD, and shall report immediately to the Secretary of 
the NASD any change in such classification.

Election

    Sec. [3.4]4.4  (a) Except as otherwise provided by law [or], these 
By-Laws, or the Delegation Plan, after the first meeting of [the 
Corporation] NASD Regulation at which [directors] Directors are 
elected, [directors of the Corporation] Directors of NASD Regulation 
shall be elected each year at the annual meeting of [stockholders] the 
stockholder, or at a special meeting called for such purpose in lieu of 
the annual meeting[, by a plurality of the votes cast at such meeting]. 
If the annual election of [directors] Directors is not held on the date 
designated [therefore,] therefor, the [directors] Directors shall cause 
such election to be held as soon thereafter as convenient.
    (b) The National Nominating Committee shall nominate Industry, Non-
Industry, and Public Directors for each vacant or new Director position 
on the Board to the NASD Board in accordance with Article VII of the 
NASD By-Laws. The Regional Nominating Committees shall nominate 
Industry Directors to represent geographical regions for consideration 
by the National Nominating Committee as provided in Article VI of these 
By-Laws.

Term

    Sec. [3.5]4.5  (a) Each Director shall hold office for a term of 
three years or until [his] a successor is duly elected and qualified, 
except in the event of earlier termination from office by reason of 
death, resignation, removal[,] with or without cause, disqualification, 
or other reason.
    (b) The Board [of Directors] shall be divided into three classes. 
The term of office of those of the first class shall expire at the 
January 1997 meeting of the Board, of the second class one year 
thereafter, and of the third class two years thereafter. At each annual 
election, commencing January 1997, Directors shall be elected for a 
term of three years to replace those whose terms expire. 
    (c) The President of [of the Corporation] NASD Regulation shall 
serve as a [member of the Board] Director until a [his] successor is 
selected and qualified, or until [his] death, resignation, or removal.
    (d) Except for the President, no Director may serve more than two 
consecutive terms; provided, however, that if a Director is appointed 
to fill a term of less than one year, such Director may serve up to two 
consecutive terms following the expiration of such Director's [current 
term] initial term.
    [(e) Each director chosen to fill a newly created directorship 
shall serve until the next succeeding annual meeting of stockholders.]

Resignation

    Sec. [3.6]4.6  Any [director] Director may resign at any time 
either upon written notice of resignation to the Chair of the Board, 
the President, or the Secretary. Any such resignation shall take effect 
at the time specified therein or, if the time [be] is not specified, 
upon receipt thereof, and the acceptance of such resignation, unless 
required by the terms thereof, shall not be necessary to make such 
resignation effective.

Removal

    Sec. [3.7]4.7  Any or all of the [directors] Directors may be 
removed from office at any time, with or without cause, [by the 
stockholders] only by a majority vote of the NASD Board.

Disqualification

    Sec. 4.8  A Director shall immediately resign or be automatically 
removed from office if the NASD Board determines by majority vote that 
(a) the Director no longer satisfies the definition for the category 
(Industry, Non-Industry or Public Director) for which the Director was 
elected; (b) failure to remove the Director would violate the 
compositional requirements for the Board set forth in Section 4.3(a); 
and (c) the Director has a remaining term of office of more than six 
months.

Filling of Vacancies

    Sec. 4.9  If a Director position becomes vacant, whether because of 
death, disability, disqualification, removal, or resignation, the 
National Nominating Committee shall nominate, and the NASD Board shall 
elect by majority vote, a person satisfying the classification 
(Industry, Non-Industry, or Public Director) for the directorship as 
provided in Section 4.3 to fill such vacancy, except that if the 
remaining term of office for the vacant Director position is not more 
than six months, no replacement shall be required. If the remaining 
term of office for the vacant Director position is more than one year, 
and the Director who vacated the position was nominated pursuant to 
Article VI, the Director elected by the Board to fill such position 
shall stand for election in the next annual election pursuant to 
Article VI.

Quorum and Voting

    Sec. [3.8]4.10  (a) At all meetings of the Board [of Directors, 
one-third of the total number of directors shall constitute], unless 
otherwise set forth in these By-Laws or required by law, a quorum for 
the transaction of business shall consist of a majority of the Board, 
including not less than 50 percent of the Non-Industry Directors. In 
the absence of a quorum, a majority of the [directors] Directors 
present may adjourn the meeting until a quorum [be present] is present.
    (b) [A director interested in a matter to be acted upon by the 
Board of Directors may be counted in determining the presence of a 
quorum at a meeting of the Board of Directors that determines the 
Corporation's action.]
    (c) Subject to the restrictions of Section 3.12] Except as provided 
in Section 4.15(b), the vote of a majority of the [directors] Directors 
present at a meeting at which a quorum is present shall be the act of 
the Board [of Directors].

Regulation

    Sec. [3.9]4.11  The Board [of Directors] may adopt such rules, 
regulations, and requirements for the conduct of the business and 
management of [the Corporation,] NASD Regulation not inconsistent with 
the law, the Restated Certificate of Incorporation, these By-Laws, [or 
the rules and By-Laws of the National Association of Securities 
Dealers, Inc., as the Board of Directors may deem proper. A member of 
the Board of Directors] the Rules of the Association, or the By-Laws of 
the NASD, as the Board may deem proper. A Director

[[Page 25278]]

shall, in the performance of [his or her] such Director's duties, be 
fully protected in relying in good faith upon the books of account or 
reports made to [the Corporation] NASD Regulation by any of its 
officers, [or] by an independent certified public accountant, [or] by 
an appraiser selected with reasonable care by the Board [of Directors] 
or any committee of the Board [of Directors] or by any agent of [the 
Corporation] NASD Regulation, or in relying in good faith upon other 
records of [the Corporation] NASD Regulation.

Meetings

    Sec. [3.10]4.12  (a) An annual meeting of the Board [of Directors] 
shall be held for the purpose of organization, election of officers, 
and transaction of any other business. If such meeting is held promptly 
after and at the place specified for the annual meeting of 
[stockholders] the stockholder, no notice of the annual meeting of the 
Board [of Directors] need be given. Otherwise, such annual meeting 
shall be held at such time and place as may be specified in a notice 
given in accordance with Section [3.11 of these By-Laws] 4.13.
    (b) Regular meetings of the Board [of Directors] may be held at 
such time and place, within or without the State of Delaware, as 
determined from time to time by the Board [of Directors]. After such 
determination has been made, notice shall be given in accordance with 
Section [3.11 of these By-Laws] 4.13.
    (c) Special meetings of the Board [of Directors] may be called by 
the Chair of the Board, [or] by the President, or by at least one-third 
of the [directors at that time being] Directors then in office. Notice 
of any special meeting of the Board [of Directors] shall be given to 
each [director] Director in accordance with Section [3.11 of these By-
Laws.] 4.13.
    (d) [Members of the Board of Directors, or any committee designated 
by the Board of Directors,] A Director or member of any committee 
appointed by the Board may participate in a meeting of the Board [of 
Directors] or of such committee through the use of a conference 
telephone or similar communications [facilities that ensure] equipment 
by means of which all persons participating in the meeting may hear one 
another, and such participation in a meeting shall constitute presence 
in person at such meeting for all purposes.

Notice of Meetings; Waiver of Notice

    Sec. [3.11]4.13  (a) Notice of any meeting of the Board [of 
Directors] shall be deemed to be duly given to a [director] Director 
if: (i) [if] mailed to the address last made known in writing to [the 
Corporation] NASD Regulation by such [director] Director as the address 
to which such notices are to be sent, at least [two] seven days before 
the day on which such [special] meeting is to be held[, or]; (ii) [if] 
sent to the [director] Director at such address by telegraph, telefax, 
cable, radio, or wireless, not later than the day before the day on 
which such meeting is to be held[,]; or (iii) [if] delivered to the 
[director] Director personally or orally, by telephone or otherwise, 
not later than the day before the day on which such [special] meeting 
is to be held. Each notice shall state the time and place of the 
meeting and the purpose(s) thereof.
    (b) Notice of any meeting of the Board [of Directors] need not be 
given to any [director] Director if waived by that [director] Director 
in writing (or by telegram, telefax, cable, radio, or wireless and 
subsequently confirmed in writing) whether before or after the holding 
of such meeting, or if such [director] Director is present at such 
meeting, subject to [Section 7.3(b) hereof.] Article XI, Section 
11.3(b).
    (c) Any meeting of the Board shall be a legal meeting without any 
prior notice if all Directors then in office shall be present thereat.

Committees [of the Board of Directors]

    Sec. [3.13] 4.14  (a) The Board [of Directors] may, by resolution 
or resolutions adopted by a majority of the whole Board [of Directors, 
designate], appoint one or more committees[, each committee to consist 
of one or more directors of the Corporation]. Except as herein 
provided, vacancies in membership of any committee shall be filled by 
the vote of a majority of the whole Board [of Directors]. The Board [of 
Directors] may designate one or more [directors] Directors as alternate 
members of any committee, who may replace any absent or disqualified 
member at any meeting of the committee. In the absence or 
disqualification of any member of a committee, the member or members 
thereof present at any meeting and not disqualified from voting, 
whether or not [he, she,] such member or [they] members constitute a 
quorum, may unanimously appoint another [member of the Board of 
Directors] Director to act at the meeting in the place of any such 
absent or disqualified member. Members of a committee shall hold office 
for such period as may be fixed by a resolution adopted by a majority 
of the whole Board [of Directors], subject, however, to removal, with 
or without cause, at any time only by the vote of a majority of the 
whole Board [of Directors].
    (b) [Any committee, to the extent permitted by law and to the 
extent provided in the] The Board may, by resolution or resolutions 
[creating such committee, shall have and may exercise all the powers 
and authority of the Board of Directors] adopted by a majority of the 
whole Board, delegate to one or more committees the power and authority 
to act on behalf of the Board in carrying out the functions and 
authority delegated to NASD Regulation by the NASD under the Delegation 
Plan. Such delegations shall be in conformance with applicable law, the 
Restated Certificate of Incorporation, these By-Laws, and the 
Delegation Plan. Action taken by a committee pursuant to such delegated 
authority shall be subject to review, ratification, or rejection by the 
Board. In all other matters, the Board may, by resolution or 
resolutions adopted by a majority of the whole Board, delegate to one 
or more committees that consist solely of one or more Directors the 
power and authority to act on behalf of the Board in the management of 
the business and affairs of [the Corporation, and]  NASD Regulation to 
the extent permitted by law and not inconsistent with the Delegation 
Plan. A committee, to the extent permitted by law and provided in the 
resolution or resolutions creating such committee, may authorize the 
seal of [the Corporation] NASD Regulation to be affixed to all papers 
that may require it.
    (c) Except as otherwise permitted by applicable law, no [such] 
committee shall have the power or authority of the Board with regard 
to: amending the Restated Certificate of Incorporation or the By-Laws 
of [the Corporation,] NASD Regulation; adopting an agreement of merger 
or consolidation; recommending to the [stockholders] stockholder the 
sale, lease, or exchange of all or substantially all [the 
Corporation's] NASD Regulation's property and assets; or recommending 
to the [stockholders] stockholder a dissolution of [the Corporation] 
NASD Regulation or a revocation of a dissolution. Unless the resolution 
of the Board [of Directors] expressly so provides, no [such] committee 
shall have the power or authority to authorize the issuance of stock.
    [(c)] (d) Each committee may adopt its own rules of procedure and 
may meet at stated times or on such notice as such committee may 
determine. Each committee shall keep regular minutes of its proceedings 
and report the same to the Board [of Directors] when required.

[[Page 25279]]

    [(d)] (e) Unless otherwise provided by the Board [of Directors, a 
majority of any such committee], a majority of committee, excluding the 
President if the President is a member of the committee, shall 
constitute a quorum for the transaction of business, and the vote of a 
majority of the members of such committee present at a meeting at which 
a quorum is present shall be an act of such committee.
    (f) The Board may appoint an Executive Committee, which shall, to 
the fullest extent permitted by Delaware law and other applicable law, 
have and be permitted to exercise all the powers and authority of the 
Board in the management of the business and affairs of NASD Regulation 
between meetings of the Board, and which may authorize the seal of NASD 
Regulation to be affixed to all papers that may require it. The 
Executive Committee shall be composed of at least seven and not more 
than nine Directors, a majority of whom shall be Non-Industry Directors 
(including at least one Public Director). In the event that the 
Executive Committee shall consist of nine members, at least two shall 
be Public Directors. The President of NASD Regulation shall be a member 
of the Executive Committee.
    (g) The Board may appoint a Finance Committee. The Finance 
Committee shall be composed of eight or more Directors. The President 
of NASD Regulation shall serve as a member of the Committee, and the 
Vice Chair of the Board shall be the Committee Chair. The Finance 
Committee shall advise the Board with respect to the oversight of the 
financial operations and conditions of NASD Regulation, including 
recommendations for NASD Regulation's annual operating and capital 
budgets and proposed changes to the rates and fees charged by NASD 
Regulation.
    (h) The Board may appoint a National Business Conduct Committee. 
The National Business Conduct Committee shall be composed of at least 
eight Directors equally balanced between Industry and Non-Industry 
Directors (including at least two Public Directors). If at any time 
there shall be an odd number of committee members, a majority of the 
members shall be Non-Industry Directors. Each National Business Conduct 
Committee member shall be elected to serve a one-year term. The 
National Business Conduct Committee may be authorized and directed to 
act for the Board in a manner consistent with these By-Laws, the Rules 
of the Association, and the Delegation Plan with respect to: (1) An 
appeal or review of a disciplinary proceeding; (2) a statutory 
disqualification decision; (3) a review of a membership proceeding; (4) 
a review of an offer of settlement, a letter of acceptance, waiver, and 
consent, and a minor rule violation plan letter; (5) the exercise of 
exemptive authority; and (6) such other proceedings or actions 
authorized by the Rules of the Association.
    (i) Upon request, each prospective committee member who is not a 
Director shall provide to the Secretary of the NASD such information as 
is reasonably necessary to serve as the basis for a determination of 
the prospective committee member's classification as an Industry, Non-
Industry, or Public committee member, and the Secretary of the NASD 
shall certify to the Board each prospective committee member's 
classification. Such committee members shall update the information 
submitted under this Section at least annually and upon request of the 
Secretary of the NASD, and shall report immediately to the Secretary of 
the NASD any change in such classification.

Conflicts of Interest; Contracts and Transactions Involving 
Directors

    Sec. [3.12] 4.15  (a) [No member of the Board of Directors or of 
any committee of the Corporation shall] A Director or a member of any 
committee shall not directly or indirectly participate in any 
adjudication of the interests of any party [that would at the same time 
substantially affect his interest or the interests of any person in 
whom he is directly or indirectly interested] if that Director or 
committee member has a conflict of interest or bias, or if 
circumstances otherwise exist where his or her fairness might 
reasonably be questioned. In any such case, the [member shall 
disqualify himself or shall be disqualified by the Chairman of the 
Board or Committee] Director or committee member shall recuse himself 
or herself or shall be disqualified in accordance with the Rules of the 
Association.
    (b) No contract or transaction between [the Corporation] NASD 
Regulation and one or more of its [directors] Directors or officers, or 
between [the Corporation] NASD Regulation and any other corporation, 
partnership, association, or other organization in which one or more of 
its [directors] Directors or officers are directors or officers, or 
have a financial interest, shall be void or voidable solely for this 
reason[, or solely because the director or officer is present at or 
participates in the meeting of the Board of Directors or the committee 
thereof which] if: (i) the material facts pertaining to such Director's 
or officer's relationship or interest and the contract or transaction 
are disclosed or are known to the Board or the committee, and the Board 
or committee in good faith authorizes the contract or transaction[, or 
solely because his, her, or their votes are counted for such purposes 
if: (i) the material facts pertaining to such director's or officer's 
relationship or interest and] by the affirmative vote of a majority of 
the disinterested Directors; (ii) the material facts are disclosed or 
become known to the Board or committee after the contract or 
transaction [are disclosed or are known to the Board of Directors or 
the committee, and the Board] is entered into, and the Board or 
committee in good faith [authorizes] ratifies the contract or 
transaction by the affirmative vote of a majority of the disinterested 
[directors, even though the disinterested directors be less than a 
quorum; or (ii)] Directors; or (iii) the material facts pertaining to 
the [director's] Director's or officer's relationship or interest and 
the contract or transaction are disclosed or are known to the 
[stockholders] stockholder entitled to vote thereon, and the contract 
or transaction is specifically approved in good faith by vote of the 
[stockholders; or (iii) the contract or transaction is fair as to the 
Corporation as of the time it is authorized, approved or ratified by 
the Board of Directors, a committee thereof, or the stockholders. 
Common or interested directors] stockholder. Only disinterested 
Directors may be counted in determining the presence of a quorum at the 
portion of a meeting of the Board [of Directors,] or of a committee 
that authorizes the contract or transaction.

Action Without Meeting

    Sec. [3.14]4.16  Any action required or permitted to be taken at 
[any] a meeting of the Board [of Directors or any] or of a committee 
[thereof] may be taken without a meeting if all Directors or all 
members of [the Board of Directors or] such committee, as the case may 
be, consent thereto in writing, and the writing or writings are filed 
with the minutes of proceedings of the Board [of Directors or such] or 
the committee.

Article V

Compensation

Compensation of Board and Committee Members

    Sec. [4.6]5.1  The Board [of Directors] may provide for reasonable 
compensation of the [Chairman] Chair of the Board, the Directors, and 
the members of any committee of the Board or any District Committee 
[from the

[[Page 25280]]

Corporation]. The Board may also provide for reimbursement of 
reasonable expenses incurred by such persons in connection with the 
business of [the Corporation] NASD Regulation.

[Article V

Indemnification

Indemnification of Directors, Officers, Employees and Agents Right to 
Indemnification

    Sec. 5.1  The corporation shall indemnify and hold harmless, to the 
fullest extent permitted by applicable law as it presently exists or 
may hereafter be amended, any person who was or is made or is 
threatened to be made a party or is otherwise involved in any action, 
suit or proceeding, whether civil, criminal, administrative or 
investigative (a ``proceeding''), by reason of the fact that he, or a 
person for whom he is the legal representative, is or was a director, 
officer, employee, or agent of the corporation or is or was serving at 
the request of the corporation as a director, officer, employee, or 
agent of another corporation or of a partnership, joint venture, trust, 
enterprise or nonprofit entity, including service with respect to 
employee benefit plans (an ``indemnitee''), against all liability and 
loss suffered and expenses (including attorneys' fees) reasonably 
incurred by such indemnitee, notwithstanding the foregoing, but subject 
to Section 5.3 hereof, the corporation shall be required to indemnify 
an indemnitee in connection with a proceeding (or part thereof) 
initiated by such indemnitee only if the initiation of such proceeding 
(or part thereof) by the indemnitee was authorized by the Board of 
Directors.]

[Payment of Expenses

    Sec. 5.2  The corporation shall pay the expenses (including 
attorneys' fees) incurred by the persons set forth in Section 5.1 in 
defending any proceeding in advance of its final disposition, provided, 
however, that the payment of expenses incurred by such person in 
advance of the final disposition of the proceeding shall be made only 
upon receipt of an undertaking by that person to repay all amounts 
advanced if it should be ultimately determined that the person is not 
entitled to be indemnified under this Article or otherwise.]

[Nonexclusivity of Rights

    Sec. 5.3  The rights conferred on any person by this Article shall 
not be exclusive of any other rights which such person may have or 
hereafter acquire under any statute, provision of the Certificate of 
Incorporation, these By-Laws, agreement, vote of stockholders or 
disinterested directors or otherwise.]

[Other Indemnification

    Sec. 5.4  The corporation's obligation, if any, to indemnify or 
advance expenses to any person who was or is serving at its request as 
a director, officer, employee or agent of another corporation, 
partnership, joint venture, trust, enterprise or nonprofit entity shall 
be reduced by any amount such person may collect as indemnification or 
advancement from such other corporation, partnership, joint venture, 
trust, enterprise or nonprofit entity.]

[Amendment or Repeal

    Sec. 5.5  Any repeal or modification of the foregoing provisions of 
this Article shall not adversely affect any right or protection 
hereunder of any person in respect of any act or omission occurring 
prior to the time of such repeal or modification.]

[Indemnification Insurance

    Sec. 5.6  The Corporation shall have power to purchase and maintain 
insurance on behalf of any person who is or was a director, officer, 
employee or agent of the Corporation, or is or was serving at the 
request of the Corporation as a director, officer, employee or agent of 
another corporation, partnership, joint venture, trust, enterprise, or 
nonprofit entity against any liability asserted against him and 
incurred by him in any such capacity, or arising out of his status as 
such, whether or not the Corporation would have the power to indemnify 
him against such liability under the provisions of this section.]

Article VI

Regional Nominating Committees

Establishment of Regions

    Sec. 6.1  The Board shall establish boundaries for geographical 
regions within the United States for the purpose of nominating 
candidates for Industry Directors to the National Nominating Committee 
to represent such regions on the Board pursuant to Article IV, Sections 
4.3(a) and 4.4(b). The Board may make changes from time to time in the 
number or boundaries of the regions as the Board deems necessary or 
appropriate. The Board shall prescribe such policies and procedures as 
are necessary or appropriate to address the implementation of a new 
region configuration in the event of a change in the number or 
boundaries of the regions.

Composition

    Sec. 6.2  (a) A Regional Nominating Committee shall be elected for 
each region designated by the Board under Section 6.1. Each District 
Nominating Committee for a district located in the region shall elect 
two District Committee members from the district to serve on the 
Regional Nominating Committee. If a region shall consist of one 
district, the District Nominating Committee for the district shall 
elect four District Committee members from the district to serve on the 
Regional Nominating Committee.
    (b) In the event of the refusal, failure, neglect, or inability of 
a member of a Regional Nominating Committee to discharge his or her 
duties, or for any cause affecting the best interests of NASD 
Regulation, the sufficiency of which shall be decided by the Regional 
Nominating Committee, the Regional Nominating Committee may remove the 
member by the affirmative vote of two-thirds of the members of the 
Regional Nominating Committee then in office and declare the member's 
position vacant. The Regional Nominating Committee shall notify the 
Regional Nominating Committee member of his or her removal within seven 
days after the vote. The member's position shall be filled pursuant to 
Section 6.4. A member who is removed may submit a written appeal of the 
removal to the Board within 30 days after the date he or she is 
notified in writing of the removal. The Board may affirm, reverse, or 
modify the determination of the Regional Nominating Committee. A vote 
of a majority of the Directors then in office shall be required to 
reverse or modify the action of the Regional Nominating Committee.

Term of Office

    Sec. 6.3  Each regularly elected member of a Regional Nominating 
Committee shall hold office for a term of one year, and until a 
successor is elected and qualified, or until death, resignation, or 
removal. A member of a Regional Nominating Committee may not serve more 
than three consecutive terms.

Filling of Vacancies

    Sec. 6.4  In the event of a vacancy on a Regional Nominating 
Committee caused by the departure of a member prior to the expiration 
of the member's term of office, the District Nominating Committee who 
elected the member shall appoint by majority vote another member of the 
District Committee to fill the vacancy. The appointment shall be 
effective until the next regularly

[[Page 25281]]

scheduled election occurs pursuant to this Article.

Meetings

    Sec. 6.5  Meetings of a Regional Nominating Committee shall be held 
at such times and places, upon such notice, and in accordance with such 
procedures as each Regional Nominating Committee in its discretion may 
determine. A quorum of a Regional Nominating Committee shall consist of 
a majority of its members, and any action taken by a majority at any 
meeting, except as otherwise provided in these By-Laws, shall 
constitute the action of the Committee. Action by a Regional Nominating 
Committee may be taken by mail, telephonic, or telegraphic vote, in 
which case any action taken by a majority of the Committee shall 
constitute the action of the Committee. Action taken by telephonic vote 
shall be confirmed in writing at a regular meeting of the Regional 
Nominating Committee.

Election of Officers

    Sec. 6.6   Following the annual election of members of the Regional 
Nominating Committees pursuant to this Article, each Regional 
Nominating Committee shall elect from its members a Chair and such 
other officers as it deems necessary for the proper performance of its 
duties under these By-Laws.

Expenses

    Sec. 6.7  Funds to meet the regular expenses of each Regional 
Nominating Committee shall be provided by the Board, and all such 
expenses shall be subject to the approval of the Board.

Notice to Chair

    Sec. 6.8  On or before August 1 of each year, the Secretary of NASD 
Regulation shall send a written notice to the Chair of a Regional 
Nominating Committee if the term of office of the Industry Director 
representing the region shall expire in the next calendar year. The 
notice shall describe the nomination procedures for filling the office.

Solicitation of Candidates

    Sec. 6.9  NASD Regulation staff shall provide the Regional 
Nominating Committee with a description of the NASD membership in the 
region. The Regional Nominating Committee shall identify and solicit 
candidates to nominate to the National Nominating Committee for the 
Industry Director vacancy on the Board. The Regional Nominating 
Committee Chair shall send a written notice of the upcoming vacancy to 
the Executive Representative and each branch office of the NASD members 
in the region and request that such NASD members submit names of 
candidates to the Regional Nominating Committee or the Secretary of 
NASD Regulation for consideration.

Secretary's Notice to NASD Members

    Sec. 6.10  The Secretary of NASD Regulation shall send a written 
notice to NASD members in the region describing the nomination 
procedures.

Regional Nominating Committee Candidate

    Sec. 6.11 The Regional Nominating Committee shall review the 
background of the candidates and the description of the NASD membership 
provided by NASD Regulation staff and shall propose one or more 
candidates for nomination to the National Nominating Committee. In 
proposing a candidate for nomination, the Regional Nominating Committee 
shall endeavor to secure appropriate and fair representation of the 
region.

Notice of Regional Nominating Committee Candidate

    Sec. 6.12  The Regional Nominating Committee shall send to the 
Executive Representatives and branch offices of the NASD members in the 
region a written notice of the name of the candidate or candidates the 
Regional Nominating Committee proposes for nomination to the National 
Nominating Committee.

Designation of Additional Candidates

    Sec. 6.13  If an officer, director, or employee of an NASD member 
in the region is not proposed for nomination by the Regional Nominating 
Committee and wants to seek the nomination, he or she shall send a 
written notice to the Regional Nominating Committee Chair or the 
Secretary of NASD Regulation within 14 calendar days after the mailing 
date of the Regional Nominating Committee's notice under Section 6.12. 
The Regional Nominating Committee Chair or the Secretary of NASD 
Regulation shall make a written record of the time and date of the 
receipt of the officer's, director's, or employee's notice. The 
officer, director, or employee shall be designated as an ``additional 
candidate.''

Communication of Views

    Sec. 6.14  If the Regional Nominating Committee proposes more than 
one candidate for nomination, or if an additional candidate is 
designated pursuant to Section 6.13, NASD Regulation, the Board, the 
Regional Nominating Committee, any other committee, and NASD Regulation 
staff shall not take a position publicly or with an NASD member or 
person associated with or employed by an NASD member with respect to 
any candidate for the nomination. A Director or a member of the 
Regional Nominating Committee or any other committee may communicate 
his or her views with respect to any candidate for the nomination if 
the Director or committee member acts solely in his or her individual 
capacity and disclaims any intention to communicate in any official 
capacity on behalf of NASD Regulation, the Board, the Regional 
Nominating Committee, or any other committee. Except as provided 
herein, any candidate and his or her representatives may communicate 
support for the candidate to an NASD member or a person associated with 
or employed by an NASD member.

List of NASD Members Eligible to Vote

    Sec. 6.15  (a) The Secretary of NASD Regulation shall mail a list 
of all NASD members eligible to vote in the region and their Executive 
Representatives to the additional candidate immediately following 
receipt of the additional candidate's notice by the Regional Nominating 
Committee Chair or the Secretary of NASD Regulation.
    (b) An NASD member that has its principal office, one or more 
registered branch offices, or a principal office and one or more 
registered branch offices in the region shall be eligible to cast one 
vote on the nomination through the NASD member's Executive 
Representative.

Requirement for Petition Supporting Additional Candidate

    Sec. 6.16  An additional candidate shall be proposed for nomination 
if a petition signed by at least ten percent of the NASD members 
eligible to vote in the region is filed with the Regional Nominating 
Committee within 30 calendar days after the date of mailing of the list 
to the additional candidate pursuant to Section 6.15. Only an Executive 
Representative may sign a petition on behalf of an NASD member.

Uncontested Nomination

    Sec. 6.17  If the Regional Nominating Committee proposes one 
candidate for nomination and no additional candidate is proposed for 
nomination pursuant to Section 6.16, the Regional Nominating Committee 
shall nominate its candidate to the National Nominating Committee.

[[Page 25282]]

Notice of Contested Nomination

    Sec. 6.18  If the Regional Nominating Committee proposes more than 
one candidate for nomination, or if an additional candidate is proposed 
for nomination pursuant to Section 6.16, the Regional Nominating 
Committee shall send a written notice to the Executive Representatives 
of the NASD members eligible to vote in the region announcing the names 
of the candidates and describing contested nomination procedures.

Administrative Support

    Sec. 6.19  The Secretary of NASD Regulation shall designate a 
district office in the region to provide administrative support to all 
candidates by sending to NASD members eligible to vote in the region up 
to two mailings of materials prepared by the candidates. NASD 
Regulation shall pay the postage for the mailings. Each candidate may 
prepare material for the mailing on his or her personal stationery, and 
the material shall state that it represents the opinion of the 
candidate. A candidate proposed for nomination by the Regional 
Nominating Committee may identify himself or herself as such in his or 
her materials. Any candidate may send additional mailings to NASD 
members at the candidate's own expense. Except as provided in this 
Article, NASD Regulation, the Board, the Regional Nominating Committee, 
any other committee, and NASD Regulation staff shall not provide any 
other administrative support to a candidate for the nomination or any 
candidate in a contested election conducted under Article VII of the 
NASD By-Laws.

Ballots

    Sec. 6.20  With the assistance of the Secretary of NASD Regulation 
and an Independent Agent, the Regional Nominating Committee shall 
prepare a ballot with the name or names of its candidate and any 
additional candidates proposed for nomination pursuant to Section 6.16. 
The ballot shall list the candidates in alphabetical order and shall 
identify the candidate or candidates proposed for nomination by the 
Regional Nominating Committee. The Regional Nominating Committee shall 
send a ballot to the Executive Representative of each NASD member 
eligible to vote in the region. Instructions on the ballot shall direct 
the Executive Representative to return the ballot to the Independent 
Agent and state that the ballot envelope must be postmarked on or 
before the return date specified on the ballot. The return date 
specified on the ballot shall be at least 30 but not more than 45 days 
after the date of mailing of the ballot.

Vote Qualification List

    Sec. 6.21  Eligibility to vote on a regional nomination shall be 
based on the NASD's membership records as of a date designated by the 
Secretary of NASD Regulation that is not more than 30 days before the 
date of mailing of the ballot. The Secretary of NASD Regulation shall 
prepare a list of NASD members eligible to vote in the region and their 
Executive Representatives, which shall be used for vote qualification 
purposes, and shall provide the list to the candidates.

Ballots Returned As Undelivered

    Sec. 6.22  The Independent Agent shall open any ballot envelope 
returned undelivered and shall determine whether it was sent to the 
NASD member's address of record. If incorrectly addressed, the 
Independent Agent shall send a new ballot to the NASD member's address 
of record.

General Procedures for Qualification and Accounting of Ballots

    Sec. 6.23  After the voting period, on a date or dates designated 
by the Secretary of NASD Regulation, the qualification and accounting 
of ballots shall take place. The date or dates designated shall be not 
later than 14 calendar days after the return date specified on the 
ballot pursuant to Section 6.20. Candidates and their representatives 
shall be allowed to observe the qualification and accounting of 
ballots. Representation for each candidate shall be limited to two 
individuals. The Independent Agent shall bring to a specified district 
office in the region all ballots timely received. Under the direction 
of the Secretary of NASD Regulation or the Secretary's designee, the 
Independent Agent shall open and count the ballots. For ballot 
qualification purposes, the Independent Agent shall identify to the 
candidates the NASD members that timely returned ballots and inform the 
candidates of the Independent Agent's determination of whether or not a 
ballot is qualified for voting purposes. The determination shall be 
based on a comparison of ballots received against the list of NASD 
members eligible to vote in the region and their Executive 
Representatives as prepared by the Secretary of NASD Regulation under 
Section 6.21. The Secretary of NASD Regulation or the Secretary's 
designee shall make the final determination of the qualification of a 
ballot. Upon the qualification of a ballot, the Independent Agent shall 
record the vote indicated on the ballot. The candidates and their 
representatives shall not be allowed to see the vote of an NASD member.

Ballots Set Aside

    Sec. 6.24  The Independent Agent shall set aside a ballot if: (a) 
the ballot is received from an NASD member eligible to vote in the 
region and the ballot is signed by a person who is not the Executive 
Representative listed on the vote qualification list prepared under 
Section 6.21, and the Secretary of the NASD has not received proper 
notice of a change in Executive Representative pursuant to the NASD By-
Laws; or (b) two or more properly executed ballots are received from an 
NASD member eligible to vote in the region. If the Independent Agent 
determines that the ballots set aside are material to the outcome of 
the nomination, the Secretary of NASD Regulation and the Independent 
Agent shall make reasonable efforts to resolve each ballot set aside. 
With respect to a ballot not signed by an Executive Representative of 
record, the Secretary of NASD Regulation shall contact the NASD member 
to request that the NASD member send proper written notice of any 
change in Executive Representative by facsimile so that the ballot may 
be counted. With respect to multiple ballots from an NASD member, the 
Independent Agent shall contact the Executive Representative of the 
NASD member to obtain the NASD member's vote. The Secretary of NASD 
Regulation shall keep a list of NASD members that reported their ballot 
was lost or not received and that were provided with a duplicate 
ballot. The Secretary of NASD Regulation shall provide the list to the 
Independent Agent and, upon request, to the candidates.

Invalid Ballots

    Sec. 6.25  The Independent Agent shall declare a ballot invalid if 
one or more of the following conditions exists:
    (a) the ballot is not signed by the Executive Representative 
(unless Section 6.24 applies);
    (b) a vote is not indicated on the ballot; or
    (c) a vote for more than one candidate is indicated on the ballot.

Certification of Nomination

    Sec. 6.26  Under the direction of the Secretary of NASD Regulation 
or the Secretary's designee, the Independent Agent shall count the 
votes received for each candidate. The candidate receiving the largest 
number of votes cast in the region shall be declared the nominee from 
the region and the Regional

[[Page 25283]]

Nominating Committee shall nominate such candidate to the National 
Nominating Committee. In the event of a tie, there shall be a run-off 
vote for the nomination. The Regional Nominating Committee shall send a 
written certification of the nomination results to the National 
Nominating Committee. The certification shall state the number of votes 
received by each candidate and the number of ballots set aside.

Rejection of Regional Nominating Committee Nominee

    Sec. 6.27  If the National Nominating Committee rejects the nominee 
of the Regional Nominating Committee, the Regional Nominating Committee 
shall repeat the nomination procedures in Section 6.9 through Section 
6.26.

Extension of Time and Additional Procedures

    Sec. 6.28  The Secretary of NASD Regulation may extend a time 
period under this Article for good cause shown. In extraordinary 
circumstances, the Secretary of NASD Regulation, with the approval of 
the Executive Committee or the Board, may adopt additional procedures 
for nominations under this Article.

Article VII

Officers, Agents, and Employees

Officers

    Sec. [4.1]7.1  The Board [of Directors] shall elect the officers of 
[the Corporation] NASD Regulation, which shall include a President, a 
Secretary, and such [for] other executive or administrative officers as 
it shall deem necessary or advisable, including, but not limited to: 
Executive Vice [-]President, Senior Vice [-]President, Vice [-
]President, General Counsel, [Secretary] and Treasurer of [the 
Corporation] NASD Regulation. All such officers shall have such titles, 
powers, and duties, and shall be entitled to such compensation, as 
shall be determined from time to time by the Board [of Directors]. The 
terms of office of such officers shall be at the pleasure of the Board 
[of Directors], which by affirmative vote of a majority of the 
[members] Board, may remove any such officer at any time. One person 
may hold the offices and perform the duties of any two or more of said 
offices, except the offices and duties of President and Vice President 
or of President and Secretary. None of the officers, except the 
President, need be [directors of the Corporation] Directors of NASD 
Regulation.

Absence of the President

    Sec. 7.2  In the case of the absence or inability to act of the 
President of NASD Regulation, or in the case of a vacancy in such 
office, the Board may appoint its Chair or such other person as it may 
designate to act as such officer pro tem, who shall assume all the 
functions and discharge all the duties of the President.

Agents and Employees

    Sec. [4.2]7.3  In addition to the officers, [the Corporation] NASD 
Regulation may employ such agents and employees as the Board [of 
Directors] may deem necessary or advisable, each of whom shall hold 
office for such period and exercise such authority and perform such 
duties as the Board [of Directors], the President, or any officer 
designated by the Board [of Directors,] may from time to time 
determine. [The Board of Directors at any time may appoint and remove, 
or may delegate to any principal officer the power to appoint and to 
remove, any agent or employee of the Corporation.] Agents and employees 
of NASD Regulation shall be under the supervision and control of the 
officers of the NASD Regulation, unless the Board, by resolution, 
provides that an agent or employee shall be under the supervision and 
control of the Board.

Delegation of Duties of Officers

    Sec. [4.3]7.4  The Board [of Directors] may delegate the duties and 
powers of any officer of [the Corporation] NASD Regulation to any other 
officer or to any [director] Director for a specified period of time 
and for any reason that the Board [of Directors] may deem sufficient.

Resignation and Removal of Officers

    Sec. [4.4]7.5 (a) Any officer may resign at any time upon written 
notice of resignation to the Board [of Directors], the President, or 
the Secretary. Any such resignation shall take effect upon receipt of 
such notice or at any later time specified therein. The acceptance of a 
resignation shall not be necessary to make the resignation effective.
    (b) Any officer[, agent or employee of the Corporation] of NASD 
Regulation may be removed, with or without cause, by resolution adopted 
by a majority of the [directors] Directors then in office at any 
regular or special meeting of the Board [of Directors] or by a written 
consent signed by all of the [directors] Directors then in office. Such 
removal shall be without prejudice to the contractual rights of the 
affected officer, [agent, or employee,] if any, with [the Corporation] 
NASD Regulation.

Bond

    Sec. [4.5]7.6 [The Corporation] NASD Regulation may secure the 
fidelity of any or all of its officers, agents, or employees by bond or 
otherwise.

Article VIII

District Committees and District Nominating Committees

Establishment of Districts

    Sec. 8.1  The Board shall establish boundaries for 11 districts 
within the United States to assist NASD Regulation in administering its 
affairs in a manner that is consistent with applicable law, the 
Restated Certificate of Incorporation, these By-Laws, the Delegation 
Plan, and the Rules of the Association. The Board may make changes from 
time to time in the number or boundaries of the districts as it deems 
necessary or appropriate. The Board shall prescribe such policies and 
procedures as are necessary or appropriate to address the 
implementation of a new district configuration in the event of a change 
in the number or boundaries of the districts.

Composition of District Committees

    Sec. 8.2  (a) A district created under Section 8.1 shall elect a 
District Committee pursuant to this Article. A District Committee shall 
be composed of not more than 12 members, unless otherwise provided by 
resolution of the Board. A District Committee shall determine the 
number of its members to be elected each year. Members of the District 
Committees shall serve as panelists in disciplinary proceedings in 
accordance with the Rules of the Association. The District Committees 
shall consider and recommend policies and rule changes to the Board. 
The District Committees shall endeavor, in such manner as they deem 
appropriate, to educate NASD members and other brokers and dealers in 
their respective districts as to the objects, purposes, and work of the 
NASD, NASD Regulation, and Nasdaq in order to foster NASD members' 
interest and cooperation.
    (b) In the event of the refusal, failure, neglect, or inability of 
a member of a District Committee to discharge his or her duties, or for 
any cause affecting the best interests of NASD Regulation, the 
sufficiency of which shall be decided by the District Committee, the 
District Committee may remove the member by the affirmative vote of 
two-thirds of the members of the District Committee then in office and 
declare the member's position vacant. The District Committee shall 
notify the District Committee member of his or her removal within

[[Page 25284]]

seven days after the vote. The member's position shall be filled 
pursuant to Section 8.4. A member who is removed may submit a written 
appeal of the removal to the Board within 30 days after the date he or 
she is notified of the removal. The Board may affirm, reverse, or 
modify the determination of the District Committee. A vote of a 
majority of the Directors then in office shall be required to reverse 
or modify the action of the District Committee.

Term of Office of District Committee Members

    Sec. 8.3  Each regularly elected member of a District Committee 
shall hold office for a term of three years, and until a successor is 
elected and qualified, or until death, resignation, or removal. A 
member of a District Committee may not serve more than two consecutive 
terms.

Filling of Vacancies on District Committees

    Sec. 8.4  In the event of a vacancy on a District Committee caused 
by the departure of a Committee member prior to the expiration of the 
member's term of office, the District Committee shall appoint by 
majority vote a representative of an NASD member eligible to vote in 
the district to fill the vacancy. The appointment shall be effective 
until the next regularly scheduled election occurs. Following the 
election, the newly elected Committee member shall serve only the 
duration of the departed Committee member's term.

Meetings of District Committees

    Sec. 8.5  Meetings of a District Committee shall be held at such 
times and places, upon such notice, and in accordance with such 
procedures as each District Committee in its discretion may determine. 
A quorum of a District Committee shall consist of a majority of its 
members, and any action taken by a majority at any meeting at which a 
quorum is present, except as otherwise provided in these By-Laws, shall 
constitute the action of the Committee. Action by a District Committee 
may be taken by mail, telephonic, or telegraphic vote, in which case 
any action taken by a majority of the Committee shall constitute the 
action of the Committee. Any action taken by telephonic vote shall be 
confirmed in writing at a regular meeting of the District Committee.

Election of District Officers

    Sec. 8.6  Following the annual election of members of the District 
Committees pursuant to this Article, each District Committee shall 
elect from its members a Chair and such other officers as it deems 
necessary for the proper performance of its duties under these By-Laws, 
and shall prescribe their powers and duties.

Advisory Council

    Sec. 8.7  (a) The Chairs of the District Committees, elected 
pursuant to Section 8.6, shall constitute an Advisory Council to the 
Board.
    (b) The Advisory Council shall be advised of and entitled to attend 
such meetings of the Board as the Board may designate for such Advisory 
Council's attendance, and the Board shall designate at least one such 
meeting annually. The Advisory Council shall not be entitled to vote at 
meetings of the Board.

Expenses of District Committees

    Sec. 8.8  Funds to meet the regular expenses of each District 
Committee shall be provided by the Board, and all such expenses shall 
be subject to the approval of the Board.

Composition of District Nominating Committees

    Sec. 8.9  (a) Each district created under Section 8.1 shall elect a 
District Nominating Committee pursuant to this Article. A District 
Nominating Committee shall consist of five members, unless the Board by 
resolution increases a District Nominating Committee to a larger 
number. Members of a District Nominating Committee shall be 
representatives of NASD members eligible to vote in the district, but 
shall not be members of the District Committee. A District Nominating 
Committee shall include a majority of persons who previously have 
served on a District Committee or who are current or former Directors 
or current or former Governors of the NASD Board, and shall include at 
least one current or former Director or Governor.
    (b) In the event of the refusal, failure, neglect, or inability of 
a member of a District Nominating Committee to discharge his or her 
duties, or for any cause affecting the best interests of NASD 
Regulation, the sufficiency of which shall be decided by the District 
Nominating Committee, the District Nominating Committee may remove the 
member by the affirmative vote of two-thirds of the members of the 
District Nominating Committee then in office and declare the member's 
position vacant. The member's position shall be filled pursuant to 
Section 8.11. The District Nominating Committee shall notify the 
District Nominating Committee member of his or her removal within seven 
days after the vote. A member who is removed may submit a written 
appeal of the removal to the Board within 30 days after the date he or 
she is notified in writing of the removal. The Board may affirm, 
reverse, or modify the determination of the District Nominating 
Committee. A vote of a majority of the Directors then in office shall 
be required to reverse or modify the action of the District Nominating 
Committee.

Term of Office of District Nominating Committee Members

    Sec. 8.10  Each regularly elected member of a District Nominating 
Committee shall hold office for a term of one year, and until a 
successor is elected and qualified, or until death, resignation, or 
removal. A member of a District Nominating Committee may not serve more 
than two consecutive terms.

Filling of Vacancies for District Nominating Committees

    Sec. 8.11  In the event of a vacancy on a District Nominating 
Committee caused by the departure of a Committee member prior to the 
expiration of the member's term of office, the District Nominating 
Committee shall appoint by majority vote a representative of an NASD 
member eligible to vote in the district to fill the vacancy. The 
appointment shall be effective until the next regularly scheduled 
election occurs pursuant to this Article.

Meetings of District Nominating Committees

    Sec. 8.12  Meetings of a District Nominating Committee shall be 
held at such times and places, upon such notice, and in accordance with 
such procedures as each District Nominating Committee in its discretion 
may determine. A quorum of a District Nominating Committee shall 
consist of a majority of its members, and any action taken by a 
majority of the entire Committee at any meeting, except as otherwise 
provided in these By-Laws, shall constitute the action of the 
Committee. Action by a District Nominating Committee may be taken by 
mail, telephonic, or telegraphic vote, in which case any action taken 
by a majority of the Committee shall constitute the action of the 
Committee. Action taken by telephonic vote shall be confirmed in 
writing at a regular meeting of the District Nominating Committee.

Election of District Nominating Committee Officers

    Sec. 8.13  Following the annual election of members of the District 
Nominating Committees pursuant to this Article, each District 
Nominating Committee shall elect from its members

[[Page 25285]]

a Chair and such other officers as it deems necessary for the proper 
performance of its duties under these By-Laws, and shall prescribe 
their powers and duties.

Expenses of District Nominating Committees

    Sec. 8.14  Funds to meet the regular expenses of each District 
Nominating Committee shall be provided by the Board, and all such 
expenses shall be subject to the approval of the Board.

Notice to Chair

    Sec. 8.15  On or before May 1 of each year, the Secretary of NASD 
Regulation shall send a written notice to the Chair of each District 
Nominating Committee and each District Committee identifying the 
members of the District Nominating Committee and the District Committee 
whose terms of office shall expire in the next calendar year. The 
notice shall describe election procedures for filling the offices.

Solicitation of Candidates

    Sec. 8.16  NASD Regulation staff shall provide the District 
Nominating Committee with a description of the NASD membership in the 
region. The District Nominating Committee shall identify and solicit 
candidates to nominate for the vacancies on the District Committee and 
the District Nominating Committee. The District Nominating Committee 
Chair shall send a written notice of the upcoming election to the 
Executive Representative and each branch office of the NASD members in 
the district and request that such NASD members submit names of 
candidates to the District Nominating Committee or the District 
Director for consideration.

Secretary's Notice to NASD Members

    Sec. 8.17  The Secretary of NASD Regulation shall send a written 
notice to NASD members in the district describing the election 
procedures.

District Nominating Committee Slate

    Sec. 8.18  (a) The District Nominating Committee shall review the 
background of proposed candidates and the description of the NASD 
membership provided by NASD Regulation staff and shall nominate a slate 
of candidates for the election. The slate shall include one or more 
candidates for each vacancy. In nominating candidates for the office of 
member of the District Committee and the office of member of the 
District Nominating Committee, the District Nominating Committee shall 
endeavor to secure appropriate and fair representation on the District 
Committee and on the District Nominating Committee of the various 
sections of the district and all classes and types of NASD members 
engaged in the investment banking or securities business within the 
district. In nominating candidates for the office of member of the 
District Nominating Committee, a District Nominating Committee shall 
assure that the composition of the District Nominating Committee meets 
the standards in Section 8.9(a).
    (b) A District Nominating Committee shall not nominate an incumbent 
member of the District Committee to succeed himself or herself unless 
the District Nominating Committee first takes appropriate action by a 
written ballot of the entire NASD membership within the district to 
ascertain that such nomination is acceptable to a majority of the NASD 
members in the district, unless the incumbent member of the District 
Committee is serving pursuant to the provisions of Section 8.4. A 
District Nominating Committee may not nominate more than two incumbent 
members of the District Nominating Committee to succeed themselves.

Certification of Nomination

    Sec. 8.19  The District Nominating Committee shall certify to the 
District Committee each candidate nominated by the District Nominating 
Committee. Within five calendar days after the certification, the 
District Committee shall send to the Executive Representatives of NASD 
members in the district a copy of the certification.

Designation of Additional Candidates

    Sec. 8.20  If an officer, director, or employee of an NASD member 
is not nominated by the District Nominating Committee and wants to be 
considered for a vacancy on the District Committee or the District 
Nominating Committee, he or she shall send a written notice to the 
District Director within 14 calendar days after the mailing date of the 
certification to the Executive Representatives pursuant to Section 
8.19. The District Director shall make a written record of the time and 
date of the receipt of the officer's, director's, or employee's notice. 
The officer, director, or employee shall be designated as an 
``additional candidate.''

Communication of Support

    Sec. 8.21  If the District Nominating Committee nominates more than 
one candidate for a vacancy, or if an additional candidate is 
designated pursuant to Section 8.20, NASD Regulation, the Board, the 
District Nominating Committee, any other committee, and NASD Regulation 
staff shall not take any position publicly or with an NASD member or 
person associated with or employed by an NASD member with respect to 
any candidate. A Director or a member of the Regional Nominating 
Committee or any other committee may communicate his or her views with 
respect to any candidate if the Director or committee member acts 
solely in his or her individual capacity and disclaims any intention to 
communicate in any official capacity on behalf of NASD Regulation, the 
NASD Regulation Board, the Regional Nominating Committee, or any other 
committee. Except as provided herein, any candidate and his or her 
representatives may communicate support for the candidate to an NASD 
member or person associated with or employed by an NASD member.

List of NASD Members Eligible to Vote

    Sec. 8.22  (a) The Secretary of NASD Regulation shall prepare a 
list of all NASD members eligible to vote in the district and their 
Executive Representatives to the additional candidate immediately 
following receipt of the additional candidate's notice by the District 
Director.
    (b) An NASD member that has its principal office, one or more 
registered branch offices, or its principal office and one or more 
registered branch offices in the district shall be eligible to cast one 
vote through the NASD member's Executive Representative for each 
vacancy to be filled in the election.

Requirement for Petition Supporting Additional Candidate

    Sec. 8.23  An additional candidate shall be nominated if a petition 
signed by at least ten percent of the NASD members eligible to vote in 
the district is filed with the District Nominating Committee within 30 
calendar days after the date of mailing of the list to the additional 
candidate pursuant to Section 8.22. Only an Executive Representative 
may sign a petition on behalf of an NASD member.

Uncontested Election

    Sec. 8.24  If the District Nominating Committee nominates one 
candidate for each vacancy and no additional candidate is nominated 
pursuant to Section 8.23, the candidates nominated by the District 
Nominating Committee shall be considered duly elected and the District 
Committee shall certify the election to the Board.

Notice of Contested Election

    Sec. 8.25  If the District Nominating Committee nominates more than 
one

[[Page 25286]]

candidate for a vacancy, or if an additional candidate is nominated 
pursuant to Section 8.23, the election shall be considered a contested 
election. The District Committee shall send a notice to the Executive 
Representatives of the NASD members eligible to vote in the district 
announcing the names of the candidates and describing contested 
election procedures.

Administrative Support

    Sec. 8.26  The District Office shall provide administrative support 
to all candidates by sending mailings to NASD members eligible to vote 
in the district up to two mailings of materials prepared by the 
candidates. NASD Regulation shall pay the postage for the mailings. 
Each candidate may prepare material for the mailing on his or her 
personal stationery, and the material shall state that it represents 
the opinion of the candidate. Candidates nominated by the District 
Nominating Committee may identify themselves as such in their 
materials. Any candidate may send additional mailings at the 
candidate's own expense. Except as provided in this Article, NASD 
Regulation, the Board, the Regional Nominating Committee, any other 
committee, and NASD Regulation staff shall not provide any other 
administrative support to a candidate in the election.

Ballots

    Sec. 8.27  With the assistance of the Secretary of NASD Regulation 
and an Independent Agent, the District Nominating Committee shall 
prepare a ballot with the names of the District Nominating Committee's 
candidates and any additional candidate nominated pursuant to Section 
8.23. The ballot shall list the candidates in alphabetical order and 
shall identify the candidates nominated by the District Nominating 
Committee. The District Nominating Committee shall send a ballot to the 
Executive Representative of each NASD member eligible to vote in the 
district. Instructions on the ballot shall direct the Executive 
Representative to return the ballot to the Independent Agent and state 
that the ballot envelope must be postmarked on or before the return 
date specified on the ballot. The return date specified on the ballot 
shall be at least 30 but not more than 45 days after the date of 
mailing of the ballot.

Vote Qualification List

    Sec. 8.28  Eligibility to vote in a district election shall be 
based on the NASD's membership records as of a date selected by the 
Secretary of NASD Regulation that is not more than 30 days before the 
date of mailing of the ballot. The Secretary of NASD Regulation shall 
prepare a list of NASD members eligible to vote in the district and 
their Executive Representatives, which shall be used for vote 
qualification purposes, and shall provide the list to the candidates.

Ballots Returned As Undelivered

    Sec. 8.29  The Independent Agent shall open any ballot envelope 
returned undelivered and shall determine whether it was sent to the 
NASD member's address of record. If incorrectly addressed, the 
Independent Agent shall send a new ballot to the address of record.

General Procedures for Qualification and Accounting of Ballots

    Sec. 8.30  After the voting period, on a date or dates designated 
by the Secretary of NASD Regulation, the qualification and accounting 
of ballots shall take place. The date or dates designated shall be not 
later than 14 calendar days after the return date specified on the 
ballot pursuant to Section 8.27. Candidates and their representatives 
shall be allowed to observe the qualification and accounting of 
ballots. Representation for each candidate shall be limited to two 
individuals. The Independent Agent shall bring to the district office 
all ballots timely received. Under the direction of the Secretary of 
NASD Regulation or the Secretary's designee, the Independent Agent 
shall open and count the ballots. For ballot qualification purposes, 
the Independent Agent shall identify to the candidates the NASD members 
that timely returned ballots and inform the candidates of the 
Independent Agent's determination of whether or not a ballot is 
qualified for voting purposes. The determination shall be based on a 
comparison of ballots received against the list of NASD members 
eligible to vote in the district and their Executive Representatives as 
prepared by the Secretary of NASD Regulation pursuant to Section 8.28. 
The Secretary of NASD Regulation or the Secretary's designee shall make 
the final determination of the qualification of a ballot. Upon the 
qualification of a ballot, the Independent Agent shall record the vote 
indicated on the ballot. The candidates and their representatives shall 
not be allowed to see the vote of an NASD member.

Ballots Set Aside

    Sec. 8.31  The Independent Agent shall set aside a ballot if: (a) 
the ballot is received from an NASD member eligible to vote in the 
district and the ballot is signed by a person who is not the Executive 
Representative listed on the vote qualification list prepared under 
Section 8.28, and the Secretary of the NASD has not received proper 
notice of a change in Executive Representative pursuant to the NASD By-
Laws; or (b) if two or more properly executed ballots are received from 
an NASD member eligible to vote in the district. If the Independent 
Agent determines that the ballots set aside are material to the outcome 
of the election, the Secretary of NASD Regulation and the Independent 
Agent shall make reasonable efforts to resolve each ballot set aside. 
With respect to a ballot not signed by an Executive Representative of 
record, the Secretary of NASD Regulation shall contact the NASD member 
to request that the NASD member send written notice of any change in 
Executive Representative by facsimile so that the ballot may be 
counted. With respect to multiple ballots from an NASD member, the 
Independent Agent shall contact the Executive Representative of the 
NASD member to obtain the NASD member's vote. The Secretary of NASD 
Regulation shall keep a list of NASD members that reported their ballot 
was lost or not received and that were provided with a duplicate 
ballot. The Secretary of NASD Regulation shall provide the list to the 
Independent Agent and, upon request, to the candidates.

Invalid Ballots

    Sec. 8.32  The Independent Agent shall declare a ballot invalid if 
one or more of the following conditions exist:
    (a) the ballot is not signed by the Executive Representative 
(unless Section 8.31 applies);
    (b) a vote is not indicated on the ballot; or
    (c) the ballot indicates votes for more candidates than there are 
vacancies for an office.

Certification of Election

    Sec. 8.33  Under the direction of the Secretary of NASD Regulation 
or the Secretary's designee, the Independent Agent shall count the 
votes received for each candidate in a district. The candidates for the 
office of member of the District Committee receiving the largest number 
of votes cast in the district for the office shall be declared elected 
such that the number of candidates declared elected equals the number 
of vacancies on the District Committee. The candidates for the office 
of member of the District Nominating Committee receiving the largest 
number of votes cast in the district for the office shall be declared 
elected such that the number of

[[Page 25287]]

candidates declared elected equals the number of vacancies on the 
District Nominating Committee. In the event of a tie, there shall be a 
run-off election. Each District Committee shall send a written 
certification of the election results to the Board. The certification 
shall state the number of votes received by each candidate and the 
number of ballots set aside.

Extensions of Time and Additional Procedures

    Sec. 8.34  The Secretary of NASD Regulation may extend a time 
period under this Article for good cause shown. In extraordinary 
circumstances, the Secretary of NASD Regulation, with the approval of 
the Executive Committee or the Board, may adopt additional procedures 
for elections under this Article.

Article IX

Indemnification

Indemnification of Directors, Officers, Employees, and Agents

    Sec. 9.1  (a) NASD Regulation shall indemnify, and hold harmless, 
to the fullest extent permitted by Delaware law as it presently exists 
or may thereafter be amended, any person (and the heirs, executors, and 
administrators of such person) who, by reason of the fact that he or 
she is or was a Director, officer, or employee of NASD Regulation, or 
is or was a Director, officer, or employee of NASD Regulation who is or 
was serving at the request of NASD Regulation as a director, officer, 
employee, or agent of another corporation, partnership, joint venture, 
trust, enterprise, or non-profit entity, including service with respect 
to employee benefit plans, is or was a party, or is threatened to be 
made a party to:
    (i) any threatened, pending, or completed action, suit, or 
proceeding, whether civil, criminal, administrative, or investigative 
(other than an action by or in the right of NASD Regulation) against 
expenses (including attorneys' fees and disbursements), judgments, 
fines, and amounts paid in settlement actually and reasonably incurred 
by such person in connection with any such action, suit, or proceeding; 
or
    (ii) any threatened, pending, or completed action or suit by or in 
the right of NASD Regulation to procure a judgment in its favor against 
expenses (including attorneys' fees and disbursements) actually and 
reasonably incurred by such person in connection with the defense or 
settlement of such action or suit.
    (b) NASD Regulation shall advance expenses (including attorneys' 
fees and disbursements) to persons described in subsection (a); 
provided, however, that the payment of expenses incurred by such person 
in advance of the final disposition of the matter shall be conditioned 
upon receipt of a written undertaking by that person to repay all 
amounts advanced if it should be ultimately determined that the person 
is not entitled to be indemnified under this Section or otherwise.
    (c) NASD Regulation may, in its discretion, indemnify and hold 
harmless, to the fullest extent permitted by Delaware law as it 
presently exists or may thereafter be amended, any person (and the 
heirs, executors, and administrators of such persons) who, by reason of 
the fact that he or she is or was an agent of NASD Regulation or is or 
was an agent of NASD Regulation who is or was serving at the request of 
NASD Regulation as a director, officer, employee, or agent of another 
corporation, partnership, trust, enterprise, or non-profit entity, 
including service with respect to employee benefit plans, was or is a 
party, or is threatened to be made a party to any action or proceeding 
described in subsection (a).
    (d) NASD Regulation may, in its discretion, pay the expenses 
(including attorneys' fees and disbursements) reasonably and actually 
incurred by an agent in defending any action, suit, or proceeding in 
advance of its final disposition; provided, however, that the payment 
of expenses incurred by such person in advance of the final disposition 
of the matter shall be conditioned upon receipt of a written 
undertaking by that person to repay all amounts advanced if it should 
be ultimately determined that the person is not entitled to be 
indemnified under this Section or otherwise.
    (e) Notwithstanding the foregoing or any other provision of these 
By-Laws, no advance shall be made by NASD Regulation to an agent or 
non-officer employee if a determination is reasonably and promptly made 
by the Board by a majority vote of those Directors who have not been 
named parties to the action, even though less than a quorum, or, if 
there are no such Directors or if such Directors so direct, by 
independent legal counsel, that, based upon the facts known to the 
Board or such counsel at the time such determination is made: (1) the 
person seeking advancement of expenses (i) acted in bad faith, or (ii) 
did not act in a manner that he or she reasonably believed to be in or 
not opposed to the best interests of NASD Regulation; (2) with respect 
to any criminal proceeding, such person believed or had reasonable 
cause to believe that his or her conduct was unlawful; or (3) such 
person deliberately breached his or her duty to NASD Regulation.
    (f) The indemnification provided by this Section in a specific case 
shall not be deemed exclusive of any other rights to which a person 
seeking indemnification may be entitled, both as to action in his or 
her official capacity and as to action in another capacity while 
holding such office, and shall continue as to a person who has ceased 
to be a Director, officer, employee, or agent and shall inure to the 
benefit of such person's heirs, executors, and administrators.
    (g) Notwithstanding the foregoing, but subject to subsection (j), 
NASD Regulation shall be required to indemnify any person identified in 
subsection (a) in connection with a proceeding (or part thereof) 
initiated by such person only if the initiation of such proceeding (or 
part thereof) by such person was authorized by the Board.
    (h) NASD Regulation's obligation, if any, to indemnify or advance 
expenses to any person who is or was serving at its request as a 
director, officer, employee, or agent of another corporation, 
partnership, joint venture, trust, enterprise, or non-profit entity 
shall be reduced by any amount such person may collect as 
indemnification or advancement from such other corporation, 
partnership, joint venture, trust, enterprise, or non-profit entity.
    (i) Any repeal or modification of the foregoing provisions of this 
Section shall not adversely affect any right or protection hereunder of 
any person respecting any act or omission occurring prior to the time 
of such repeal or modification.
    (j) If a claim for indemnification or advancement of expenses under 
this Article is not paid in full within 60 days after a written claim 
therefor by an indemnified person has been received by NASD Regulation, 
the indemnified person may file suit to recover the unpaid amount of 
such claim and, if successful in whole or in part, shall be entitled to 
be paid the expense of prosecuting such claim. In any such action, NASD 
Regulation shall have the burden of proving that the indemnified person 
is not entitled to the requested indemnification or advancement of 
expenses under Delaware law. 

Indemnification Insurance

    Sec. 9.2  NASD Regulation shall have power to purchase and maintain 
insurance on behalf of any person who is or was a Director, officer, 
employee,

[[Page 25288]]

or agent of NASD Regulation, or is or was serving at the request of 
NASD Regulation as a director, officer, employee, or agent of another 
corporation, partnership, joint venture, trust, enterprise, or non-
profit entity against any liability asserted against such person and 
incurred by such person in any such capacity, or arising out of such 
person's status as such, whether or not NASD Regulation would have the 
power to indemnify such person against such liability hereunder.

Article X

Capital Stock

Sole Stockholder

    Sec. 10.1  The NASD shall be the sole stockholder of the capital 
stock of NASD Regulation.

Certificates

    Sec. [6.1]10.2  [Each]The stockholder [in the Corporation] shall be 
entitled to a certificate or certificates in such form as shall be 
approved by the Board, certifying the number of shares of capital stock 
in [the Corporation] NASD Regulation owned by [such] the stockholder.

Signatures

    Sec. [6.2]10.3  (a) Certificates for shares of capital stock of 
[the Corporation] NASD Regulation shall be signed in the name of [the 
Corporation] NASD Regulation by two officers with one being the Chair 
of the Board, the President, or a Vice President, and the other being 
the Secretary, the Treasurer, or such other officer that may be 
authorized by the Board [of Directors]. Such certificates may be sealed 
with the corporate [Seal] seal of [the Corporation] NASD Regulation or 
a facsimile thereof.
    (b) If any such certificates are countersigned by a transfer agent 
other than [the Corporation] NASD Regulation or its employee, or by a 
registrar other than [the Corporation] NASD Regulation or its employee, 
any other signature on the certificate may be a facsimile. In [case] 
the event that any officer, transfer agent, or registrar who has signed 
or whose facsimile signature has been placed upon a certificate shall 
[have ceased] cease to be such officer, transfer agent, or registrar 
before such certificate is issued, such certificate may be issued by 
[the Corporation] NASD Regulation with the same effect as if such 
person were such officer, transfer agent, or registrar at the date of 
issue.

Stock Ledger

    Sec. [6.3]10.3  (a) A record of all certificates for capital stock 
issued by [the Corporation] NASD Regulation shall be kept by the 
Secretary or any other officer, employee, or agent designated by the 
Board [of Directors]. Such record shall show the name and address of 
the person, firm, or corporation in which certificates for capital 
stock are registered, the number of shares represented by each such 
certificate, the date of each such certificate, and in the case of 
certificates that have been canceled, the date of cancellation thereof.
    (b) [The Corporation] NASD Regulation shall be entitled to treat 
the holder of record of shares of capital stock as shown on the stock 
ledger as the owner thereof and as the person entitled to vote such 
shares and to receive notice of meetings, and for all other purposes. 
Except as otherwise required by applicable law, [the Corporation] NASD 
Regulation shall not be bound to recognize any equitable or other claim 
to or interest in any share of capital stock on the part of any other 
person, whether or not [the Corporation] NASD Regulation shall have 
express or other notice thereof.

Transfers of Stock

    Sec. [6.4]10.4  (a) The Board [of Directors] may make such rules 
and regulations as it may deem expedient, not inconsistent with law, 
the Restated Certificate of Incorporation, or these By-Laws, concerning 
the issuance, transfer, and registration of certificates for [share] 
shares of capital stock of [the Corporation] NASD Regulation. The Board 
[of Directors] may appoint, or authorize any principal officer to 
appoint, one or more transfer agents or one or more transfer clerks and 
one or more registrars and may require all certificates for capital 
stock to bear the signature or signatures of any of them.
    (b) Transfers of capital stock shall be made on the books of [the 
Corporation] NASD Regulation only upon delivery to [the Corporation] 
NASD Regulation or its transfer agent of: (i) a written direction of 
the registered holder named in the certificate or such holder's 
attorney lawfully constituted in writing[,]; (ii) the certificate for 
the shares of capital stock being transferred[,]; and (iii) a written 
assignment of the shares of capital stock evidenced thereby.

Cancellation

    Sec. [6.5]10.5  Each certificate for capital stock surrendered to 
[the Corporation] NASD Regulation for exchange or transfer shall be 
cancelled and no new certificate or certificates shall be issued in 
exchange for any existing certificate other than pursuant to [Sec. 6.6] 
Section 10.6 until such existing certificate shall have been canceled.

Lost, Stolen, Destroyed, and Mutilated Certificates

    Sec. [6.6]10.6  In the event that any certificate for shares of 
capital stock of [the Corporation] NASD Regulation shall be mutilated, 
[the Corporation] NASD Regulation shall issue a new certificate in 
place of such mutilated certificate. In [case] the event that any such 
certificate shall be lost, stolen, or destroyed [the Corporation] NASD 
Regulation may, in the discretion of the Board [of Directors] or a 
committee [designated] appointed thereby with power so to act, issue a 
new certificate for capital stock in the place of any such lost, 
stolen, or destroyed certificate. The applicant for any substituted 
certificate or certificates shall surrender any mutilated certificate 
or, in the case of any lost, stolen, or destroyed certificate, furnish 
satisfactory proof of such loss, theft, or destruction of such 
certificate and of the ownership thereof. The Board [of Directors] or 
such committee may, in its discretion, require the owner of a lost or 
destroyed certificate, or [his] such owner's representatives, to 
furnish to [the Corporation] NASD Regulation a bond with an acceptable 
surety or sureties and in such sum as [will] shall be sufficient to 
indemnify [the Corporation] NASD Regulation against any claim that may 
be made against it on account of the lost, stolen, or destroyed 
certificate or the issuance of such new certificate. A new certificate 
may be issued without requiring a bond when, in the judgment of the 
Board [of Directors], it is proper to do so.

Fixing of Record Date

    Sec. [6.7]10.7  The Board may fix a record date in accordance with 
Delaware law. [(a) In order that the Corporation may determine the 
stockholders entitled to notice of or to vote at any meeting of 
stockholders or any adjournment thereof, or to express consent or 
dissent to corporate action in writing without a meeting, or to 
exercise any rights with respect to any change, conversion or exchange 
of stock, or for the purpose of any other lawful action, the Board of 
Directors may fix, in advance, a record date, pursuant to and in 
accordance with Section 213 of the General Corporation Law of the State 
of Delaware. Only such stockholders as shall be stockholders of record 
on the date so fixed shall be entitled to notice of and to vote at such 
meeting or any adjournment thereof, or to give such consent or dissent, 
or to exercise such rights with respect to any such change, conversion 
or exchange of stock, or to

[[Page 25289]]

participate in any such action, notwithstanding the transfer of any 
stock on the books of the Corporation after any record date so fixed.]
    [(b) If no record date is fixed by the Board of Directors:
    (i) the record date for determining stockholders entitled to notice 
of or to vote at a meeting of stockholders shall be at the close of 
business on the day next preceding the date on which notice is given, 
or if notice is waived, at the close of business on the day next 
preceding the day on which the meeting is held;
    (ii) the record date for determining stockholders entitled to 
express consent to corporate action in writing without a meeting, when 
no prior action by the Board of Directors is necessary, shall be at the 
close of business on the day on which the first written consent is 
expressed; and
    (iii) the record date for determining stockholders for any other 
purpose shall be at the close of business on the day on which the Board 
of Directors adopts the resolution relating thereto.]
    [(c) A determination of stockholders of record entitled to notice 
of or to vote at a meeting of stockholders shall apply to any 
adjournment of the meeting; provided, however, that the Board of 
Directors may fix a new record date for the adjourned meeting.]

Article XI

Miscellaneous Provisions

Corporate Seal

    Sec. [7.1]11.1  The seal of [the Corporation] NASD Regulation shall 
be circular in form and shall bear, in addition to any other emblem or 
device approved by the Board [of Directors], the name of [the 
Corporation] NASD Regulation, the year of its incorporation, and the 
words ``Corporate Seal'' and ``Delaware[''].'' The seal may be used by 
causing it to be affixed or impressed, or a facsimile thereof may be 
reproduced or otherwise used in such manner as the Board [of Directors] 
may determine.

Fiscal Year

    Sec. [7.2]11.2  The fiscal year of [the Corporation] NASD 
Regulation shall begin on the [1st] first day of January in each year, 
or such other month as the Board [of Directors] may determine by 
resolution.

Waiver of Notice

    Sec. [7.3]11.3 (a) Whenever notice is required to be given by law, 
the Restated Certificate of Incorporation, or these By-Laws, a written 
waiver thereof, signed by the person or persons entitled to such 
notice, whether before or after the time stated therein, shall be 
deemed equivalent to notice. Neither the business to be transacted at, 
nor the purpose of, any regular or special meeting of the 
[stockholders, directors] stockholder, Directors, or members of a 
committee of [directors] Directors need be specified in any written 
waiver of notice.
    (b) Attendance of a person at a meeting shall constitute a waiver 
of notice of such meeting, except when the person attends a meeting for 
the express purpose of objecting, at the beginning of the meeting, to 
the transaction of any business because the meeting is not lawfully 
called or convened.

Execution of Instruments, Contracts, Etc.

    Sec. [7.4]11.4  (a) All checks, drafts, bills of exchange, notes, 
or other obligations or orders for the payment of money shall be signed 
in the name of [the Corporation] NASD Regulation by such officer or 
officers or person or persons[,] as the Board [of Directors], or a duly 
authorized committee thereof, may from time to time designate. Except 
as otherwise provided by law, the Board [of Directors], any committee 
given specific authority in the premises by the Board [of Directors], 
or any committee given authority to exercise generally the powers of 
the Board [of Directors] during intervals between meetings of the Board 
[of Directors], may authorize any officer, employee, or agent, in the 
name of and on behalf of [the Corporation] NASD Regulation, to enter 
into or execute and deliver deeds, bonds, mortgages, contracts, and 
other obligations or instruments, and such authority may be general or 
confined to specific instances.
    (b) All applications, written instruments, and papers required by 
any department of the United States Government or by any state, county, 
municipal, or other governmental authority, may be executed in the name 
of [the Corporation] NASD Regulation by any principal officer or 
subordinate officer of [the Corporation] NASD Regulation, or, to the 
extent designated for such purpose from time to time by the Board [of 
Directors], by an employee or agent of [the Corporation] NASD 
Regulation. Such designation may contain the power to substitute, in 
the discretion of the person named, one or more other persons.

Form of Records

    Sec. [7.5]11.5  Any records maintained by [the Corporation] NASD 
Regulation in the regular course of business, including its stock 
ledger, books of account, and minute books, may be kept on, or be in 
the form of, magnetic tape, computer disk, or any other information 
storage device, provided that the records so kept can be converted into 
clearly legible form within a reasonable time.

Article [VIII] XII

Amendments; Emergency By-Laws

By Stockholder[s]

    Sec. [8.1]12.1  These By-Laws may be altered, amended, or repealed, 
or new By-Laws may be adopted, at any meeting of [stockholders] the 
stockholder, provided that, in the case of a special meeting, notice 
that an amendment is to be considered and acted upon shall be inserted 
in the notice or waiver of notice of said meeting.

By Directors

    Sec. [8.2]12.2  To the extent permitted by the Restated Certificate 
of Incorporation, these By-Laws may be altered, amended, or repealed, 
or new By-Laws may be adopted, at any regular or special meeting of the 
Board [of Directors].

Emergency By-Laws

    Sec. [8.3]12.3  The Board [of Directors] may adopt emergency By-
Laws subject to repeal or change by action of the [stockholders] 
stockholder that shall, notwithstanding any different provision of law, 
the Restated Certificate of Incorporation, or these By-Laws, be 
operative during any emergency resulting from any nuclear or atomic 
disaster, an attack on the United States or on a locality in which [the 
Corporation] NASD Regulation conducts its business or customarily holds 
meetings of the Board [of Directors or stockholders] or stockholder, 
any catastrophe, or other emergency condition, as a result of which a 
quorum of the Board [of Directors] or a committee thereof cannot 
readily be convened for action. Such emergency By-Laws may make any 
provision that may be practicable and necessary [for] under the 
circumstances of the emergency.
* * * * *

By-Laws of the NASDAQ Stock Market, Inc.

Article I

Definitions

    When used in these By-Laws, unless the context otherwise requires, 
the term:
    (a) ``Act'' means the Securities Exchange Act of 1934, as amended;
    (b) ``Board'' means the Board of Directors of Nasdaq;

[[Page 25290]]

    (c) ``broker'' means any individual, corporation, partnership, 
association, joint stock company, business trust, unincorporated 
organization, or other legal entity engaged in the business of 
effecting transactions in securities for the account of others, but 
does not include a bank;
    (d) ``Commission'' means the Securities and Exchange Commission;
    (e) ``day'' means calendar day;
    (f) ``dealer'' means any individual, corporation, partnership, 
association, joint stock company, business trust, unincorporated 
organization, or other legal entity engaged in the business of buying 
and selling securities for such individual's or entity's own account, 
through a broker or otherwise, but does not include a bank, or any 
person insofar as such person buys or sells securities for such 
person's own account, either individually or in some fiduciary 
capacity, but not as part of a regular business;
    (g) ``Delaware law'' means the General Corporation Law of the State 
of Delaware;
    (h) ``Delegation Plan'' means the ``Plan of Allocation and 
Delegation of Functions by NASD to Subsidiaries'' as approved by the 
Commission, and as amended from time to time;
    (i) ``Director'' means a member of the Board, excluding the Chief 
Executive Officer of the NASD;
    (j) ``Industry Director'' or ``Industry committee member'' means a 
Director (excluding the President of Nasdaq) or committee member who 
(1) is an officer, director, or employee of a broker or dealer or has 
been employed in any such capacity at any time within the prior three 
years; or (2) has a consulting or employment relationship with or 
provides professional services to the NASD, NASD Regulation, or Nasdaq 
or has had any such relationship or provided any such services at any 
time within the prior three years;
    (k) ``NASD'' means the National Association of Securities Dealers, 
Inc.;
    (l) ``NASD Board'' means the NASD Board of Governors;
    (m) ``NASD Regulation'' means NASD Regulation, Inc.;
    (n) ``Nasdaq'' means The Nasdaq Stock Market, Inc.;
    (o) ``National Nominating Committee'' means the National Nominating 
Committee appointed pursuant to Article VII, Section 9 of the NASD By-
Laws;
    (p) ``Non-Industry Director'' or ``Non-Industry committee member'' 
means a Director or committee member who is (1) a Public Director or 
committee member; (2) an officer or employee of an issuer of securities 
listed on Nasdaq or traded in the over-the-counter market; (3) a person 
affiliated with a broker or a dealer that operates solely to assist the 
securities-related activities of the business of a non-member affiliate 
(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; (4) an employee 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 is 
primarily engaged in the business of the non-member entity; or (5) any 
other individual who would not be an Industry Director or committee 
member;
    (q) ``Public Director'' or ``Public committee member'' means a 
Director or committee member who has no material business relationship 
with a broker or dealer or the NASD, NASD Regulation, or Nasdaq; and
    (r) ``Rules of the Association'' or ``Rules'' means the numbered 
rules set forth in the NASD Manual beginning with the Rule 0100 Series, 
as adopted by the NASD Board pursuant to the NASD By-Laws, as hereafter 
amended or supplemented.

Article [I] II

Offices

Location

    Sec. [1.1]2.1  The address of the registered office of [the 
Corporation] Nasdaq in the State of Delaware and the name of the 
registered agent at such address shall be: The Corporation Trust 
Company, 1209 Orange [St.,] Street, Wilmington, [DE] Delaware 19801. 
[The Corporation] Nasdaq also may [also] have offices at such other 
places both within and without the State of Delaware as the Board [of 
Directors] may from time to time designate or the business of [the 
Corporation] Nasdaq may require.

Change of Location

    Sec. [1.2]2.2  In the manner permitted by law, the Board [of 
Directors] or the registered agent may change the address of [the 
Corporation's] Nasdaq's registered office in the State of Delaware and 
the Board [of Directors] may make, revoke, or change the designation of 
the registered agent.

Article[II] III

Meetings of Stockholder[s]

[Annual Meeting

    Sec. 2.1  The annual meeting of stockholders of the Corporation for 
the election of Directors and for the transaction of such other 
business as may properly come before the meeting shall be held on such 
date, and at such time, and place, within or without the State of 
Delaware, as may be fixed, from time to time, by the Board of 
Directors.]

[Special Meetings

    Sec. 2.2  Special meetings of stockholders of the Corporation, 
unless otherwise prescribed by law, may be called at any time by the 
Chair of the Board, by the President or by order of a majority of the 
Board of Directors. Special meetings of stockholders prescribed by law 
for the election of directors shall be called by the Board of 
Directors, the President, or the Secretary. Special meetings of 
stockholders shall be held at such place within or without the State of 
Delaware as shall be designated in the notice of meeting.]

[Notice of Meetings

    Sec. 2.3  (a) Whenever stockholders are required or permitted to 
take any action at a meeting, they shall be given written notice 
stating the place, date and hour of the meeting, and, in the case of a 
special meeting, the purpose or purposes thereof. Unless otherwise 
required by law, the Certificate of Incorporation or these By-Laws, 
written notice shall be delivered or mailed at least ten but not more 
than sixty days before such meeting date to each stockholder entitled 
to vote at such meeting. If mailed, such notice shall be deposited in 
the United States mail, postage prepaid, directed to each stockholder 
at the address that appears on the records of the Corporation.]
    [(b) When a meeting of stockholders is adjourned to another time or 
place, notice need not be given of the adjourned meeting if the time 
and place thereof are announced at the meeting at which the adjournment 
is taken. At the adjourned meeting, the Corporation may transact any 
business which might have been transacted at the original meeting. If, 
however, the adjournment is for more than thirty days from the date of 
the original meeting, or if, after the adjournment, a new record date 
is set for the adjourned meeting, notice of the adjourned meeting shall 
be given to each stockholder of record entitled to vote at the meeting 
in the manner prescribed above in subsection (a).]

[Quorum

    Sec. 2.4  Except as otherwise provided by law, the Certificate of 
Incorporation or these By-Laws, at each meeting of stockholders the 
presence in person or by proxy of the holders of

[[Page 25291]]

record of a majority of the outstanding shares of capital stock 
entitled to vote or act at such a meeting shall constitute a quorum for 
the transaction of any business. In the absence of a quorum, the 
stockholders so present may by majority rule, adjourn any meeting until 
a quorum shall be present. When a quorum is once present to organize a 
meeting, the quorum cannot be destroyed by the subsequent withdrawal or 
revocation of the proxy of any stockholder.]

[Voting

    Sec. 2.5  (a) At any meeting of stockholders, each stockholder as 
of the record date is entitled to one vote for each such share of stock 
having voting power, upon the matter in question. Each stockholder 
entitled to vote at a meeting of stockholders or to express consent or 
dissent to corporate action in writing without a meeting may authorize 
another person or persons to act for him by proxy, provided that no 
proxy shall be voted or acted upon after three years from its date, 
unless the proxy provides for a longer period. A duly executed proxy 
shall be irrevocable if it states that it is irrevocable and if, and 
only so long as, it is coupled with an interest, whether in the stock 
itself or in the Corporation, sufficient in law to support an 
irrevocable power. A stockholder may revoke any proxy which is not 
irrevocable by attending the meeting and voting in person or by filing 
an instrument in writing revoking the proxy or by delivering a proxy in 
accordance with applicable law bearing a later date to the Secretary of 
the Corporation.]
    [(b) Directors of the Corporation shall be elected by a plurality 
of the votes cast at a meeting of stockholders pursuant to Sec. 2.5 of 
these By-Laws. Corporate action other than the election of directors 
shall be authorized by a majority of the votes cast at a meeting of 
stockholders, except as otherwise required by law, the Certificate of 
Incorporation or these By-Laws.]
    [(c) Upon the demand of any stockholder entitled to vote, the 
election of directors or a vote on any other matter at a meeting of 
stockholders shall be by written ballot; otherwise, the method of 
voting and the manner in which votes are counted at such a meeting 
shall be discretionary with the presiding officer of the meeting.]

[Presiding Officer and Secretary

    Sec. 2.6  At every meeting of stockholders, the Chair, or in his/
her absence, the President, or in his/her absence, the appointee of the 
meeting, shall preside. The Secretary, or in his/her absence, the 
appointee of the presiding officer of the meeting, shall act as 
Secretary of the meeting.]

Action by Consent of Stockholder[s]

    Sec. [2.7]3.1  Any action required[,] or permitted by law to be 
taken at any meeting of the stockholder [stockholders] of [the 
Corporation] Nasdaq may be taken without a meeting, without prior 
notice and without a vote, if a consent in writing, setting forth the 
action so taken, is signed by the [holders] holder of the outstanding 
stock [having not less than the minimum number of votes that would be 
necessary to authorize or take such action at a meeting at which all 
shares entitled to vote thereon were present and voted. Prompt notice 
of the taking of corporate action without a meeting and by less than 
unanimous written consent shall be given to those stockholders who have 
not consented in writing and who would be entitled to vote thereon at a 
meeting].

Article [III] IV

Board of Directors

General Powers

    Sec. [3.1]4.1  The property, business, and affairs of [the 
Corporation] Nasdaq shall be managed by or under the direction of the 
Board [of Directors]. The Board [of Directors] may exercise all such 
powers of [the Corporation] Nasdaq and have the authority to perform 
all such lawful acts as are permitted by law, the Restated Certificate 
of Incorporation [or], these By-Laws, or the Delegation Plan for the 
organization, development, and operation of electronic data processing 
and communications facilities, including computer hardware and 
software, for the purposes of: [(i)](a) supporting the operation, 
regulation, and surveillance of The Nasdaq Stock Market and other 
organized securities markets established for trading equity securities, 
debt securities, derivative instruments, or other financial products 
that may be developed; [(ii)](b) supporting the efficient clearance and 
settlement of securities transactions; [(iii)](c) supporting various 
elements of the national market system pursuant to Section 11A of the 
[Securities Exchange Act of 1934 (``Exchange Act'')] Act and the rules 
thereunder; [(iv)](d) assisting the [National Association of Securities 
Dealers, Inc.] NASD in fulfilling its self-regulatory responsibilities 
as set forth in Section 15A of the [Exchange] Act[,]; and [(v)](e) 
supporting such other initiatives as the Board [of Directors] may deem 
appropriate. To the fullest extent permitted by applicable law, the 
Restated Certificate of Incorporation, and these By-Laws, the Board may 
delegate any of its powers to a committee appointed pursuant to Section 
4.14 or to Nasdaq staff in a manner not inconsistent with the 
Delegation Plan.

Number of Directors

    Sec. [3.2]4.2  [The Board of Directors of the Corporation shall 
consist of one or more members; the exact number of directors which 
shall constitute the whole Board of Directors shall be fixed from time 
to time by resolution adopted by a majority of the whole Board of 
Directors. After fixing the number of directors constituting the whole 
Board of Directors, the Board of Directors may, by resolution adopted 
by a majority of the whole Board of Directors, from time to time change 
the number of directors constituting the whole Board of Directors.] The 
Board shall be composed of at least 11 and not more than 15 Directors, 
the number thereof to be determined by the Board prior to the annual 
election of Directors. Any new Director position created as a result of 
an increase in the size of the Board shall be filled as part of the 
annual election conducted under Section 4.4.

Qualifications

    Sec. [3.3]4.3  (a) Directors need not be stockholders of [the 
Corporation] Nasdaq. The President of Nasdaq shall be a Director, and 
the remaining Directors shall be equally balanced between Industry and 
Non-Industry Directors, including at least two 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 Directors. In the event that the Board shall consist of 
more than 12 Directors, at least three shall be Public Directors. The 
Chief Executive Officer of the NASD shall be an ex-officio non-voting 
member of the Board.
    (b) Each Director shall update the information submitted to the 
Secretary of the NASD pursuant to Article VII, Section 9(e) of the NASD 
By-Laws regarding the Director's classification as an Industry, Non-
Industry, or Public Director at least annually and upon request of the 
Secretary of the NASD, and shall report immediately to the Secretary of 
the NASD any change in such classification.

Election

    Sec. [3.4]4.4  (a) Except as otherwise provided by law [or], these 
By-Laws, or the Delegation Plan, after the first meeting of [the 
Corporation] Nasdaq at which [directors] Directors are elected,

[[Page 25292]]

[directors of the Corporation] Directors of Nasdaq shall be elected 
each year at the annual meeting of [stockholders] the stockholder, or 
at a special meeting called for such purpose in lieu of the annual 
meeting[, by a plurality of the votes cast at such meeting]. If the 
annual election of [directors] Directors is not held on the date 
designated [therefore,] therefor, the [directors] Directors shall cause 
such election to be held as soon thereafter as convenient.
    (b) The National Nominating Committee shall nominate Industry, Non-
Industry, and Public Directors for each vacant or new Director position 
on the Board to the NASD Board in accordance with Article VII of the 
NASD By-Laws.

Term

    Sec. [3.5]4.5  (a) Each [director] Director shall hold office for a 
term of three years or until [his] a successor is duly elected and 
qualified, except in the event of earlier termination from office by 
reason of death, resignation, removal[,] with or without cause, 
disqualification, or other reason.
    (b) The Board [of Directors] shall be divided into three classes. 
The term of office of those of the first class shall expire at the 
January 1998 meeting of the Board, of the second class one year 
thereafter, and of the third class two years thereafter. At each annual 
election, commencing January 1998, Directors shall be elected for a 
term of three years to replace those whose terms expire.
    (c) The President of [the Corporation] Nasdaq shall serve as a 
[member of the Board] Director until [his] a successor is selected and 
qualified, or until [his] death, resignation, or removal.
    (d) Except for the President, no Director may serve more than two 
consecutive terms; provided, however, that if a Director is appointed 
to fill a term of less than one year, such Director may serve up to two 
consecutive terms following the expiration of such Director's [current 
term] initial term.
    [(e) Each Director chosen to fill newly created directorship shall 
serve until the next succeeding annual meeting of stockholders.]

Resignation

    Sec. [3.6]4.6  Any [director] Director may resign at any time 
either upon written notice of resignation to the Chair of the Board, 
the President, or the Secretary. Any such resignation shall take effect 
at the time specified therein or, if the time [be] is not specified, 
upon receipt thereof, and the acceptance of such resignation, unless 
required by the terms thereof, shall not be necessary to make such 
resignation effective.

Removal

    Sec. [3.7]4.7  Any or all of the [directors] Directors may be 
removed from office at any time, with or without cause, only by a 
majority vote of the [stockholders] NASD Board.

Disqualification

    Sec. 4.8  A Director shall immediately resign or be automatically 
removed from office if the NASD Board determines by majority vote that 
(a) the Director no longer satisfies the definition for the category 
(Industry, Non-Industry or Public Director) for which the Director was 
elected; (b) failure to remove the Director would violate the 
compositional requirements for the Board set forth in Section 4.3(a); 
and (c) the Director has a remaining term of office of more than six 
months.

Filling of Vacancies

    Sec. 4.9  If a Director position becomes vacant, whether because of 
death, disability, disqualification, removal, or resignation, the 
National Nominating Committee shall nominate, and the NASD Board shall 
elect by majority vote, a person satisfying the classification 
(Industry, Non-Industry, or Public Director) for the directorship as 
provided in Section 4.3 to fill such vacancy, except that if the 
remaining term of office for the vacant Director position is not more 
than six months, no replacement shall be required.

Quorum and Voting

    Sec. [3.8]4.10  (a) At all meetings of the Board [of Directors, 
one-third of the total number of directors shall constitute], unless 
otherwise set forth in these By-Laws or required by law, a quorum for 
the transaction of business shall consist of a majority of the Board, 
including not less than 50 percent of the Non-Industry Directors. In 
the absence of a quorum, a majority of the [directors] Directors 
present may adjourn the meeting until a quorum be present.
    (b) [A director interested in a contract or transaction may be 
counted in determining the presence of a quorum at a meeting of the 
Board of Directors which authorizes the contract or transaction.] 
Except as provided in Section 4.15(b), the vote of a majority of the 
Directors present at a meeting at which a quorum is present shall be 
the act of the Board.
    [(c) The vote of a majority of the directors present at a meeting 
at which a quorum is present shall be the act of the Board of 
Directors.]

Regulation

    Sec. [3.9]4.11  The Board [of Directors] may adopt such rules, 
regulations, and requirements for the conduct of the business and 
management of [the Corporation] Nasdaq, not inconsistent with law, the 
Restated Certificate of Incorporation, these By-Laws, [or the rules and 
By-Laws of the National Association of Securities Dealers, Inc., as the 
Board of Directors may deem proper. A member of the Board of Directors] 
the Rules of the Association, or the By-Laws of the NASD, as the Board 
may deem proper. A Director shall, in the performance of [his or her] 
such Director's duties, be fully protected in relying in good faith 
upon the books of account or reports made to [the Corporation] Nasdaq 
by any of its officers, [or] by an independent certified public 
accountant, [or] by an appraiser selected with reasonable care by the 
Board [of Directors] or any committee of the Board [of Directors] or by 
any agent of [the Corporation] Nasdaq, or in relying in good faith upon 
other records of [the Corporation] Nasdaq.

Meetings

    Sec. [3.10]4.12  (a) An annual meeting of the Board [of Directors] 
shall be held for the purpose of organization, election of officers, 
and transaction of any other business. If such meeting is held promptly 
after and at the place specified for the annual meeting of 
[stockholders] the stockholder, no notice of the annual meeting of the 
Board [of Directors] need be given. Otherwise, such annual meeting 
shall be held at such time and place as may be specified in a notice 
given in accordance with Section [3.11 of these By-Laws] 4.13.
    (b) Regular meetings of the Board [of Directors] may be held at 
such time and place, within or without the State of Delaware, as 
determined from time to time by the Board [of Directors]. After such 
determination has been made, notice shall be given in accordance with 
Section [3.11 of these By-Laws] 4.13.
    (c) Special meetings of the Board [of Directors] may be called by 
the Chair of the Board, [or] by the President, or by at least one-third 
of the [directors at that time being] Directors then in office. Notice 
of any special meeting of the Board [of Directors] shall be given to 
each [director] Director in accordance with Section [3.11 of these By-
Laws.] 4.13.
    (d) [Members of the Board of Directors, or any committee designated 
by the Board of Directors,] Directors or members of any committee 
appointed

[[Page 25293]]

by the Board may participate in a meeting of the Board [of Directors] 
or of such committee through the use of a conference telephone or 
similar communications equipment by means of which all persons 
participating in the meeting may hear one another, and such 
participation in a meeting shall constitute presence in person at such 
meeting for all purposes.

Notice of Meetings; Waiver of Notice

    Sec. [3.11]4.13  (a) Notice of any meeting of the Board [of 
Directors] shall be deemed to be duly given to a [director (i) if 
]Director if: (i) mailed to the address last made known in writing to 
[the Corporation] Nasdaq by such [director] Director as the address to 
which such notices are to be sent, at least [two] seven days before the 
day on which such [special] meeting is to be held[, or]; (ii) [if] sent 
to the [director] Director at such address by telegraph, telefax, 
cable, radio, or wireless, not later than the day before the day on 
which such meeting is to be held[,]; or (iii) [if] delivered to the 
[director] Director personally or orally, by telephone or otherwise, 
not later than the day before the day on which such [special] meeting 
is to be held. Each notice shall state the time and place of the 
meeting and the purpose(s) thereof.
    (b) Notice of any meeting of the Board [of Directors] need not be 
given to any [director] Director if waived by that [director] Director 
in writing (or by telegram, telefax, cable, radio, or wireless and 
subsequently confirmed in writing) whether before or after the holding 
of such meeting, or if such [director] Director is present at such 
meeting, subject to Article IX, Section 9.3(b).
    (c) Any meeting of the Board [of Directors] shall be a legal 
meeting without any prior notice if all [directors] Directors then in 
office shall be present thereat.

Committees [of the Board of Directors]

    Sec. [3.13]4.14  (a) The Board [of Directors] may, by resolution or 
resolutions adopted by a majority of the whole Board [of Directors, 
designate], appoint one or more committees[, each committee to consist 
of one or more directors of the Corporation]. Except as herein 
provided, vacancies in membership of any committee shall be filled by 
the vote of a majority of the whole Board [of Directors]. The Board [of 
Directors] may designate one or more [directors] Directors as alternate 
members of any committee, who may replace any absent or disqualified 
member at any meeting of the committee. In the absence or 
disqualification of any member of a committee, the member or members 
thereof present at any meeting and not disqualified from voting, 
whether or not [he, she,] such member or [they] members constitute a 
quorum, may unanimously appoint another [member of the Board of 
Directors] Director to act at the meeting in the place of any such 
absent or disqualified member. Members of a committee shall hold office 
for such period as may be fixed by a resolution adopted by a majority 
of the whole Board [of Directors], subject, however, to removal, with 
or without cause, at any time only by the vote of a majority of the 
whole Board [of Directors].
    (b) [Any committee, to the extent permitted by law and to the 
extent provided in the] The Board may, by resolution or resolutions 
[creating such committee, shall have and may exercise all the powers 
and authority of the Board of Directors] adopted by a majority of the 
whole Board, delegate to one or more committees the power and authority 
to act on behalf of the Board in carrying out the functions and 
authority delegated to Nasdaq by the NASD under the Delegation Plan. 
Such delegations shall be in conformance with applicable law, the 
Restated Certificate of Incorporation, these By-Laws, and the 
Delegation Plan. Action taken by a committee pursuant to such delegated 
authority shall be subject to review, ratification, or rejection by the 
Board. In all other matters, the Board may, by resolution or 
resolutions adopted by a majority of the whole Board, delegate to one 
or more committees that consist solely of one or more Directors the 
power and authority to act on behalf of the Board in the management of 
the business and affairs of [the Corporation, and]Nasdaq to the extent 
permitted by law and not inconsistent with the Delegation Plan. A 
committee, to the extent permitted by law and provided in the 
resolution or resolutions creating such committee, may authorize the 
seal of [the Corporation] Nasdaq to be affixed to all papers [which] 
that may require it.
    (c) Except as otherwise provided by applicable law, no [No such] 
committee shall have the power or authority of the Board with regard 
to: amending the Restated Certificate of Incorporation or the By-Laws 
of [the Corporation,] Nasdaq; adopting an agreement of merger or 
consolidation; recommending to the [stockholders] stockholder the sale, 
lease, or exchange of all or substantially all [the Corporation's] 
Nasdaq's property and assets; or recommending to the [stockholders] 
stockholder a dissolution of [the Corporation] Nasdaq or a revocation 
of a dissolution. Unless the resolution of the Board [of Directors] 
expressly so provides, no [such] committee shall have the power or 
authority to authorize the issuance of stock.
    (d) The Board may appoint an Executive Committee, which shall, to 
the fullest extent permitted by Delaware law and other applicable law, 
have and be permitted to exercise all the powers and authority of the 
Board in the management of the business and affairs of Nasdaq between 
meetings of the Board, and which may authorize the seal of Nasdaq to be 
affixed to all papers that may require it. The President of Nasdaq 
shall be a member of the Executive Committee, and with respect to the 
remaining members, the Executive Committee shall have a percentage of 
Non-Industry Directors at least as great as the percentage of Non-
Industry Directors on the whole Board, and a percentage of Public 
Directors at least as great as the percentage of Public Directors on 
the whole Board.
    (e)[(c)] Each committee may adopt its own rules of procedure and 
may meet at stated times or on such notice as such committee may 
determine. Each committee shall keep regular minutes of its proceedings 
and report the same to the Board [of Directors] when required.
    (f) [(d)]Unless otherwise provided by the Board [of Directors, a 
majority of any such committee ], a majority of a committee, excluding 
the President if the President is a member of the committee, shall 
constitute a quorum for the transaction of business, and the vote of a 
majority of the members of such committee present at a meeting at which 
a quorum is present shall be an act of such committee.
    (g) Upon request, each prospective committee member who is not a 
Director shall provide to the Secretary of the NASD such information as 
is reasonably necessary to serve as the basis for a determination of 
the prospective committee member's classification as an Industry, Non-
Industry, or Public committee member, and the Secretary of the NASD 
shall certify to the Board each prospective committee member's 
classification. Such committee members shall update the information 
submitted under this Section at least annually and upon request of the 
Secretary of the NASD, and shall report immediately to the Secretary of 
the NASD any change in such classification.

Conflicts of Interest; Contracts and Transactions Involving Directors

    Sec. [3.12.]4.15  (a) A Director or a member of any committee shall 
not directly or indirectly participate in any

[[Page 25294]]

adjudication of the interests of any party if that Director or 
committee member has a conflict of interest or bias, or if 
circumstances otherwise exists where his or her fairness might 
reasonably be questioned. In any such case, the Director or committee 
member shall recuse himself or herself or shall be disqualified.
    (b) No contract or transaction between [the Corporation] Nasdaq and 
one or more of its [directors] Directors or officers, or between [the 
Corporation] Nasdaq and any other corporation, partnership, 
association, or other organization in which one or more of its 
[directors] Directors or officers are directors or officers, or have a 
financial interest, shall be void or voidable solely for this reason[, 
or solely because the director or officer is present at or participates 
in the meeting of the Board of Directors or the committee thereof 
which] if: (i) the material facts pertaining to such Director's or 
officer's relationship or interest and the contract or transaction are 
disclosed or are known to the Board or the committee, and the Board or 
committee in good faith authorizes the contract or transaction[, or 
solely because his, her, or their votes are counted for such purposes 
if: (i) the material facts pertaining to such director's or officer's 
relationship or interest and] by the affirmative vote of a majority of 
the disinterested Directors; (ii) the material facts are disclosed or 
become known to the Board or committee after the contract or 
transaction [are disclosed or are known to the Board of Directors or 
the committee, and the Board] is entered into, and the Board or 
committee in good faith [authorizes] ratifies the contract or 
transaction by the affirmative vote of a majority of the disinterested 
[directors, even though the disinterested directors be less than a 
quorum; or (ii)] Directors; or (iii) the material facts pertaining to 
the [director's] Director's or officer's relationship or interest and 
the contract or transaction are disclosed or are known to the 
[stockholders] stockholder entitled to vote thereon, and the contract 
or transaction is specifically approved in good faith by vote of the 
[stockholders; or (iii) the contract or transaction is fair as to the 
Corporation as of the time it is authorized, approved or ratified by 
the Board of Directors, a committee thereof, or the stockholders. 
Common or interested directors] stockholder. Only disinterested 
Directors may be counted in determining the presence of a quorum at the 
portion of a meeting of the Board [of Directors,] or of a committee 
that [which] authorizes the contract or transaction.

Communication of Views Regarding NASD or NASD Regulation Election or 
Nomination

    Sec. 4.16  Nasdaq, the Board, any committee, and Nasdaq staff shall 
not take any position publicly or with an NASD member or person 
associated with or employed by a member with respect to any candidate 
in a contested election or nomination held pursuant to the NASD By-Laws 
or the NASD Regulation By-Laws. A Director or committee member may 
communicate his or her views with respect to a candidate if such 
Director or committee member acts solely in his or her individual 
capacity and disclaims any intention to communicate in any official 
capacity on behalf of Nasdaq, the Board, or any committee. Nasdaq, the 
Board, any committee, and the Nasdaq staff shall not provide any 
administrative support to any candidate in a contested election or 
nomination conducted pursuant to the NASD By-Laws or the NASD 
Regulation By-Laws.

Action Without Meeting

    Sec. [3.14]4.17  Any action required or permitted to be taken at 
[any] a meeting of the Board [of Directors or any] or of a committee 
[thereof] may be taken without a meeting if all Directors or all 
members of [the Board of Directors or] such committee, as the case may 
be, consent thereto in writing, and the writing or writings are filed 
with the minutes of proceedings of the Board [of Directors or such 
committee] or the committee.

Article V

Compensation

Compensation of Board and Committee Members

    Sec. 5.1  The Board may provide for reasonable compensation of the 
Chair of the Board, the Directors, and the members of any committee. 
The Board may also provide for reimbursement of reasonable expenses 
incurred by such persons in connection with the business of Nasdaq.

Article [IV]VI

Officers, Agents, and Employees

Principal Officers

    Sec. [4.1]6.1  The principal officers of [the Corporation] Nasdaq 
shall be elected by the Board [of Directors] and shall include a Chair, 
a President, a Secretary, a Treasurer, and such other officers as may 
be designated by the Board [of Directors]. One person may hold the 
offices and perform the duties of any two or more of said principal 
offices, except the offices and duties of President and Vice President 
or of President and Secretary. None of the principal officers, except 
the Chair of the Board and the President, need be [directors of the 
Corporation] Directors of Nasdaq.

Election of Principal Officers; Term of Office

    Sec. [4.2]6.2  (a) The principal officers of [the Corporation] 
Nasdaq shall be elected annually by the Board [of Directors] at the 
annual meeting of the Board [of Directors] convened pursuant to Section 
[3.10(a) of these By-Laws] 4.12(a). Failure to elect any principal 
officer annually shall not dissolve [the Corporation] Nasdaq.
    (b) If the Board [of Directors] shall fail to fill any principal 
office at an annual meeting, or if any vacancy in any principal office 
shall occur, or if any principal office shall be newly created, such 
principal office may be filled at any regular or special meeting of the 
Board [of Directors].
    (c) Each principal officer shall hold office until [his or her] a 
successor is duly elected and qualified, or until [his or her earlier] 
death, resignation, or removal.

Subordinate Officers, Agents, or Employees

    Sec. [4.3]6.3  In addition to the principal officers, [the 
Corporation] Nasdaq may have one or more subordinate officers, agents, 
and employees as the Board [of Directors] may deem necessary, each of 
whom shall hold office for such period and exercise such authority and 
perform such duties as the Board [of Directors], the President, or any 
officer designated by the Board [of Directors], may from time to time 
determine. [The Board of Directors at any time may appoint and remove, 
or may delegate to any principal officer the power to appoint and to 
remove, any subordinate officer, agent, or employee of the 
Corporation.] Agents and employees of Nasdaq shall be under the 
supervision and control of the officers of Nasdaq, unless the Board, by 
resolution, provides that an agent or employee shall be under the 
supervision and control of the Board.

Delegation of Duties of Officers

    Sec. [4.4]6.4  The Board [of Directors] may delegate the duties and 
powers of any officer of [the Corporation] Nasdaq to any other officer 
or to any [director] Director for a specified period of time and for 
any reason that the Board [of Directors] may deem sufficient.

[[Page 25295]]

Resignation and Removal of Officers

    Sec. [4.5]6.5  (a) Any officer may resign at any time upon written 
notice of resignation to the Board [of Directors], the President, or 
the Secretary. Any such resignation shall take effect upon receipt of 
such notice or at any later time specified therein. The acceptance of a 
resignation shall not be necessary to make the resignation effective.
    (b) Any officer[, agent or employee of the Corporation] of Nasdaq 
may be removed, with or without cause, by resolution adopted by a 
majority of the [directors] Directors then in office at any regular or 
special meeting of the Board [of Directors] or by a written consent 
signed by all of the [directors] Directors then in office. Such removal 
shall be without prejudice to the contractual rights of the affected 
officer, [agent, or employee,] if any, with [the Corporation] Nasdaq.

Bond

    Sec. [4.6]6.6  [The Corporation] Nasdaq may secure the fidelity of 
any or all of its officers, agents, or employees by bond or otherwise.

Chair of the Board

    Sec. [4.7]6.7  The Chair of the Board shall preside at all meetings 
of the Board [of Directors] at which [he or she] the Chair is present. 
The Chair shall exercise such other powers and perform such other 
duties as may be assigned to [him or her] the Chair from time to time 
by the Board [of Directors].

President

    Sec. [4.8]6.8  The President shall, in the absence of the Chair of 
the Board, preside at all meetings of the Board [of Directors] at which 
[he or she] the President is present. The President shall be the [chief 
executive officer of the Corporation] Chief Executive Officer of Nasdaq 
and shall have general supervision over the business and affairs of 
[the Corporation] Nasdaq. The President shall have all powers and 
duties usually incident to the office of the President, except as 
specifically limited by a resolution of the Board [of Directors]. The 
President shall exercise such other powers and perform such other 
duties as may be assigned to [him or her] the President from time to 
time by the Board [of Directors].

Vice President

    Sec. [4.9]6.9  The Board shall elect one or more Vice Presidents. 
In the absence or disability of the President or if the office of 
President [be] becomes vacant, the Vice Presidents in the order 
determined by the Board [of Directors], or if no such determination has 
been made, in the order of their seniority, shall perform the duties 
and exercise the powers of the President, subject to the right of the 
Board [of Directors] at any time to extend or restrict such powers and 
duties or to assign them to others. Any Vice President may have such 
additional designations in [his or her] such Vice President's title as 
the Board [of Directors] may determine. The Vice Presidents shall 
generally assist the President in such manner as the President shall 
direct. Each Vice President shall exercise such other powers and 
perform such other duties as may be assigned to [him or her] such Vice 
President from time to time by the Board [of Directors] or the 
President. The term ``Vice President'' used in this Section shall 
include the positions of Executive Vice President, Senior Vice 
President, and Vice President.

Secretary

    Sec. [4.10]6.10  Secretary shall act as Secretary of all meetings 
of [stockholders] the stockholder and of the Board [of Directors] at 
which [he or she] the Secretary is present, shall record all the 
proceedings of all such meetings in a book to be kept for that purpose, 
shall have supervision over the giving and service of notices of [the 
Corporation] Nasdaq, and shall have supervision over the care and 
custody of the corporate records and the corporate seal of [the 
Corporation] Nasdaq. The Secretary shall be empowered to affix the 
corporate seal to documents, the execution of which on behalf of [the 
Corporation] Nasdaq under its seal, is duly authorized, and when so 
affixed, may attest the same. The Secretary shall have all powers and 
duties usually incident to the office of Secretary, except as 
specifically [listed] limited by a resolution of the Board [of 
Directors]. The Secretary shall exercise such other powers and perform 
such other duties as may be assigned to [him or her] the Secretary from 
time to time by the Board [of Directors] or the President.

Assistant Secretary

    Sec. [4.11]6.11  In the absence of the Secretary or in the event of 
[his or her] the Secretary's inability or refusal to act, any Assistant 
Secretary, approved by the Board, shall exercise all powers and perform 
all duties of the Secretary. An Assistant Secretary shall also exercise 
such other powers and perform such other duties as may be assigned to 
[him or her] such Assistant Secretary from time to time by the Board 
[of Directors] or the Secretary.

Treasurer

    Sec. [4.12]6.12  The Treasurer shall have general supervision over 
the care and custody of the funds and over the receipts and 
disbursements of [the Corporation] Nasdaq and shall cause the funds of 
[the Corporation] Nasdaq to be deposited in the name of [the 
Corporation] Nasdaq in such banks or other depositories as the Board 
[of Directors] may designate. The Treasurer shall have supervision over 
the care and safekeeping of the securities of [the Corporation] Nasdaq. 
The Treasurer shall have all powers and duties usually incident to the 
office of Treasurer except as specifically limited by a resolution of 
the Board [of Directors]. The Treasurer shall exercise such other 
powers and perform such other duties as may be assigned to [him] the 
Treasurer from time to time by the Board [of Directors] or the 
President.

Assistant Treasurer

    Sec. [4.13]6.13  In the absence of the Treasurer or in the event of 
[his or her] the Treasurer's inability or refusal to act, any Assistant 
Treasurer, approved by the Board, shall exercise all powers and perform 
all duties of the Treasurer. An Assistant Treasurer shall also exercise 
such other powers and perform such other duties as may be assigned to 
[him or her] such Assistant Treasurer from time to time by the Board 
[of Directors] or the Treasurer.

Article [V] VII

Indemnification

Indemnification of Directors, Officers, Employees, and Agents

    Sec. [5.1]7.1  (a) [The Corporation] Nasdaq shall indemnify, and 
hold harmless, to the fullest extent permitted by Delaware law as it 
presently exists or may thereafter be amended, any person (and the 
heirs, executors, and administrators of such person) who, by reason of 
the fact that he or she is or was a [director or] Director, officer [of 
the Corporation], or employee of Nasdaq, or is or was a [director or] 
Director, officer, or employee of Nasdaq who is or was serving at the 
request of [the Corporation] Nasdaq as a director, officer, employee, 
or agent of another corporation, partnership, joint venture, trust [or 
other enterprise, ], enterprise, or non-profit entity, including 
service with respect to employee benefit plans, is or was a party, or 
is threatened to be made a party to:
    (i) any threatened, pending, or completed action, suit, or 
proceeding, whether civil, criminal, administrative, or investigative 
(other than an action by or in the right of [the Corporation)]

[[Page 25296]]

Nasdaq) against expenses (including attorneys' fees and disbursements), 
judgments, fines, and amounts paid in settlement actually and 
reasonably incurred by such person in connection with any such action, 
suit, or proceeding; or (ii) any threatened, pending, or completed 
action or suit by or in the right of [the Corporation] Nasdaq to 
procure a judgment in its favor against expenses (including attorneys' 
fees and disbursements) actually and reasonably incurred by such 
[persons] person in connection with the defense or settlement of such 
action or suit.
    (b) Nasdaq shall advance expenses (including attorneys' fees and 
disbursements) to persons described in subsection (a); provided, 
however, that the payment of expenses incurred by such person in 
advance of the final disposition of the matter shall be conditioned 
upon receipt of a written undertaking by that person to repay all 
amounts advanced if it should be ultimately determined that the person 
is not entitled to be indemnified under this Section or otherwise.
    [(b)](c) [The Corporation] Nasdaq may, in its discretion, indemnify 
and hold harmless, to the fullest extent permitted by Delaware law as 
it presently exists or may thereafter be amended, any person (and the 
heirs, executors, and administrators of such persons) who, by reason of 
the fact that he or she is or was an [employee or agent of the 
Corporation, or] agent of Nasdaq or is or was an agent of Nasdaq who is 
or was serving at the request of [the Corporation] Nasdaq as a 
director, officer, employee, or agent of another corporation, 
partnership, trust [or other enterprise] enterprise, or non-profit 
entity, including service with respect to employee benefit plans, was 
or is a party, or is threatened to be made a party to any action or 
proceeding described [above] in subsection (a).
    [(c)](d) [The Corporation] Nasdaq may, in its discretion, pay the 
expenses (including attorneys' fees and disbursements) reasonably and 
actually incurred by an agent in defending any action, suit, or 
proceeding in advance of its final disposition[,]; provided, however, 
that the payment of expenses incurred by [a director, officer, or 
employee] such person in advance of the final disposition of the matter 
shall be conditioned upon receipt of a written undertaking by [the 
officer, director, or employee] that person to repay all amounts 
advanced if it should be ultimately determined that [such] the person 
is not entitled to be indemnified under this Section [5.1 or otherwise] 
or otherwise.
    (e) Notwithstanding the foregoing or any other provision of these 
By-Laws, no advance shall be made by Nasdaq to an agent or non-officer 
employee if a determination is reasonably and promptly made by the 
Board by a majority vote of those Directors who have not been named 
parties to the action, even though less than a quorum, or, if there are 
no such Directors or if such Directors so direct, by independent legal 
counsel, that, based upon the facts known to the Board or such counsel 
at the time such determination is made: (1) the person seeking 
advancement of expenses (i) acted in bad faith, or (ii) did not act in 
a manner that he or she reasonably believed to be in or not opposed to 
the best interests of Nasdaq; (2) with respect to any criminal 
proceeding, such person believed or had reasonable cause to believe 
that his or her conduct was unlawful; or (3) such person deliberately 
breached his or her duty to Nasdaq.
    [(d)] (f) The indemnification provided by this [section] Section in 
a specific case shall not be deemed exclusive of any other rights to 
which a person seeking indemnification may be entitled [under any by-
law, agreement, vote of stockholders or disinterested directors or 
otherwise], both as to action in his or her official capacity and as to 
action in another capacity while holding such office, and shall 
continue as to a person who has ceased to be a [director] Director, 
officer, employee, or agent and shall inure to the benefit of [his or 
her] such person's heirs, executors, and administrators.
    (g) Notwithstanding the foregoing, but subject to subsection (j), 
Nasdaq shall be required to indemnify any person identified in 
subsection (a) in connection with a proceeding (or part thereof) 
initiated by such person only if the initiation of such proceeding (or 
part thereof) by such person was authorized by the Board.
    [(e)](h) [The Corporation's] Nasdaq's obligation, if any, to 
indemnify or advance expenses to any person who is or was serving at 
its request as a director, officer, employee, or agent of another 
corporation, partnership, joint venture, trust [or other], enterprise, 
or non-profit entity shall be reduced by any amount such person may 
collect as indemnification or advancement from such other corporation, 
partnership, joint venture, trust, [or other] enterprise, or non-profit 
entity.
    [(f)] (i) Any repeal or modification of the foregoing provisions of 
this Section [5.1] shall not adversely affect any right or protection 
hereunder of any person respecting any act or omission occurring prior 
to the time of such repeal or modification.
    (j) If a claim for indemnification or advancement of expenses under 
this Article is not paid in full within 60 days after a written claim 
therefor by an indemnified person has been received by Nasdaq, the 
indemnified person may file suit to recover the unpaid amount of such 
claim and, if successful in whole or in part, shall be entitled to be 
paid the expense of prosecuting such claim. In any such action, Nasdaq 
shall have the burden of proving that the indemnified person is not 
entitled to the requested indemnification or advancement of expenses 
under Delaware law.

Indemnification Insurance

    Sec. [5.2]7.2  [The Corporation] Nasdaq shall have power to 
purchase and maintain insurance on behalf of any person who is or was a 
[director] Director, officer, employee, or agent of [the Corporation] 
Nasdaq, or is or was serving at the request of [the Corporation] Nasdaq 
as a director, officer, employee, or agent of another corporation, 
partnership, joint venture, trust [or other], enterprise, or non-profit 
entity against any liability asserted against [him or her] such person 
and incurred by [him or her] such person in any such capacity, or 
arising out of [his or her] such person's status as such, whether or 
not [the Corporation] Nasdaq would have the power to indemnify [him or 
her] such person against such liability [under the provisions of this 
section] hereunder.

Article [VI] VIII

Capital Stock

Sole Stockholder

    Sec. 8.1  The NASD shall be the sole stockholder of the capital 
stock of Nasdaq.

Certificates

    Sec. [6.1]8.2  [Each] The stockholder [in the Corporation] shall be 
entitled to a certificate or certificates in such form as shall be 
approved by the Board [of Directors], certifying the number of shares 
of capital stock in [the Corporation] Nasdaq owned by [such] the 
stockholder.

Signatures

    Sec. [6.2]8.3  (a) Certificates for shares of capital stock of [the 
Corporation] Nasdaq shall be signed in the name of [the Corporation] 
Nasdaq by two officers with one being the Chair of the Board, the 
President, or a Vice President, and the other being the Secretary, the 
Treasurer, or such other

[[Page 25297]]

officer that may be authorized by the Board [of Directors]. Such 
certificates may be sealed with the corporate [Seal] seal of [the 
Corporation] Nasdaq or a facsimile thereof.
    (b) If any such certificates are countersigned by a transfer agent 
other than [the Corporation] Nasdaq or its employee, or by a registrar 
other than [the Corporation] Nasdaq or its employee, any other 
signature on the certificate may be a facsimile. In [case] the event 
that any officer, transfer agent, or registrar who has signed or whose 
facsimile signature has been placed upon a certificate shall [have 
ceased] cease to be such officer, transfer agent, or registrar before 
such certificate is issued, such certificate may be issued by [the 
Corporation] Nasdaq with the same effect as if such person were such 
officer, transfer agent, or registrar at the date of issue.

Stock Ledger

    Sec. [6.3]8.4  (a) A record of all certificates for capital stock 
issued by [the Corporation] Nasdaq shall be kept by the Secretary or 
any other officer, employee, or agent designated by the Board [of 
Directors]. Such record shall show the name and address of the person, 
firm, or corporation in which certificates for capital stock are 
registered, the number of shares represented by each such certificate, 
the date of each such certificate, and in the case of certificates 
which have been canceled, the date of cancellation thereof.
    (b)  [The Corporation] Nasdaq shall be entitled to treat the holder 
of record of shares of capital stock as shown on the stock ledger as 
the owner thereof and as the person entitled to vote such shares and to 
receive notice of meetings, and for all other purposes. [The 
Corporation] Nasdaq shall not be bound to recognize any equitable or 
other claim to or interest in any share of capital stock on the part of 
any other person, whether or not [the Corporation] Nasdaq shall have 
express or other notice thereof.

Transfers of Stock

    Sec. [6.4]8.5  (a) The Board [of Directors] may make such rules and 
regulations as it may deem expedient, not inconsistent with law, the 
Restated Certificate of Incorporation, or these By-Laws, concerning the 
issuance, transfer, and registration of certificates for [share] shares 
of capital stock of [the Corporation] Nasdaq. The Board [of Directors] 
may appoint, or authorize any principal officer to appoint, one or more 
transfer agents or one or more transfer clerks and one or more 
registrars and may require all certificates for capital stock to bear 
the signature or signatures of any of them.
    (b) Transfers of capital stock shall be made on the books of [the 
Corporation] Nasdaq only upon delivery to [the Corporation] Nasdaq or 
its transfer agent of: (i) a written direction of the registered holder 
named in the certificate or such holder's attorney lawfully constituted 
in writing[,]; (ii) the certificate for the shares of capital stock 
being transferred[,]; and (iii) a written assignment of the shares of 
capital stock evidenced thereby.

Cancellation

    Sec. [6.5]8.6  Each certificate for capital stock surrendered to 
[the Corporation] Nasdaq for exchange or transfer shall be canceled and 
no new certificate or certificates shall be issued in exchange for any 
existing certificate other than pursuant to [Sec. 6.6. of these By-
Laws] Section 8.7 until such existing certificate shall have been 
canceled.

Lost, Stolen, Destroyed, and Mutilated Certificates

    Sec. [6.6]8.7  In the event that any certificate for shares of 
capital stock of [the Corporation] Nasdaq shall be mutilated, [the 
Corporation] Nasdaq shall issue a new certificate in place of such 
mutilated certificate. In [case] the event that any such certificate 
shall be lost, stolen, or destroyed [the Corporation], Nasdaq may, in 
the discretion of the Board [of Directors] or a committee [designated] 
appointed thereby with power so to act, issue a new certificate for 
capital stock in the place of any such lost, stolen, or destroyed 
certificate. The applicant for any substituted certificate or 
certificates shall surrender any mutilated certificate or, in the case 
of any lost, stolen, or destroyed certificate, furnish satisfactory 
proof of such loss, theft, or destruction of such certificate and of 
the ownership thereof. The Board [of Directors] or such committee may, 
in its discretion, require the owner of a lost or destroyed 
certificate, or [his] the owner's representatives, to furnish to [the 
Corporation] Nasdaq a bond with an acceptable surety or sureties and in 
such sum as will be sufficient to indemnify [the Corporation] Nasdaq 
against any claim that may be made against it on account of the lost, 
stolen, or destroyed certificate or the issuance of such new 
certificate. A new certificate may be issued without requiring a bond 
when, in the judgment of the Board [of Directors], it is proper to do 
so.

Fixing of Record [Dates] Date

    Sec.[6.7]8.8  The Board may fix a record date in accordance with 
Delaware law. [ (a) In order that the Corporation may determine the 
stockholders entitled to notice of or to vote at any meeting of 
stockholders or any adjournment thereof, or to express consent or 
dissent to corporate action in writing without a meeting, or to 
exercise any rights with respect to any change, conversion or exchange 
of stock, or for the purpose of any other lawful action, the Board of 
Directors may fix, in advance, a record date, which shall not be more 
than sixty nor less than ten days before the date of any meeting of 
stockholders, nor more than sixty days prior to any other action. Only 
such stockholders as shall be stockholders of record on the date so 
fixed shall be entitled to notice of and to vote at such meeting or any 
adjournment thereof, or to give such consent or dissent, or to exercise 
such rights with respect to any such change, conversion or exchange of 
stock, or to participate in any such action, notwithstanding the 
transfer of any stock on the books of the Corporation after any record 
date so fixed.]
    [(b) If no record date is fixed by the Board of Directors:
    (i) the record date for determining stockholders entitled to notice 
of or to vote at a meeting of stockholders shall be at the close of 
business on the day next preceding the date on which notice is given, 
or if notice is waived, at the close of business on the day next 
preceding the day on which the meeting is held;
    (ii) the record date for determining stockholders entitled to 
express consent to corporate action in writing without a meeting, when 
no prior action by the Board of Directors is necessary, shall be at the 
close of business on the day on which the first written consent is 
expressed; and
    (iii) the record date for determining stockholders for any other 
purpose shall be at the close of business on the day on which the Board 
of Directors adopts the resolution relating thereto.]
    [(c) A determination of stockholders of record entitled to notice 
of or to vote at a meeting of stockholders shall apply to any 
adjournment of the meeting; provided, however, that the Board of 
Directors may fix a new record date for the adjourned meeting.]

Article [VII] IX

Miscellaneous Provisions

Corporate Seal

    Sec. [7.1]9.1  The seal of [the Corporation] Nasdaq shall be 
circular in

[[Page 25298]]

form and shall bear, in addition to any other emblem or device approved 
by the Board [of Directors], the name of [the Corporation] Nasdaq, the 
year of its incorporation, and the words ``Corporate Seal'' and 
``Delaware[''].'' The seal may be used by causing it to be affixed or 
impressed, or a facsimile thereof may be reproduced or otherwise used 
in such manner as the Board [of Directors] may determine.

Fiscal Year

    Sec. [7.2]9.2  The fiscal year of [the Corporation] Nasdaq shall 
begin the 1st day of January in each year, or such other month as the 
Board [of Directors] may determine by resolution.

Waiver of Notice

    Sec. [7.3]9.3  (a) Whenever notice is required to be given by law, 
the Restated Certificate of Incorporation, or these By-Laws, a written 
waiver thereof, signed by the person or persons entitled to such 
notice, whether before or after the time stated therein, shall be 
deemed equivalent to notice. Neither the business to be transacted at, 
nor the purpose of, any regular or special meeting of the 
[stockholders, directors] stockholder, Directors, or members of a 
committee of [directors] Directors need be specified in any written 
waiver of notice.
    (b) Attendance of a person at a meeting shall constitute a waiver 
of notice of such meeting, except when the person attends a meeting for 
the express purpose of objecting, at the beginning of the meeting, to 
the transaction of any business because the meeting is not lawfully 
called or convened.

Execution of Instruments, Contracts, Etc.

    Sec. [7.4.]9.4  (a) All checks, drafts, bills of exchange, notes, 
or other obligations or orders for the payment of money shall be signed 
in the name of [the Corporation] Nasdaq by such officer or officers or 
person or persons[,] as the Board [of Directors], or a duly authorized 
committee thereof, may from time to time designate. Except as otherwise 
provided by law, the Board [of Directors], any committee given specific 
authority in the premises by the Board [of Directors], or any committee 
given authority to exercise generally the powers of the Board [of 
Directors] during intervals between meetings of the Board [of 
Directors], may authorize any officer, employee, or agent, in the name 
of and on behalf of [the Corporation] Nasdaq, to enter into or execute 
and deliver deeds, bonds, mortgages, contracts, and other obligations 
or instruments, and such authority may be general or confined to 
specific instances.
    (b) All applications, written instruments, and papers required by 
any department of the United States Government or by any state, county, 
municipal, or other governmental authority, may be executed in the name 
of [the Corporation] Nasdaq by any principal officer or subordinate 
officer of [the Corporation] Nasdaq, or, to the extent designated for 
such purpose from time to time by the Board [of Directors], by an 
employee or agent of [the Corporation] Nasdaq. Such designation may 
contain the power to substitute, in the discretion of the person named, 
one or more other persons.

Form of Records

    Sec. [7.5]9.5  Any records maintained by [the Corporation] Nasdaq 
in the regular course of business, including its stock ledger, books of 
account, and minute books, may be kept on, or be in the form of, 
magnetic tape, computer disk, or any other information storage device, 
provided that the records so kept can be converted into clearly legible 
form within a reasonable time.

Article [VIII] X

Amendments; Emergency By-Laws

By [Stockholders] Stockholder

    Sec. [8.1]10.1  These By-Laws may be altered, amended, or repealed, 
or new By-Laws may be adopted, at any meeting of [stockholders by the 
vote of the holders of not less than a majority of the outstanding 
shares of stock entitled to vote thereat] the stockholder, provided 
that, in the case of a special meeting, notice that an amendment is to 
be considered and acted upon shall be inserted in the notice or waiver 
of notice of said meeting.

By Directors

    Sec. [8.2]10.2  To the extent permitted by the Restated  
Certificate of Incorporation, these By-Laws may be altered, amended, or 
repealed, or new By-Laws may be adopted, at any regular or special 
meeting of the Board [of Directors] by a resolution adopted by a vote 
of a majority of the whole Board [of Directors].

Emergency By-Laws

    Sec. [8.3]10.3  The Board [of Directors] may adopt emergency By-
Laws subject to repeal or change by action of the [stockholders] 
stockholder which shall, notwithstanding any different provision of 
law, the Restated Certificate of Incorporation, or these By-Laws, be 
operative during any emergency resulting from any nuclear or atomic 
disaster, an attack on the United States or on a locality in which [the 
Corporation] Nasdaq conducts its business or customarily holds meetings 
of the Board [of Directors or stockholders] or the stockholder, any 
catastrophe, or other emergency condition, as a result of which a 
quorum of the Board [of Directors] or a committee thereof cannot 
readily be convened for action. Such emergency By-Laws may make any 
provision that may be practicable and necessary [for] under the 
circumstances of the emergency.
* * * * *

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'')]''NASD 
Regulation'') 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 terms ``Industry Governors,'' ``Non-Industry Governors,'' 
``Public Governors,'' ``Industry Directors,'' ``Non-Industry 
Directors,'' ``Public Directors,'' ``Industry committee members,'' 
``Non-Industry committee members,'' and ``Public committee members,'' 
as used herein, shall have the meanings set forth in the By-Laws of the 
NASD, NASD Regulation and Nasdaq, as applicable. [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 provided 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

[[Page 25299]]

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-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 the 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] 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 
Securities Exchange Act of 1934 (``Act''), or as set forth in the 
[articles of incorporation] Restated Certificate of Incorporation or 
the by-laws is hereby reserved, except as expressly delegated to the 
[subsidiaries] 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.] II.B. and [III.C] III.B. 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] I.C.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 
pursuant to Section 2.b(3) above may be 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 may be 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.

[[Page 25300]]

    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 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.]
C.[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)] four or more [Members] members of the NASD 
Board, equally balanced between Industry and Non[-industry]-Industry 
Governors. If at any time there shall be an odd number of members of 
the Management Compensation Committee, Non[-industry Committee 
Members]-Industry committee members shall be in the majority.
D.[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 Sections 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'')] 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'')](``NASD Regulation'')
A. Delegation of Functions and Authority
    1. The NASD hereby delegates to [the NASDR and the NASDR] NASD 
Regulation and NASD Regulation assumes the following responsibilities 
of 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.], and arbitration procedures.
    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

[[Page 25301]]

Association or MSRB rules, the federal securities laws, and other laws, 
rules, and regulations the Association has the authority to administer, 
interpret [or enforce. ], or enforce.
    f. To establish and maintain procedures for the consideration and 
determination regarding complaints by members, associated persons, and 
members of the public who request investigative or disciplinary actions 
by the Association.
    g. To administer Association enforcement and disciplinary programs, 
including investigation, adjudication of cases and the imposition of 
fines and other sanctions.
    [g] h. To administer the Association's office of professional 
hearing officers.
    [h] i. To conduct arbitrations, mediations, and other dispute 
resolution programs.
    [i] j. To conduct qualification examinations and continuing 
education programs.
    [j] k. To operate the Central Registration Depository[(``CRD'')].
    [k] l. To determine whether applicants for NASD membership have met 
the requirements for membership established by the Association.
    [l] m. 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] n. 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] o. To oversee all District Office activities.
    [o] p. To establish the annual budget and business plan for 
[NASDR.] NASD Regulation.
    [p] q. To determine allocation of [NASDR] NASD Regulation 
resources.
    [q] r. 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.] NASD Regulation.
    [r] s. To manage external relations on enforcement, regulatory, and 
other policy issues with Congress, the Securities and Exchange 
Commission [(``SEC'')](``Commission''), state regulators, other self-
regulatory organizations, business groups, and the public.
    t. To operate Stockwatch in conjunction with Nasdaq pursuant to 
Section IV.
    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 a 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] B. NASD Regulation 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] in accordance with the procedures set forth in the [Code of 
Procedure. A] Rules of the Association. Any disciplinary decision of 
the NBCC and 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] 
the NASD Regulation Board in accordance with the procedures set forth 
in the Rules of the Association. Any disciplinary decision of the NBCC 
or [the NASDR Board] NASD Regulation Board and any decision of the NBCC 
or NASD Regulation Board with respect to statutory disqualification 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] the NASD Board in 
accordance with the procedures set forth in the Rules of the 
Association. A respondent has the right to appeal a final action of the 
Association taken by the NBCC, [NASDR or NASD to the SEC.] NASD 
Regulation or NASD to the Commission.
    [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

[[Page 25302]]

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]
    2. Rule Filings--Any rule change adopted by the NASD Regulation 
Board that imposes fees or other charges on persons or entities other 
than NASD members or that the NASD Regulation Board refers to the NASD 
Board because in the view of the NASD Regulation 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 NASD 
Regulation Board does not refer a rule change to the NASD Board for 
review, the NASD Regulation Board action will 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] NASD Regulation Board's action but which is 15 calendar days or 
more following the action of the [NASDR Board.] NASD Regulation Board. 
Notwithstanding the 15 day requirement, the NASD Board may determine it 
is advisable to call or not call for review any rule change within the 
15 calendar day period following the decision of the NASD Regulation 
Board. During the process of developing rule proposals, [NASDR] NASD 
Regulation staff shall consult with and seek the advice of Nasdaq staff 
before presenting any rule proposal to the [NASDR Board.] NASD 
Regulation 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.
D] C. Supplemental Delegation Regarding [the Formation of Committees] 
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. 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 NASDR Board in accordance with procedures established 
by the NASDR Board.]

1. Market Regulation Committee

    [(a) National Business Conduct Committee--A National Business 
Conduct Committee may be created for the purpose of: ]
    a. The Market Regulation Committee shall advise the NASD Regulation 
board on regulatory proposals and industry initiatives relating to 
quotations, execution, trade reporting the trading practices; advise 
the NASD Regulation Board in its administration of 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; provide a pool of panelists for those hearing panels that the 
Chief Hearing Officer or his or her designees determines should include 
a member of the Market Regulation Committee pursuant to the Rules of 
the Association; participate in the training of hearing panelists on 
issues relating to quotations, executions, trade reporting, and trading 
practices; and review the recommend to the National Business Conduct 
Committee changes to the Association's Sanction Guidelines.
    [(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]
    b. The NASD Regulation Board shall appoint the Market Regulation 
Committee by resolution. The members of the Market Regulation Committee 
shall be balanced between Industry and Non-Industry committee members. 
[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.]

2. National Arbitration and Mediation Committee

    a. The National Arbitration and Mediation Committee shall have the 
powers and authority pursuant to the Rules of the Association to advise 
the NASD Regulation Board on the development and maintenance of an 
equitable and efficient system of dispute resolution that will equally 
serve the needs of public investors and Association members, to monitor 
rules and procedures governing the conduct of dispute resolution, and 
to have such other powers and authority as is necessary to effectuate 
the purposes of the Rules of the Association.
    b. The NASD Regulation Board shall appoint the National Arbitration 
and Mediation Committee by resolution. The members of the National 
Arbitration and Mediation Committee shall be equally balanced between 
Industry and Non-Industry committee members.
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

[[Page 25303]]

and handling of quotations, orders, transaction reports, and 
comparisons of transactions.
    c. To collect, process, consolidate, and provide to [NASDR] NASD 
Regulation 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[,] and 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] Commission, state 
regulators, other self-regulatory organizations, business groups, and 
the public.
    o. To operate Stockwatch in conjunction with NASD Regulation 
pursuant to Section IV.
    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.] B. 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 
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.
[D.] C. Supplemental Delegation Regarding [the Formation of Committees] 
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

[[Page 25304]]

committee pursuant to delegated authority shall be subject to review, 
ratification or rejection by the Nasdaq Board.
1. Specific Committees
a.] 1. Quality of Markets Committee (``QOMC'')
    [(1)](a) The QOMC shall be a committee appointed by the Nasdaq 
Board and shall have the following functions:
    [(i)](1) To provide advice and guidance to 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, Nasdaq[-]-listed companies, and 
other participants in The Nasdaq Stock Market.
    [(ii)](2) To advise the Nasdaq Board with respect to national 
market systems plans and linkages between the facilities of Nasdaq and 
registered exchanges.
    [(2)](b) The QOMC will have broad representation that is equally 
balanced between [industry] Industry and [non-industry] 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] 2. Market Operations Review Committee (``MORC'')
    [(1)](a) The MORC shall be a committee appointed by the Nasdaq 
Board and shall exercise the functions contained in [Section 70] Rule 
11890 of the [Uniform Practice Code (``UPC''),] Rules of the 
Association in accordance with the procedures specified therein. 
[NASDR] NASD Regulation shall receive weekly reports of all 
determinations made by the staff or MORC under [Section 70 of the UPC] 
Rule 11890 for regulatory review.
    [(2)](b) The MORC shall be appointed by resolution of the Nasdaq 
Board and shall have no more than [Fifty (50)] 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 [%] 
percent of its total revenues.
[c] 3. Firm Operations and Clearance Committee (``FOCC'')
    [(1)](a) The FOCC shall be a committee appointed by the Nasdaq 
Board and shall have the following functions:
    [(i)](1) To issue interpretations or rulings with respect to 
[Sections 4-10, 12, 46, 67-68 and 71 of the UPC] Rules 11130-11180, 
11200-11220, 11320, 11620, 11830, 11880 of the Rules of the 
Association, as well as any other provision of the [UPC] Rule 11000 
Series pertaining to transactions and post execution processing.
    [(ii)](2) To advise the Nasdaq Board with respect to modifications 
to the [UPC] Rule 11000 Series dealing with the transactions and post 
execution processing.
[d] 4. Nasdaq Listing and Hearing Review Committee (``Listing 
Committee'')
    [(1)](a) The Listing Committee shall be a committee appointed by 
the Nasdaq Board and shall have the following functions:
    [(i)](1) 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)](2) To exercise the functions set forth in [Article IX] the 
Rules of the [Code of Procedure] Association, in accordance with the 
procedures specified therein.
    [(2)](b) The Listing Committee shall be appointed by resolution of 
the Nasdaq Board and shall have no more than [Fifty (50)] 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[%] 
percent 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.] IV. 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] NASD Regulation, 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] NASD Regulation 
may deem necessary. [NASDR] NASD Regulation staff at all times will 
have access to all records and files of the Stockwatch function.
* * * * *

Restated Certificate of Incorporation of National Association of 
Securities Dealers, Inc.

    The present name of the corporation is National Association of 
Securities Dealers, Inc. [(the ``Corporation''). The Corporation] 
(``NASD''). The NASD was originally incorporated as a nonstock 
corporation under the name of Investment Bankers Conference, Inc., and 
its original Certificate of Incorporation was filed with the Secretary 
of State of the State of Delaware on September 3, 1936. This Restated 
Certificate of Incorporation of the [Corporation] NASD, which both 
restates and further amends the provisions of the [Corporation's] 
NASD's Certificate of Incorporation as heretofore amended, was duly 
adopted in accordance with the provisions of Sections 242 and 245 of 
the General Corporation Law of the State of Delaware.

Name

    First: The name of the [Corporation] corporation is National 
Association of Securities Dealers, Inc.

Delaware Office and Agent

    Second: The registered office of the [Corporation] NASD in the 
State of Delaware is located at 1209 Orange Street, in the City of 
Wilmington, County of New Castle. The name and address of its 
registered agent is the Corporation Trust Company, 1209 Orange Street, 
Wilmington, Delaware.

Objects or Purposes

    Third: The nature of the business or purposes to be conducted or 
promoted is to engage in any lawful act or activity for which 
corporations may be organized under the General Corporation Law of the 
State of Delaware, and, without limiting the generality of the 
foregoing, the business or purposes to be conducted or promoted shall 
include the following:
    (1) To promote through cooperative effort the investment banking 
and securities business, to standardize its principles and practices, 
to promote therein high standards of commercial honor, and to encourage 
and promote among members observance of Federal and [State] state 
securities laws;

[[Page 25305]]

    (2) To provide a medium through which its membership may be enabled 
to confer, consult, and cooperate with governmental and other agencies 
in the solution of problems affecting investors, the public, and the 
investment banking and securities business;
    (3) To adopt, administer, and enforce rules of fair practice and 
rules to prevent fraudulent and manipulative acts and practices, and in 
general to promote just and equitable principles of trade for the 
protection of investors;
    (4) To promote self-discipline among members, and to investigate 
and adjust grievances between the public and members and between 
members;
    (5) To establish, and to register with the Securities and Exchange 
Commission as, a national securities association pursuant to Section 
15A of the Securities Exchange Act of 1934, as amended, and thereby to 
provide a medium for effectuating the purposes of said [section;] 
Section; and
    (6) To transact business and to purchase, hold, own, lease, 
mortgage, sell, and convey any and all property, real and personal, 
necessary, convenient, or useful for the purposes of the [Corporation;] 
NASD.
    The objects and purposes specified in the foregoing clauses shall, 
except where otherwise expressed, not be limited or restricted by 
reference to, or inference from, the terms of any other clause in this 
[certificate of incorporation] Restated Certificate of Incorporation, 
but the objects and purposes specified in each of the foregoing clauses 
of this [article] Article shall be regarded as independent objects and 
purposes.

Form of Organization

    Fourth: [This Corporation] The NASD shall be a membership 
corporation and shall have no capital stock. The [Corporation] NASD is 
not organized and shall not be conducted for profit, and no part of its 
net revenues or earnings shall inure to the benefit of any individual, 
subscriber, contributor, or member.
    Except as may be otherwise provided by [applicable law] the General 
Corporation Law of the State of Delaware or this Restated Certificate 
of Incorporation, the members of the [Corporation] NASD shall have no 
voting rights. Notwithstanding the foregoing, the members shall be 
entitled to vote for the election of Governors and on any amendment to 
the By-Laws of the [Corporation] NASD in accordance with the procedures 
for such a vote as provided in the By-Laws.
    Except as may be otherwise provided by the General Corporation Law 
of the State of Delaware, other applicable law or this Restated 
Certificate of Incorporation, the conditions, method of admission, 
qualifications and classifications of membership, the limitations, 
rights, powers and duties of members, the dues, assessments, and 
contributions of members, the method of expulsion from and termination 
of membership, and all other matters pertaining to the membership and 
the conduct, management, and control of the business, property, and 
affairs of the [Corporation] NASD shall be as provided from time to 
time in the By-Laws of the [Corporation] NASD and the Rules of the 
Association.

Indemnification; Governor Liability

    Fifth: (a) [To] The NASD shall indemnify, and hold harmless, to the 
fullest extent permitted by [applicable law] the General Corporation 
Law of the State of Delaware as it presently exists or may [hereafter 
be amended, the Corporation shall indemnify any person who was or is 
made] thereafter be amended, any person (and the heirs, executors, and 
administrators of such person) who, by reason of the fact that he or 
she is or was a Governor, officer, or employee of the NASD, or is or 
was a Governor, officer, or employee of the NASD who is or was serving 
at the request of the NASD as a director, officer, employee, or agent 
of another corporation, partnership, joint venture, trust, enterprise, 
or non-profit entity, including service with respect to employee 
benefit plans, is or was a party, or is threatened to be made a party 
[or is otherwise involved in any ]to:
    (i) any threatened, pending, or completed action, suit, or 
proceeding, whether civil, criminal, administrative [or 
investigative,], or investigative (other than an action by or in the 
right of the NASD) against expenses (including attorneys' fees and 
disbursements), judgments, fines, and amounts paid in settlement 
actually and reasonably incurred by such person in connection with any 
such action, suit, or proceeding; or
    (ii) any threatened, pending, or completed action or suit by or in 
the right of the NASD to procure a judgment in its favor against 
expenses (including attorneys' fees and disbursements) actually and 
reasonably incurred by such person in connection with the defense or 
settlement of such action or suit.
    [(b) A Governor of the Corporation shall not be liable to the 
Corporation or its members for monetary damages for breach of fiduciary 
duty as a Governor, except to the extent such exemption from liability 
or limitation thereof is not permitted under the General Corporation 
Law as the same exists or may hereafter by amended.]
    (b) The NASD shall advance expenses (including attorneys' fees and 
disbursements) to persons described in Article Fifth (a); provided, 
however, that the payment of expenses incurred by such person in 
advance of the final disposition of the matter shall be conditioned 
upon receipt of a written undertaking by that person to repay all 
amounts advanced if it should be ultimately determined that the person 
is not entitled to be indemnified under this Article Fifth or 
otherwise.
    (c) The NASD may, in its discretion, indemnify and hold harmless, 
to the fullest extent permitted by the General Corporation Law of the 
State of Delaware as it presently exists or may thereafter be amended, 
any person (and the heirs, executors, and administrators of such 
persons) who, by reason of the fact that he[, or a person for whom he 
is the legal representative, is or was a Governor or officer of the 
Corporation or ] or she is or was an agent of the NASD or is or was an 
agent of the NASD who is or was serving at the request of the 
[Corporation] NASD as a director, officer, employee, or agent of 
another corporation [or of a], partnership, [joint venture,] trust, 
enterprise, or non-profit entity, including service with respect to 
employee benefit plans, [against all expenses, liability, and loss 
reasonably incurred or suffered by such person, and the Corporation 
shall advance expenses (including attorneys' fees) to such person.] was 
or is a party, or is threatened to be made a party to any action or 
proceeding described in Article Fifth (a).
    (d) The NASD may, in its discretion, pay the expenses (including 
attorneys' fees and disbursements) reasonably and actually incurred by 
an agent in defending any action, suit, or proceeding in advance of its 
final disposition; provided, however, that the payment of expenses 
incurred by such person in advance of the final disposition of the 
matter shall be conditioned upon receipt of a written undertaking by 
that person to repay all amounts advanced if it should be ultimately 
determined that the person is not entitled to be indemnified under this 
Article Fifth or otherwise.
    (e) Notwithstanding the foregoing[, the Corporation shall be 
required to indemnify a person and advance expenses to such person in 
connection with a proceeding (or part thereof) commenced by such person 
only if the commencement of such proceeding (or part thereof) was 
authorized by the

[[Page 25306]]

Board of Governors. The Board of Governors may indemnify and/or advance 
expenses to any employee or agent of the Corporation to the extent it 
deems appropriate and to the extent permitted by applicable law. The 
rights conferred on any person by this Article Fifth(a) shall not be ] 
or any other provision of these By-Laws, no advance shall be made by 
the NASD to an agent or non-officer employee if a determination is 
reasonably and promptly made by the Board by a majority vote of those 
Governors who have not been named parties to the action, even though 
less than a quorum, or, if there are no such Governors or if such 
Governors so direct, by independent legal counsel, that, based upon the 
facts known to the Board or such counsel at the time such determination 
is made: (1) The person seeking advancement of expenses (i) acted in 
bad faith, or (ii) did not act in a manner that he or she reasonably 
believed to be in or not opposed to the best interests of the NASD; (2) 
with respect to any criminal proceeding, such person believed or had 
reasonable cause to believe that his or her conduct was unlawful; or 
(3) such person deliberately breached his or her duty to the NASD.
    (f) The indemnification provided by this Article Fifth in a 
specific case shall not be deemed exclusive of any other rights [which 
such person may have or hereafter acquire under any statute, provision 
of this Restated Certificate of Incorporation, By-Law, agreement, vote 
of members or disinterested Governors or otherwise.] to which a person 
seeking indemnification may be entitled, both as to action in his or 
her official capacity and as to action in another capacity while 
holding such office, and shall continue as to a person who has ceased 
to be a Governor, officer, employee, or agent and shall inure to the 
benefit of such person's heirs, executors, and administrators.
    (g) Notwithstanding the foregoing, but subject to Article Fifth 
(j), the NASD shall be required to indemnify any person identified in 
Article Fifth (a) in connection with a proceeding (or part thereof) 
initiated by such person only if the initiation of such proceeding (or 
part thereof) by such person was authorized by the Board.
    (h) The NASD's obligation, if any, to indemnify or advance expenses 
to any person who is or was serving at its request as a director, 
officer, employee, or agent of another corporation, partnership, joint 
venture, trust, enterprise, or non-profit entity shall be reduced by 
any amount such person may collect as indemnification or advancement 
from such other corporation, partnership, joint venture, trust, 
enterprise, or non-profit entity.
    (i) Any repeal or modification of the [first sentence] foregoing 
provisions of this Article Fifth[(b)] shall not adversely affect any 
right or protection [of a Governor of the Corporation existing 
hereunder with respect to] hereunder of any person respecting any act 
or omission occurring prior to the time of such repeal or modification.
    (j) If a claim for indemnification or advancement of expenses under 
this Article Fifth is not paid in full within 60 days after a written 
claim therefore by an indemnified person has been received by the NASD, 
the indemnified person may file suit to recover the unpaid amount of 
such claim and, if successful in whole or in part, shall be entitled to 
be paid the expense of prosecuting such claim. In any such action, the 
NASD shall have the burden of proving that the indemnified person is 
not entitled to the requested indemnification or advancement of 
expenses under the General Corporation Law of the State of Delaware.
    (k) The NASD shall have power to purchase and maintain insurance on 
behalf of any person who is or was a Governor, officer, employee, or 
agent of the NASD, or is or was serving at the request of the NASD as a 
director, officer, employee, or agent of another corporation, 
partnership, joint venture, trust, enterprise, or non-profit entity 
against any liability asserted against such person and incurred by such 
person in any such capacity, or arising out of such person's status as 
such, whether or not the NASD would have the power to indemnify such 
person against such liability hereunder.
    (l) A Governor shall not be liable to the NASD or its members for 
monetary damages for breach of fiduciary duty as a Governor, except to 
the extent such exemption from liability or limitation thereof is not 
permitted under the General Corporation Law of the State of Delaware as 
it presently exists or may hereafter be amended.

Perpetual Existence

    Sixth: The [Corporation] NASD shall have perpetual existence.

Members' Liability

    Seventh: The private property of the members shall not be subject 
to the payment of corporate debts to any extent whatever.

Governors

    Eighth: To the fullest extent permitted by Sections 141(a), 141(j), 
and 215 of the General Corporation Law of the State of Delaware and 
other applicable law, the business and affairs of the [Corporation] 
NASD shall be managed and the election of Governors shall be conducted 
in the manner provided in this Restated Certificate of Incorporation 
and the By-Laws of the [Corporation] NASD. To the extent there is any 
inconsistency between the provisions of this Restated Certificate of 
Incorporation and the By-Laws relating to such matters and the General 
Corporation Law, the provisions of this Restated Certificate of 
Incorporation and the By-Laws shall govern to the fullest extent 
permitted by the General Corporation Law and other applicable law. To 
the fullest extent permitted by the General Corporation Law of the 
State of Delaware and other applicable law, the Board of Governors may 
delegate such powers, authority, and functions as it shall determine 
from time to time, in a manner not inconsistent with the ``Plan of 
Allocation and Delegation of Functions by NASD to Subsidiaries,'' 
approved by the Securities and Exchange Commission, as amended from 
time to time.
    The [Corporation] NASD shall be managed under the direction of a 
Board of Governors having such powers and duties as shall be provided 
from time to time in this Restated Certificate of Incorporation or the 
By-Laws of the [Corporation] NASD. The Board of Governors shall be the 
governing body of the [Corporation] NASD. The members of the Board of 
Governors shall be elected by a plurality of the votes of the members 
of the [Corporation] NASD present in person or represented by proxy at 
the annual meeting of the members of the [Corporation] NASD and 
entitled to vote thereat. Elections shall be by written ballot. Any 
Governor so elected must be nominated by the National Nominating 
Committee or certified by the Secretary of the NASD (as provided in the 
By-[laws)] Laws) and must satisfy the other qualifications for 
Governors set forth in the By-Laws or established by resolution of the 
Board of Governors from time to time, which qualifications shall be 
consistent with the ``Plan of Allocation and Delegation of Functions by 
NASD to Subsidiaries['' as approved by the Securities and Exchange 
Commission, as amended from time to time. ].'' The By-Laws may also 
provide for such assistants to the Board of Governors, and such 
officers, agents, and employees, as may be deemed necessary to 
administer affairs of the [Corporation] NASD.
    The Board of Governors shall be divided into three classes. Each 
Governor shall hold office for a term of not more than three years, 
such term to

[[Page 25307]]

be fixed by the Board at the time of the nomination or certification of 
such Governor, or until [his] a successor is duly elected and 
qualified, or until [his] death, resignation, disqualification, or 
removal. Except for the Chief Executive Officer, no Governor may serve 
more than two consecutive terms, provided, however, that if a Governor 
is appointed to fill a term of less than one year, such Governor may 
serve up to two consecutive terms following the expiration of such 
Governor's [current] initial term. The Chief Executive Officer of the 
[Corporation] NASD shall serve as a member of the Board until [his] a 
successor is selected and qualified, or until [his] death, resignation, 
disqualification, or removal.
    In furtherance and not in limitation of the powers granted by 
[applicable law] the General Corporation Law of the State of Delaware, 
the Board of Governors is expressly authorized unless the By-Laws 
otherwise provide, to make, alter, or repeal the By-Laws of the 
[Corporation] NASD.
    In the event of the refusal, failure, neglect, or inability of any 
member of the Board of Governors to discharge [his] such member's 
duties, or for any cause affecting the best interest of the 
[Corporation] NASD the sufficiency of which the Board of Governors 
shall be the sole judge, the Board shall have the power, by the 
affirmative vote of two-thirds of the Governors then in office, to 
remove such member and declare [his] such member's position vacant and 
that it shall be filled in accordance with the provisions of the By-
Laws.
    The [Corporation] NASD may, in its By-Laws, confer powers upon its 
Board of Governors in addition to the foregoing and in addition to the 
powers and authorities expressly conferred upon them by [applicable 
law.] the General Corporation Law of the State of Delaware.

Meetings and Offices

    Ninth: Both members and the Board of Governors shall have power, if 
the By-Laws so provide, to hold their meetings and to have one or more 
offices within or without the State of Delaware and to keep the books 
of the [Corporation] NASD (subject to the provision of the statutes), 
outside the State of Delaware at such places as may be from time to 
time designated by the Board of Governors.

Right to Amend Certificate of Incorporation

    Tenth: The [Corporation] NASD reserves the right to amend, alter, 
change, or repeal any provisions contained in this [certificate of 
incorporation] Restated Certificate of Incorporation, in the manner now 
or hereafter prescribed by statute, and all rights conferred upon 
members herein are granted subject to this reservation.
    IN WITNESS WHEREOF, this Restated Certificate of Incorporation has 
been signed under the seal of the [Corporation] NASD this ________ day 
of[, 1996] ________________________, 1997.
NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC.
By:--------------------------------------------------------------------
      [signature]
----------------------------------------------------------------------
      [printed name]
----------------------------------------------------------------------
      [title]
Attest:----------------------------------------------------------------
      [title]
* * * * *

Restated Certificate of Incorporation of NASD Regulation, Inc.

    The undersigned, Mary Schapiro, President of NASD Regulation, Inc. 
(``NASD Regulation''), a Delaware corporation, does hereby certify:
    FIRST: That [The] the name of the corporation is NASD Regulation, 
Inc. The date of filing of its original Certificate of Incorporation 
with the Secretary of State of the State of Delaware was January 25, 
1996. The name under which NASD Regulation was originally incorporated 
was NASD Regulation, Inc.
    SECOND: [The address of the Corporation's] That the Certificate of 
Incorporation of NASD Regulation has been amended and restated in its 
entirety as follows:

Article First

    The name of the corporation is NASD Regulation, Inc.

Article Second

    The address of NASD Regulation's registered office in the State of 
Delaware is 1209 Orange Street, City of Wilmington, County of New 
Castle, 19801. The name of [the Corporation's] NASD Regulation's 
registered agent at such address is The Corporation Trust Company.

Article Third

    [THIRD:] The purpose of [the Corporation] NASD Regulation is to 
engage in any lawful act or activity for which corporations may be 
organized under the General Corporation Law of the State of 
Delaware[.], and, without limiting the generality of the forgoing 
business or purposes to be conducted or promoted, shall include the 
responsibilities and functions set forth in the ``Plan of Allocation 
and Delegation of Functions by NASD to Subsidiaries,'' as approved by 
the Securities and Exchange Commission, as amended from time to time. 
NASD Regulation [The Corporation] is not organized for profit and no 
part of the net earnings of [the Corporation] NASD Regulation shall 
inure to the benefit of any private stockholder or individual.

Article Fourth

    [FOURTH:] The total number of shares of stock which [the 
Corporation] NASD Regulation shall have authority to issue is 2,000, 
par value $0.01 per share, all of which shall be shares of common 
stock.

Article Fifth

    [FIFTH:] (a) The business and affairs of [the Corporation] NASD 
Regulation shall be managed by or under the direction of the Board of 
Directors. The qualifications, number, tenure, powers, and duties of 
the members of the Board of Directors shall be provided in the By-Laws. 
Except as otherwise provided in this Restated Certificate of 
Incorporation, the By-Laws shall specify the manner by which directors 
of [the Corporation] NASD Regulation shall be nominated and elected.
    (b) Unless and except to the extent that the By-Laws of NASD 
Regulation [the Corporation] shall so require, the election of 
directors of [the Corporation] NASD Regulation need not be by written 
ballot.
    [SIXTH: To the fullest extent permitted by applicable law as it 
presently exists or may hereafter be amended, the Corporation shall 
indemnify any person who was or is made or is threatened to be made a 
party or is otherwise involved in any action, suit, or proceeding, 
whether civil, criminal, administrative or investigative, by reason of 
the fact that he, or a person for whom he is the legal representative, 
is or was a director or officer of the Corporation or is or was serving 
at the request of the Corporation as a director, officer, employee or 
agent of another corporation or of a partnership, joint venture, trust, 
enterprise or non-profit entity, including service with respect to 
employee benefit plans, against all expenses, liability, and loss 
reasonably incurred or suffered by such person, and the Corporation 
shall advance expenses (including attorneys' fees) to such person. 
Notwithstanding the foregoing, the Corporation shall be required to 
indemnify a person and advance expenses to such person in connection 
with a proceeding (or part thereof)

[[Page 25308]]

commenced by such person only if the commencement of such proceeding 
(or part thereof) was authorized by the Board of Directors. The rights 
conferred on any person by this Article SIXTH shall not be exclusive of 
any other rights which such person may have or hereafter acquire under 
any statute, provision of this Certificate of Incorporation, By-Law, 
agreement, vote of stockholders or disinterested directors or 
otherwise.]

Article Sixth

    [SEVENTH:] A director of [the Corporation] NASD Regulation shall 
not be liable to [the Corporation] NASD Regulation or its 
[stockholders] stockholder for monetary damages for breach of fiduciary 
duty as a director, except to the extent such exemption from liability 
or limitation thereof is not permitted under the General Corporation 
Law as the same exists or may hereafter be amended. Any repeal or 
modification of the first sentence of this Article [SEVENTH] SIXTH 
shall not adversely affect any right or protection of a director of 
[the Corporation] NASD Regulation existing hereunder with respect to 
any act or omission occurring prior to such repeal or modification.

Article Seventh

    [EIGHTH:] In furtherance and not in limitation of the powers 
conferred by the laws of the State of Delaware, the Board of Directors 
is expressly authorized and empowered to make, alter, and repeal the 
By-Laws of [the Corporation] NASD Regulation, subject to the power of 
the [stockholders of the Corporation] stockholder of NASD Regulation to 
alter or repeal any By-Law made by the Board of Directors.

Article Eighth

    [NINTH: The Corporation] NASD Regulation reserves the right [at any 
time, and from time to time,] to amend, alter, change, or repeal any 
provision contained in this Restated Certificate of Incorporation, [and 
other provisions authorized by the laws of the State of Delaware at the 
time in force may be added or inserted,] in the manner now or hereafter 
prescribed by [law; and all rights, preferences and privileges of 
whatsoever nature conferred upon stockholders, directors or any other 
persons whomsoever by and pursuant to this Certificate of Incorporation 
in its present form or as hereafter amended] statute, and all rights 
conferred herein are granted subject to [the rights reserved in this 
Article NINTH.] this reservation.

Article Ninth

    [TENTH: The Corporation] NASD Regulation shall have perpetual 
existence.
    [ELEVENTH: The name and mailing address of the incorporator is 
Joseph R. Hardiman, c/o National Association of Securities Dealers, 
Inc., 1735 K Street, N.W., Washington, D.C. 20006.
    TWELFTH: The powers of the Incorporator shall terminate upon the 
filing of this] THIRD: That such Restated Certificate of 
Incorporation[. The names and mailing addresses of the persons who are 
to serve as the directors of the Corporation until the first annual 
meeting of the stockholders of the Corporation, or until their 
successors are elected and qualified are Joseph R. Hardiman, c/o 
National Association of Securities Dealers, Inc., 1735 K Street, N.W., 
Washington, D.C. 20006, Richard G. Ketchum, c/o National Association of 
Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C. 20006 
and Mary Schapiro, c/o National Association of Securities Dealers, 
Inc., 1735 K Street, N. W., Washington, D. C. 20006.] has been duly 
adopted by the stockholder of NASD Regulation in accordance with the 
applicable provisions of Sections 242 and 245 of the General 
Corporation Law of the State of Delaware.
    IN WITNESS WHEREOF, [I, the undersigned, being the sole 
incorporator hereinabove named, hereby acknowledge that the foregoing 
Certificate of Incorporation is my act and deed and further certify 
that the facts hereinabove stated are truly set forth, and accordingly 
I have hereunto set my hand this ________ day of January, 1996.] the 
undersigned have executed this certificate this ________ day of 
____________________, 1997.

----------------------------------------------------------------------
      [Incorporator] Mary Schapiro President

Attest:----------------------------------------------------------------
      Alden S. Adkins
      General Counsel
* * * * *

Restated Certificate of Incorporation of the NASDAQ Stock Market, 
Inc.

    [Adopted in accordance with the provisions of Section 242 and 
Section 245 of the General Corporation Law of the State of Delaware]
    [The undersigned, Joseph R. Hardiman] The undersigned, Alfred 
Berkeley, President of The Nasdaq Stock Market, Inc. (``Nasdaq''), a 
Delaware corporation [(the ``Corporation'')], does hereby certify:
    FIRST: That the name of the [Corporation] corporation is The Nasdaq 
Stock Market, Inc. The date of filing of its original Certificate of 
Incorporation with the Secretary of State of the State of Delaware was 
November 13, 1979. The name under which [the Corporation] Nasdaq was 
originally incorporated was ``NASD Market Services, Inc.''
    SECOND: That the Certificate of Incorporation of [the Corporation] 
Nasdaq has been amended and restated in its entirety as follows:

Article First

    The name of the [Corporation] corporation is The Nasdaq Stock 
Market, Inc.

Article Second

    The address of [the Corporation's] Nasdaq's registered office in 
the State of Delaware is 1209 Orange Street, City of Wilmington, 
[Delaware 19801,] County of New Castle, Delaware 19801. The name of 
[its] Nasdaq's registered agent at such address is The Corporation 
Trust Company.

Article Third

    The nature of the business or purposes to be conducted or promoted 
is to engage in any lawful act or activity for which corporations may 
be organized under the General Corporation Law of the State of 
Delaware, and, without limiting the generality of the foregoing 
business or purposes to be conducted or promoted, shall include the 
responsibilities and functions set forth in the ``Plan of Allocation 
and Delegation of Functions by NASD to Subsidiaries,'' as approved by 
the Securities and Exchange Commission, as amended from time to time. 
[shall include the following:
    (a) to investigate, study, organize, develop, maintain and operate, 
and to assist and contract with others for the investigation, study, 
organization, development, maintenance and operation of systems for 
collecting, processing, and preparing for distribution and publication, 
and otherwise assisting, participating in, and coordinating the 
distribution and publication of information with respect to 
transactions in and quotations for securities by means of an electronic 
data processing system or systems, as such may be required or permitted 
by federal statute and regulation (in particular the Securities 
Exchange Act of 1934 (``Exchange Act'') and the regulations thereunder, 
as either may be amended from time to time) on a current and continuing 
basis, consistent with the public interest, the protection of 
investors, the maintenance of fair and orderly markets in securities, 
and the removal if impediments to and

[[Page 25309]]

perfection of the mechanism of a national market system;
    (b) to organize, develop, operate and maintain securities markets 
and related systems that assure: (i) economically efficient execution, 
clearance and settlement of securities transactions; (ii) fair 
competition among brokers and dealers, and among exchange markets and 
markets other than exchange markets; (iii) the practicability of 
broker/dealers executing inventors' orders in the best market; (iv) the 
linking of all markets for qualified securities through communications 
and data processing facilities; and (v) appropriate regulatory 
oversight;
    (c) to develop, organize, operate and maintain securities markets 
and related systems that will assist the National Association of 
Securities Dealers, Inc. in carrying out its regulatory 
responsibilities under the Exchange Act, particularly Sections 11A and 
15A and all applicable rules promulgated under the Exchange Act;
    (d) to establish terms, conditions, rules, regulations, orders, and 
schedules for the operation, maintenance, and regulation of methods, 
means and systems established by the Corporation; and
    (e) to offer consulting services respecting the organization, 
development, operation, and maintenance of securities market systems 
and facilities, including systems and procedures for regulatory 
oversight of trading in securities markets.]

Article Fourth

    [The Corporation] Nasdaq shall be authorized to issue a total of 
2,000 shares of common stock with no par value.

Article Fifth

    [The Corporation] Nasdaq shall be governed by the Board of 
Directors of such number and having such qualifications, powers, and 
duties[,] as shall be provided in the By-Laws. The Board shall be 
selected in such manner, and shall serve for such term, as shall be 
stated in the By-Laws. The Board of Directors shall have the power to 
adopt, alter, or repeal the By-Laws of [the Corporation] Nasdaq at any 
meeting at which a quorum is present by the affirmative vote of the 
majority of the whole Board of Directors.
    A [Director of this Corporation] director of Nasdaq shall not be 
liable to [the Corporation] Nasdaq or its stockholders for monetary 
damages for breach of fiduciary duty as a director, except to the 
extent that such exemption from liability or limitation thereof is not 
permitted under the General Corporation Law of the State of Delaware as 
the same exists or may hereafter be amended.
    Any repeal or modification of the foregoing paragraph shall not 
adversely affect any right or protection of a director of [the 
Corporation] Nasdaq existing hereunder with respect to any act or 
omission occurring prior to such repeal or modification.

Article Sixth

    Nasdaq reserves the right to amend, alter, change, or repeal any 
provisions contained in this Restated Certificate of Incorporation, in 
the manner now or hereafter prescribed by statute, and all rights 
conferred herein are granted subject to this reservation.

Article Seventh

    Nasdaq [The Corporation] shall have perpetual existence.
    THIRD: That such Restated Certificate of Incorporation has been 
duly adopted by the [stockholders of the Corporation] stockholder of 
Nasdaq in accordance with the applicable provisions of Sections 242 and 
245 of the General Corporation Law of the State of Delaware.
    IN WITNESS WHEREOF, the undersigned have executed this certificate 
this ________ day of __, 199__.

----------------------------------------------------------------------
  [Joseph R. Hardiman] Alfred Berkeley
      President

Attest:----------------------------------------------------------------
      Robert E. Aber
  [Secretary] General Counsel
* * * * *

Rule 0120

0120. Definitions
    When used in these Rules, unless the context otherwise requires:
    (a) ``Act''
    The term ``Act'' means the Securities Exchange Act of 1934, as 
amended.
    (b) ``Association''
    The term ``Association'' means, collectively, the NASD, NASD 
Regulation, and Nasdaq. [National Association of Securities Dealers, 
Inc., (NASD) a nonprofit membership corporation organized under the 
laws of the State of Delaware.]
    (c) ``By-Laws''
    The term ``By-Laws'' means the By-Laws of the Corporation.
    (d) ``Code of Procedure''
    The term ``Code of Procedure'' means the procedural rules contained 
in the Rule 9000 Series.
    (e) ``Commission''
    The term ``Commission'' means the Securities and Exchange 
Commission (SEC), established pursuant to the Act.
    (f) ``Completion of the Transaction''
    The term ``the completion of the transaction'' means:
    (1) In the case of a customer who purchases a security through or 
from a member, except as provided in subparagraph (2), the time when 
such customer pays the member any part of the purchase price, or, if 
payment is effected by a bookkeeping entry, the time when such 
bookkeeping entry is made by the member for any part of the purchase 
price;
    (2) In the case of a customer who purchases a security through or 
from a member and who makes payment therefor prior to the time when 
payment is requested or notification is given that payment is due, the 
time when such member delivers the security to or into the account of 
such customer;
    (3) In the case of a customer who sells a security through or to a 
member, except as provided in subparagraph (4), if any security is not 
in the custody of the member at the time of sale, the time when the 
security is delivered to the member, and if the security is in the 
custody of the member at the time of sale, when the member transfers 
the security from the account of such customer;
    (4) In the case of a customer who sells a security through or to a 
member and who delivers such security to such member prior to the time 
when delivery is requested or notification is given that delivery is 
due, the time when such member makes payment to or into the account of 
such customer.
    (g) ``Customer''
    The term ``customer'' shall not include a broker or dealer.
    (h) ``Fixed Price Offering''
    The term ``fixed price offering'' means the offering of securities 
at a stated public offering price or prices, all or part of which 
securities are publicly offered in the United States or any territory 
thereof, whether or not registered under the Securities Act of 1933, 
except that the term does not include offerings of ``exempted 
securities'' or ``municipal securities'' as those terms are defined in 
Sections 3(a)(12) and 3(a)(29), respectively, of the Act or offerings 
of redeemable securities of investment companies registered pursuant to 
the Investment Company Act of 1940 which are offered at prices 
determined by the net asset value of the securities.
    (i) ``Member''
    The term ``member'' means any individual, partnership, corporation 
or other legal entity admitted to

[[Page 25310]]

membership in the Association under the provisions of Articles II and 
III of the By-Laws.
    (j) ``NASD''
    The term ``NASD'' means NASD, Inc.
    (k) ``Nasdaq''
    The term ``Nasdaq'' means The Nasdaq Stock Market, Inc.
    (l) ``NASD Regulation''
    The term ``NASD Regulation'' means NASD Regulation, Inc.
    (m) ``National Business Conduct Committee''
    The term ``National Business Conduct Committee'' means the 
committee of the Board of Directors of NASD Regulation which may be 
authorized and directed to act for the Board of Directors of NASD 
Regulation in a manner consistent with the By-Laws of NASD Regulation, 
the Rules of the Association, and the Delegation Plan with respect to 
(1) an appeal or review of a disciplinary proceeding; (2) a statutory 
disqualification decision; (3) a review of a membership proceeding; (4) 
a review of an offer of settlement, a letter of acceptance, waiver, and 
consent, and a minor rule violation plan letter; (5) the exercise of 
exemptive authority; and (6) such other proceedings or actions 
authorized by the Rules of the Association.
    (n)[(j)] ``Person''
    The term ``person'' shall include any natural person, partnership, 
corporation, association, or other legal entity.
    (o)[(k)] ``Rules'' or ``Rules of the Association''
    The term ``Rules'' or ``Rules of the Association'' means the 
numbered rules set forth in the NASD Manual beginning with the Rule 
0100 Series, as adopted by the Board of Governors of the NASD pursuant 
to the By-Laws of the NASD, as hereafter amended or supplemented. 
[means the Rules as adopted pursuant to Article VII of the By-laws, as 
the same may be hereafter amended or supplemented, as provided in the 
By-Laws.]
    (p)[(l)] ``Selling Group''
    The term ``selling group'' means any group formed in connection 
with a public offering, to distribute all or part of an issue of 
securities by sales made directly to the public by or through members 
of such selling group, under an agreement which imposes no financial 
commitment on the members of such group to purchase any such securities 
except as they may elect to do so.
    (q)[(m)] ``Selling Syndicate''
    The term ``selling syndicate'' means any syndicate formed in 
connection with a public offering, to distribute all or part of an 
issue of securities by sales made directly to the public by or through 
participants in such syndicate under an agreement which imposes a 
financial commitment upon participants in such syndicate to purchase 
any such securities.
* * * * *

Proposed Rule 0121

0121. Definitions in NASD By-Laws

    Unless the context otherwise requires, or unless otherwise defined 
in these Rules, terms used in the Rules and interpretive material, if 
defined in the NASD By-Laws, shall have the meaning as defined in the 
NASD By-Laws.
* * * * *

Proposed Rule IM-2210-4

M-2210-4. Limitations on Use of Association's Name

    (a) Use of Association Name
    Members may indicate membership in the Association in conformity 
with Article XVI, Section 2 of the NASD By-Laws in one or more of the 
following ways:
    (1) A member may indicate membership in the Association in 
recognized trade directories or other similar types of business 
listings.
    (2) A member may indicate membership in the Association in the 
member's advertisements and sales literature if such use is:
    (A) separate from the regular text of the advertisement or sales 
literature;
    (B) in a smaller type size and with less emphasis than that used 
for the member's name; and
    (C) carries no direct or implied indication of Association approval 
of any security or service discussed in the advertisement or sales 
literature.
    (3) A confirmation form for an over-the-counter transaction may 
include the following statement: ``This transaction has been executed 
in conformity with the Uniform Practice Code of the National 
Association of Securities Dealers, Inc.''.
    (4) A member may indicate membership in the Association on the door 
or entrance way of a member's principal office or a registered branch 
office in the following manner: ``Member, National Association of 
Securities Dealers, Inc.'' or ``Member of the National Association of 
Securities Dealers, Inc.''.
    (b) Certification of Membership
    Upon request to the Association, a member shall be entitled to 
receive an appropriate certification of membership, which may be 
displayed in the principal office or a registered branch office of the 
member. The certification shall remain the property of the Association 
and shall be returned by the member upon request of the NASD Board or 
the Chief Executive Officer of the Association.
    (c) Fraudulent or Misleading Use Prohibited
    A member or person associated with a member shall not use the name 
of the Association in a fraudulent or misleading manner in connection 
with the promotion or sale of any security or in connection with any 
other aspect of the member's business or imply orally, visually, or in 
writing that the Association endorses, indemnifies, or guarantees a 
member's business practices, selling methods, or class or type of 
securities offered.
    (d) Violation of Rule 2110
    An improper, fraudulent, or misleading use of the Association's 
name by a member or person associated with a member shall be deemed 
conduct inconsistent with high standards of commercial honor and just 
and equitable principles of trade in violation of Rule 2110.
* * * * *

Membership and Registration Rules 130
---------------------------------------------------------------------------

    \130\ The Tables of Contents for the proposed Rule 1010 Series, 
the proposed Rule 8000 Series, and the proposed Rule 9000 Series are 
included as a convenience to guide the reader through a lengthy 
document, but are not part of the proposed rule change.
---------------------------------------------------------------------------

The Tables of Contents

1000. MEMBERSHIP, REGISTRATION AND QUALIFICATION REQUIREMENTS
    IM-1000-1. Filing of Misleading Information as to Membership or 
Registration
    IM-1000-2. Status of Sole Proprietors and Registered 
Representatives Serving in the Armed Forces
    IM-1000-3. Failure to Register Personnel
    IM-1000-4. Appointment of Executive Representative

    1010. Application for Membership

    1011. Definitions
    1012. General Provisions
    1013. Application and Membership Interview
    1014. Department Decision
    1015. Review by the National Business Conduct Committee
    1016. Discretionary Review by Boards
    1017. Application to Commission for Review
    1018. Removal or Modification of Business Restrictions
    1019. Change in Ownership, Control, or Operations
* * * * *

[[Page 25311]]

Rule 1010 Series

1010. Membership Proceedings

1011. Definitions

    Unless otherwise provided, terms used in the Rule 1010 Series shall 
have the meaning as defined in Rule 0120.
    (a) ``Applicant''
    The term ``Applicant'' means a person or entity that applies for 
membership in the Association in accordance with Rule 1013 or seeks to 
remove or modify a restriction in accordance with Rule 1018.
    (b) ``Associated Person''
    The term ``Associated Person'' means a sole proprietor, partner, 
officer, director, branch manager, or natural person occupying a 
similar status or performing similar functions who will be or is 
anticipated to be associated with the Applicant, or any natural person 
engaged in the investment banking or securities business who will be or 
is anticipated to be directly or indirectly controlling or controlled 
by the Applicant, whether or not any such person is registered or 
exempt from registration under the NASD By-Laws or the Rules of the 
Association.
    (c) ``Department''
    The term ``Department'' means the Department of Member Regulation 
of NASD Regulation, Inc.
    (d) Director
    The term ``Director'' means a member of the NASD Regulation Board, 
excluding the Chief Executive Officer of the NASD.
    (e) ``district''
    The term ``district'' means a district established by the NASD 
Regulation Board under Article VIII, Section 8.1 of the NASD Regulation 
By-Laws.
    (f) ``district office''
    The term ``district office'' means an office of NASD Regulation, 
Inc. located in a district.
    (g) ``Governor''
    The term ``Governor'' means a member of the NASD Board.
    (h) ``Interested Association Staff''
    The term ``Interested Association Staff'' means an employee who 
directly participates in a decision on a membership application or in a 
decision under Rule 1018 or 1019, an employee who directly supervises 
an employee with respect to such decision, an employee who conducted an 
investigation or examination of a member that files an application 
under Rule 1018 or a notice under Rule 1019, the District Director for 
the relevant district, and the head of the Department.
    (i) ``NASD Board''
    The term ``NASD Board'' means the Board of Governors of the NASD.
    (j) ``NASD Regulation Board''
    The term ``NASD Regulation Board'' means the Board of Directors of 
NASD Regulation.
    (k) ``sales practice violations''
    The term ``sales practice violations'' means any conduct directed 
at or involving a customer that would constitute a violation of any 
Rule in the Rule 2000 or 3000 Series, any provision of the Act, or any 
state statute prohibiting fraudulent conduct in connection with the 
offer, sale, or purchase of a security or in connection with the 
rendering of investment advice.
    (l) ``Subcommittee''
    The term ``Subcommittee'' means a subcommittee of the National 
Business Conduct Committee that is constituted pursuant to Rule 1015 to 
conduct a review of a Department decision issued under the Rule 1010 
Series.

1012. General Provisions

    (a) Service of Notices and Decisions; Filing by Applicant
    Except as provided in Rules 1013 and 1015, a notice or a decision 
issued by the Association under the Rule 1010 Series with respect to an 
application shall be served promptly by first-class mail on the 
Applicant or its counsel. Service by the Association or filing by an 
Applicant by mail shall be deemed complete upon mailing. Service by the 
Association or filing by an Applicant by commercial courier or 
facsimile shall be deemed complete on the date specified in the written 
confirmation of receipt.
    (b) Ex Parte Communications
    (1) Unless on notice and opportunity for an Applicant and 
Interested Association Staff to participate, or to the extent required 
for the disposition of ex parte matters as authorized by the Rules of 
the Association:
    (A) an Applicant, a counsel or representative of an Applicant, or 
an Interested Association Staff shall not make or knowingly cause to be 
made an ex parte communication relevant to the merits of a membership 
proceeding under the Rule 1010 Series to a Governor, a Director, a 
member of the National Business Conduct Committee or a Subcommittee 
thereof, or an Association employee who is participating or advising in 
a decision of such a person with respect to that proceeding; and
    (B) a Governor, a Director, a member of National Business Conduct 
Committee or a Subcommittee thereof, or an Association employee who is 
participating or advising in the decision of such a person with respect 
to a membership proceeding shall not make or knowingly cause to be made 
to an Applicant, a counsel or representative of the Applicant, or an 
Interested Association Staff an ex parte communication relevant to the 
merits of that proceeding.
    (2) A Governor, a Director, a member of the National Business 
Conduct Committee or a Subcommittee thereof, or an Association employee 
participating or advising in the decision of such a person, who 
receives, makes, or knowingly causes to be made a communication 
prohibited by this paragraph shall place in the record of the 
membership proceeding:
    (A) all such written communications;
    (B) memoranda stating the substance of all such oral 
communications; and
    (C) all written responses and memoranda stating the substance of 
all oral responses to all such communications.
    (3) The prohibitions against ex parte communications shall become 
effective when Association staff has knowledge that an Applicant 
intends to file a written request for review by the National Business 
Conduct Committee under Rule 1015.
    (c) Recusal or Disqualification
    A Governor, a Director, or a member of the National Business 
Conduct Committee or a Subcommittee thereof shall not participate in a 
matter governed by the Rule 1010 Series as to which that person has a 
conflict of interest or bias, or if circumstances otherwise exist where 
his or her fairness might reasonably be questioned. In such a case, the 
person shall recuse himself or shall be disqualified as follows:
    (1) The Chair of the NASD Board shall have authority to direct the 
disqualification of a Governor, and the Vice Chair of the NASD Board 
shall have authority to direct the disqualification of the Chair of the 
NASD Board.
    (2) The Chair of the NASD Regulation Board shall have authority to 
direct the disqualification of a Director, and the Vice Chair of the 
NASD Regulation Board shall have authority to direct the 
disqualification of the Chair of the NASD Regulation Board.
    (3) The Chair of the National Business Conduct Committee shall have 
authority to direct the disqualification of a member of the Committee 
or a member of a Subcommittee appointed pursuant to Rule 1015, and the 
Vice Chair of the Committee shall have authority to direct the 
disqualification of the Chair of the National Business Conduct 
Committee.
    (d) Separation of Review Functions
    A Director shall not participate or advise in the decision of a 
Governor with respect to the review of a membership proceeding under 
the Rule 1010 Series, and a Governor shall not

[[Page 25312]]

participate or advise in the decision of a Director with respect to the 
review of a membership proceeding under the Rule 1010 Series.
    (e) Computation of Time
    (1) Calendar Day
    In the Rule 1010 Series, ``day'' means calendar day.
    (2) Formula
    In computing a period of time under the Rule 1010 Series, the day 
of the act, event, default, or lapse from which the period of time 
designated begins to run shall not be included. The last day of the 
period so computed shall be included unless it is a Saturday, Sunday, 
or Federal holiday, in which event the period runs until the end of the 
next day that is not a Saturday, Sunday, or Federal holiday. 
Intermediate Saturdays, Sundays, and Federal holidays shall be excluded 
from the computation when the period prescribed is ten days or less.
    (f) Membership Application Docket
    The Department shall promptly record in the Association's 
membership application docket each request for review filed with the 
National Business Conduct Committee under Rule 1015 and each subsequent 
event, filing, and change in the status of a membership proceeding.

1013. Application and Membership Interview

    (a) Filing of Application
    (1) Each Applicant for Association membership shall file a written 
application with the Membership Department, which shall transmit the 
application to the Department staff at the district office in the 
district in which the Applicant has or intends to have its principal 
place of business. An application shall include the following 
information and documents:
    (A) a detailed business plan, in a form prescribed by the 
Association, that describes all material aspects of the business that 
will be, or are reasonably anticipated to be, performed at and after 
the initiation of business operations, and includes:
    (i) a trial balance, balance sheet, supporting schedules, and 
computation of net capital, each of which has been prepared as of a 
date that is within 30 days before the date of application;
    (ii) a monthly projection of income and expenses, with a supporting 
rationale, for the first twelve months of operations;
    (iii) an organizational chart;
    (iv) a list of the intended locations of all offices, whether or 
not such offices would be required to be registered under the Rules of 
the Association, and the names of the persons who will be in charge of 
each office;
    (v) a list of the types of securities to be offered and sold and 
the types of retail or institutional customers to be solicited;
    (vi) a description of the methods and media to be employed to 
develop a customer base and to offer and sell products and services to 
customers, including the use of the Internet, telephone solicitation, 
seminars, or mailings;
    (vii) a description of the business facilities and a copy of any 
proposed or final lease;
    (viii) the number of markets to be made, if any, the type and 
volatility of the products, and the anticipated maximum inventory 
positions;
    (ix) any plan to enter into contractual commitments, such as 
underwritings or other securities-related activities;
    (x) any plan to distribute or maintain securities products in 
proprietary positions, and the risks, volatility, degree of liquidity, 
and speculative nature of the products; and
    (xi) any other activity that the Applicant may engage in that 
reasonably could have a material impact on capital within the first six 
months of business operations;
    (B) a copy of the Applicant's most recent Form BD;
    (C) evidence of all registrations and licenses required by the 
Commission, state securities authorities, the Municipal Securities 
Rulemaking Board, the National Securities Clearing Corporation, and 
self-regulatory organizations, and a copy of any decision by a federal 
or state authority or self-regulatory organization taking permanent or 
temporary adverse action with respect to a registration or licensing 
determination regarding the Applicant or an Associated Person;
    (D) a list of all Associated Persons, the most recent Form U-4 and 
Form U-5 for each Associated Person, any other document that discloses 
the disciplinary history of each Associated Person, and a list of any 
other persons or entities that will exercise control with respect to 
the Applicant's business;
    (E) documentation of any:
    (i) regulatory action against or investigation of the Applicant or 
an Associated Person by the Commission, the Commodity Futures Trading 
Commission, a federal, state, or foreign regulatory agency, or a self-
regulatory organization that is pending, adjudicated, or settled;
    (ii) investment-related civil action for damages or an injunction 
against the Applicant or an Associated Person that is pending, 
adjudicated, or settled;
    (iii) investment-related customer complaint or arbitration 
involving sales practice violations, theft, misappropriation, 
conversion, or breach of fiduciary duty, against the Applicant or an 
Associated Person that is pending, settled, or has resulted in an award 
or judgement; and
    (iv) criminal action (other than a minor traffic violation) against 
the Applicant or an Associated Person that is pending, adjudicated, or 
that has resulted in a guilty or no contest plea;
    (F) a copy of any document evidencing a termination for cause or a 
permitted resignation after investigation of an alleged violation of a 
federal or state securities law, a rule or regulation thereunder, a 
self-regulatory organization rule, or an industry standard of conduct;
    (G) a description of any remedial action, such as special training 
or continuing education requirements or heightened supervision, imposed 
on an Associated Person by a state or federal authority or self-
regulatory organization;
    (H) a written acknowledgment that heightened supervisory procedures 
and special educational programs may be required for an Associated 
Person whose records reflect: (i) disciplinary actions involving sales 
practice violations; (ii) customer complaints; or (iii) arbitrations 
that were resolved adversely to the Associated Person;
    (I) a copy of final or proposed contracts with banks, clearing 
entities, or service bureaus, and a general description of any other 
final or proposed contracts;
    (J) a description of the nature and source of Applicant's capital, 
including a list of all persons or entities that have contributed or 
plan to contribute financing to the Applicant's business, the terms and 
conditions of such financing arrangements, the risk to capital 
presented by the Applicant's proposed business activities, and any 
arrangement for additional capital should a business need arise;
    (K) a description of the financial controls to be employed by the 
Applicant;
    (L) a description of the Applicant's supervisory system and a copy 
of its written supervisory procedures, internal operating procedures 
(including operational and internal controls), compliance procedures, 
internal inspections plan, written approval process, and qualifications 
investigations required by Rule 3010;
    (M) a description of the number, experience, and qualifications of 
supervisors and principals and the number, experience, and 
qualifications of persons to be supervised by such

[[Page 25313]]

personnel, the other responsibilities of the supervisors and principals 
with the Applicant, their full-time or part-time status, any business 
activities that the supervisors or principals may engage in outside of 
their association with the Applicant, the hours per week devoted to 
such activities, and an explanation of how a part-time supervisor or 
principal will be able to discharge his or her designated functions on 
a part-time basis;
    (N) a description of Applicant's proposed recordkeeping system; and
    (O) a copy of the Applicant's written training plan to comply with 
Firm Element continuing education requirements described in Rule 
1120(b), including the name of the Associated Person responsible for 
implementation.
    (2) Within 30 days after the receipt of an application, the 
Department shall determine whether the application is complete and, if 
not, shall request additional information or documents. The Department 
may request additional information or documents at any time during the 
membership application process.
    (3) Unless otherwise agreed by the Department and the Applicant, 
the Applicant shall file any additional information and documents with 
the Department within 60 days after the Department's initial request 
and 30 days after any subsequent request.
    (b) Lapse of Application
    (1) Absent a showing of good cause, an application for membership 
shall lapse if an Applicant fails to:
    (A) respond fully within 60 days after an initial request for 
information or documents, within 30 days after any subsequent request, 
or within such other time period agreed to by the Department and the 
Applicant; or
    (B) appear at or otherwise participate in a scheduled membership 
interview pursuant to paragraph (c).
    (2) The lapse of an application shall require an Applicant 
continuing to seek membership to submit a new application under 
paragraph (a).
    (c) Membership Interview
    (1) Requirement for Interview
    Before the Department issues a decision on an application for 
membership in the Association, the Department shall conduct a 
membership interview with a representative or representatives of the 
Applicant.
    (2) Service of Notice
    At least seven days before the membership interview, the Department 
shall serve on the Applicant a written notice that specifies the date 
and time of the interview and the representative or representatives of 
the Applicant who are required to participate in the interview. The 
Department shall serve the notice by facsimile or commercial courier.
    (3) Time
    Unless the Department directs otherwise for good cause shown, a 
membership interview shall be scheduled to occur within 90 days after 
the receipt of an application or within 60 days after the receipt of 
all additional information or documents requested, whichever is later.
    (4) Place
    Unless the Department and the Applicant otherwise agree, the 
membership interview shall be conducted in the district office for the 
district in which the Applicant has or intends to have its principal 
place of business.
    (5) Review of Standards for Admission
    During the membership interview, the Department shall review the 
standards for admission to membership with the Applicant's 
representative or representatives and inform them of the Department's 
preliminary decision, if any, as to whether the Applicant meets each 
standard.
    (6) Information From Other Sources
    During the membership interview, the Department shall provide to 
the Applicant's representative or representatives any information or 
document that the Department has obtained from the Central Registration 
Depository or a source other than the Applicant and upon which the 
Department intends to base its decision under Rule 1014. If the 
Department receives such information or document after the membership 
interview or decides to rely on such information after the membership 
interview, the Department shall promptly serve the information or 
document and an explanation thereof on the Applicant.

1014. Department Decision

    (a) Standards for Admission
    After considering the application, the membership interview, other 
information and documents provided by the Applicant, other information 
and documents obtained by the Department, and the public interest and 
the protection of investors, the Department shall determine whether the 
Applicant meets each of the following standards:
    (1) The application and all supporting documents are complete and 
accurate.
    (2) The Applicant and its Associated Persons have all licenses and 
registrations required by state and federal authorities and self-
regulatory organizations.
    (3) The Applicant and its Associated Persons are capable of 
complying with the federal securities laws, the rules and regulations 
thereunder, and the Rules of the Association, including observing high 
standards of commercial honor and just and equitable principles of 
trade. In determining whether this standard is met, the Department may 
take into consideration whether:
    (A) a state or federal authority or self-regulatory organization 
has taken permanent or temporary adverse action with respect to a 
registration or licensing determination regarding the Applicant or an 
Associated Person;
    (B) an Applicant's or Associated Person's records reflect: (i) 
disciplinary actions involving sales practice violations; (ii) customer 
complaints; or (iii) arbitrations that were resolved adversely to the 
Applicant or Associated Person;
    (C) an Applicant or Associated Person is the subject of a pending, 
adjudicated, or settled regulatory action or investigation by the 
Commission, the Commodity Futures Trading Commission, a federal, state, 
or foreign regulatory agency, or a self-regulatory organization; a 
pending, adjudicated, or settled investment-related civil action for 
damages or an injunction; an investment-related customer complaint or 
arbitration alleging sales practice violations, theft, 
misappropriation, conversion, or breach of fiduciary duty that is 
pending, settled, or has resulted in an award or judgment; or a 
criminal action (other than a minor traffic violation) that is pending, 
adjudicated, or that has resulted in a guilty or no contest plea;
    (D) an Associated Person was terminated for cause or permitted to 
resign after an investigation of an alleged violation of a federal or 
state securities law, a rule or regulation thereunder, a self-
regulatory organization rule, or industry standard of conduct;
    (E) a state or federal authority or self-regulatory organization 
has imposed a remedial action, such as special training or continuing 
education requirements or heightened supervision, on an Associated 
Person; and
    (F) a state or federal authority or self-regulatory organization 
has provided information indicating that the Applicant or an Associated 
Person otherwise poses a threat to public investors.
    (4) The Applicant has established all contractual or other 
arrangements and business relationships with banks, clearing 
corporations, service bureaus, or others necessary to: (i) initiate the 
operations described in the Applicant's business plan, considering the 
nature and scope of operations and the number

[[Page 25314]]

of personnel; and (ii) comply with the federal securities laws, the 
rules and regulations thereunder, and the Rules of the Association.
    (5) The Applicant has or has adequate plans to obtain facilities 
that are sufficient to: (i) initiate the operations described in the 
Applicant's business plan, considering the nature and scope of 
operations and the number of personnel; and (ii) comply with the 
federal securities laws, the rules and regulations thereunder, and the 
Rules of the Association .
    (6) The Applicant is capable of maintaining a level of capital in 
excess of the minimum net capital requirements set forth in SEC Rule 
15c3-1 adequate to support the Applicant's intended business operations 
on a continuing basis, based on information that is current within 30 
days before the membership interview. The Department may impose a 
reasonably determined higher capital requirement for the initiation of 
operations after considering:
    (A) the amount of the capital sufficient to avoid early warning 
level reporting requirements, such as SEC Rule 17a-11;
    (B) the amount of capital necessary to meet expenses net of 
revenues for at least twelve months, based on reliable projections 
agreed to by the Applicant and the Department;
    (C) any planned market making activities, the number of markets to 
be made, the type and volatility of products, and the anticipated 
maximum inventory positions;
    (D) any plan to enter into other contractual commitments, such as 
underwritings or other securities-related activities;
    (E) any plan to distribute or maintain securities products in 
proprietary positions, and the risks, volatility, degree of liquidity, 
and speculative nature of the products; and
    (F) any other activity that the Applicant will engage in that 
reasonably could have a material impact on capital within the first six 
months of business operations.
    (7) The Applicant has financial controls to ensure compliance with 
the federal securities laws, the rules and regulations thereunder, and 
the Rules of the Association.
    (8) The Applicant has compliance, supervisory, operational, and 
internal control practices and standards that are consistent with 
practices and standards regularly employed in the investment banking or 
securities business, taking into account the nature and scope of 
Applicant's proposed business.
    (9) The Applicant has a supervisory system, including written 
supervisory procedures, internal operating procedures (including 
operational and internal controls), and compliance procedures designed 
to prevent and detect, to the extent practicable, violations of the 
federal securities laws, the rules and regulations thereunder, and the 
Rules of the Association. In evaluating the adequacy of a supervisory 
system, the Department shall consider the overall nature and scope of 
the Applicant's intended business operations and shall consider 
whether:
    (A) the number, experience, and qualifications of supervisory 
personnel are adequate in light of the number, experience, and 
qualifications of persons to be supervised; the disciplinary history of 
such persons; any criminal, civil, administrative, or arbitration 
actions or written customer complaints against such persons; and the 
number and locations of the offices that the Applicant intends to open;
    (B) the Applicant has identified specific Associated Persons to 
supervise and discharge: (i) each of the functions in Applicant's 
business plan; and (ii) each of the Applicant's intended offices, 
whether or not such offices are required to be registered under the 
Rules of the Association;
    (C) each Associated Person identified to discharge a supervisory 
function in the business plan has at least one year of direct 
experience or two years of related experience in the subject area;
    (D) the Applicant will solicit retail or institutional business;
    (E) the Applicant will recommend securities to customers;
    (F) the part-time status of a supervisor or principal will affect 
such person's ability to be an effective supervisor;
    (G) the records of an Associated Person reflect: (i) disciplinary 
actions involving sales practice violations; (ii) customer complaints; 
or (iii) arbitrations that were resolved adversely to the Associated 
Person;
    (H) any remedial action, such as special training or continuing 
education requirements or heightened supervision, has been imposed on 
an Associated Person by a state or federal authority or self-regulatory 
organization; and
    (I) any other condition that will have a material impact on the 
Applicant's ability to detect and prevent violations of the federal 
securities laws, the rules and regulations thereunder, and the Rules of 
the Association.
    (10) The Applicant has a recordkeeping system that enables 
Applicant to comply with federal, state, and self-regulatory 
organization recordkeeping requirements and a staff that is sufficient 
in qualifications and numbers to prepare and preserve required records.
    (11) The Applicant has completed a training needs assessment and 
has a written training plan that complies with the continuing education 
requirements imposed by the federal securities laws, the rules and 
regulations thereunder, and the Rules of the Association.
    (12) The Association does not possess any information indicating 
that the Applicant may circumvent, evade, or otherwise avoid compliance 
with the federal securities laws, the rules and regulations thereunder, 
or the Rules of the Association.
    (13) The application and all supporting documents otherwise are 
consistent with the federal securities laws, the rules and regulations 
thereunder, and the Rules of the Association.
    (b) Granting or Denying Application
    (1) If the Department determines that the Applicant meets each of 
the standards in paragraph (a), the Department shall grant the 
application for membership.
    (2) If the Department determines that the Applicant does not meet 
one or more of the standards in paragraph (a) in whole or in part, the 
Department may:
    (A) grant the application subject to one or more restrictions 
reasonably designed to address a specific financial, operational, 
supervisory, disciplinary, investor protection, or other regulatory 
concern based on the standards for admission in Rule 1014(a); or
    (B) deny the application.
    (c) Submission of Membership Agreement
    If the Department grants an application, with or without 
restriction, the Applicant's approval for membership shall be 
contingent upon the Applicant's submission of a written membership 
agreement, satisfactory to the Department, undertaking to:
    (1) engage only in the business set forth in the business plan and 
the membership agreement;
    (2) abide by any restriction specified in the Department's 
decision;
    (3) obtain the Department's prior approval of the removal or 
modification of such a restriction pursuant to Rule 1018; and
    (4) notify and obtain the Department's approval of a change in 
ownership or control or a material change in business operations 
pursuant to Rule 1019.
    The Applicant shall not waive the right to file a written request 
for review under Rule 1015 by executing a membership agreement under 
this paragraph.

[[Page 25315]]

    (d) Decision
    (1) Time
    The Department shall issue a written decision on the membership 
application within 30 days after the conclusion of the membership 
interview or after the submission of additional information or 
documents, whichever is later.
    (2) Content
    If the Department denies the application, the decision shall 
explain the reason for denial, referencing the applicable standard or 
standards in paragraph (a). If the Department grants the application 
subject to restrictions, the decision shall explain the reason for each 
restriction, referencing the applicable standard or standards in 
paragraph (a) upon which the restriction is based and identify the 
specific financial, operational, supervisory, disciplinary, investor 
protection, or other regulatory concern that the restriction is 
designed to address and the manner in which the restriction is 
reasonably designed to address the concern.
    (3) Failure to Issue Decision
    If the Department fails to issue a decision within 180 days after 
receipt of an application or such later date as the Department and the 
Applicant have agreed in writing, the Applicant may file a written 
request with the NASD Board requesting that the NASD Board direct the 
Department to issue a decision. Within seven days after receipt of such 
a request, the NASD Board shall direct the Department to serve its 
written decision immediately or to show good cause for an extension of 
time. If the Department shows good cause for an extension of time, the 
NASD Board may extend the 180 day time limit by not more than 90 days.
    (e) Service and Effectiveness of Decision
    The Department shall serve its decision on the Applicant in 
accordance with Rule 1012. The decision shall become effective upon 
service and shall remain in effect during the pendency of any review 
until a decision constituting final action of the Association is issued 
under Rule 1015 or 1016, unless otherwise directed by the National 
Business Conduct Committee, the NASD Regulation Board, the NASD Board, 
or the Commission.
    (f) Effectiveness of Restriction
    A restriction imposed under this Rule shall remain in effect and 
bind the Applicant and all successors to the ownership or control of 
the Applicant unless:
    (1) removed or modified by the Department under Rule 1018;
    (2) removed or modified by a decision constituting final action of 
the Association issued under Rule 1015 or 1016; or
    (3) stayed by the National Business Conduct Committee, the NASD 
Regulation Board, the NASD Board, or the Commission.
    (g) Final Action
    Unless the Applicant files a written request for a review under 
Rule 1015, the Department's decision shall constitute final action by 
the Association.
    1015. Review by National Business Conduct Committee
    (a) Request
    Within 25 days after service of a decision under Rule 1014, an 
Applicant may file a written request for review with the National 
Business Conduct Committee. A request for review shall state with 
specificity why the Applicant believes that the Department's decision 
is inconsistent with the membership standards set forth in Rule 1014, 
or otherwise should be set aside, and state whether a hearing is 
requested. The Applicant simultaneously shall send by first-class mail 
a copy of the request to the district office where the Applicant filed 
its membership application.
    (b) Transmission of Documents
    Within ten days after receipt of a request for review, the 
Department shall:
    (1) transmit to the National Business Conduct Committee copies of 
all documents that were considered in connection with the Department's 
decision and an index to the documents; and
    (2) serve on the Applicant a copy of such documents (other than 
those documents originally submitted by Applicant) and a copy of the 
index.
    (c) Appointment of Subcommittee
    The National Business Conduct Committee shall appoint a 
Subcommittee to participate in the review. The Subcommittee shall be 
composed of at least two members. One member shall be a current member 
of the National Business Conduct Committee. The remaining member or 
members shall be current or past members of the NASD Regulation Board 
or past members of the NASD Board.
    (d) Powers of Subcommittee
    If a hearing is requested, the Subcommittee shall conduct the 
hearing. If a hearing is not requested, the Subcommittee may serve a 
notice directing that a hearing be held. If a hearing is not requested 
or directed, the Subcommittee shall conduct its review on the basis of 
the record developed before the Department and any written submissions 
made by the Applicant or the Department in connection with the request 
for review.
    (e) Hearing
    (1) Notice
    If a hearing is requested or directed, the hearing shall be held 
within 45 days after the receipt of the request or service of the 
notice by the National Business Conduct Committee. The National 
Business Conduct Committee shall send written notice of the date and 
time of the hearing to the Applicant by facsimile or commercial courier 
not later than 14 days before the hearing.
    (2) Counsel
    The Applicant and the Department may be represented by counsel at a 
hearing conducted pursuant to this Rule.
    (3) Evidence
    Formal rules of evidence shall not apply to a hearing under this 
Rule. Not later than five days before the hearing, the Applicant and 
the Department shall exchange copies of their proposed hearing exhibits 
and witness lists and provide copies of the same to the National 
Business Conduct Committee. If the Applicant or the Department fails to 
provide copies of its proposed hearing exhibits or witness list within 
such time, the Subcommittee shall exclude the evidence or witnesses 
from the proceeding, unless the Subcommittee determines that good cause 
is shown for failure to comply with the production date of this 
subparagraph.
    (4) Transcript
    The hearing shall be recorded and a transcript prepared by a court 
reporter. A transcript of the hearing shall be available for purchase 
from the court reporter at prescribed rates. The Applicant, the 
Department, or a witness may seek to correct its transcript. A proposed 
correction of the transcript shall be submitted to the Subcommittee 
within a reasonable period of time prescribed by the Subcommittee. Upon 
notice to the Applicant and the Department, the Subcommittee may direct 
the correction to the transcript as requested or sua sponte.
    (5) Failure to Appear at Hearing
    If an Applicant fails to appear at a hearing for which it has 
notice, the National Business Conduct Committee may dismiss the request 
for review as abandoned, and the decision of the Department shall 
become the final action of the Association. Upon a showing of good 
cause, the National Business Conduct Committee may withdraw a dismissal 
entered pursuant to this subparagraph.
    (f) Additional Information, Briefs
    At any time during its consideration, the Subcommittee or the 
National Business Conduct Committee may direct the Applicant or the 
Department to submit additional information and to

[[Page 25316]]

file briefs. Any additional information or brief submitted shall be 
provided to all parties before the National Business Conduct Committee 
renders its decision.
    (g) Subcommittee Recommendation
    The Subcommittee shall present a recommended decision in writing to 
the National Business Conduct Committee and all other Directors within 
60 days after the date of the hearing held pursuant to paragraph (e), 
and not later than seven days before the meeting of the National 
Business Conduct Committee at which the membership proceeding shall be 
considered.
    (h) Decision
    (1) Proposed Written Decision
    After considering all matters presented in the review and the 
Subcommittee's recommended written decision, the National Business 
Conduct Committee may affirm, modify, or reverse the Department's 
decision or remand the membership proceeding with instructions. The 
National Business Conduct Committee shall prepare a proposed written 
decision pursuant to subparagraph (2).
    (2) Contents
    The decision shall include:
    (A) a description of the Department's decision, including its 
rationale;
    (B) a description of the principal issues raised in the review;
    (C) a summary of the evidence on each issue; and
    (D) a statement whether the Department's decision is affirmed, 
modified, or reversed, and a rationale therefor that references the 
applicable standards in Rule 1014.
    (3) Issuance of Decision After Expiration of Call for Review 
Periods
    The National Business Conduct Committee shall provide its proposed 
written decision to the NASD Regulation Board, and, if such decision is 
not called for review by the NASD Regulation Board, to the NASD Board. 
The NASD Regulation Board may call the membership proceeding for review 
pursuant to Rule 1016(a). The NASD Board may call the membership 
proceeding for review pursuant to Rule 1016(b). If neither the NASD 
Regulation Board nor the NASD Board calls the membership proceeding for 
review, the proposed written decision of the National Business Conduct 
Committee shall become final. The National Business Conduct Committee 
shall serve the Applicant with a written notice specifying the date on 
which the call for review period expired and stating that the final 
written decision will be served within 15 days after such date. The 
National Business Conduct Committee shall serve its final written 
decision within 15 days after the date on which the call for review 
period expired. The decision shall constitute the final action of the 
Association for purposes of SEC Rule 19d-3, unless the National 
Business Conduct Committee remands the membership proceeding.
    (4) Failure to Issue Decision
    If the National Business Conduct Committee fails to serve its final 
written decision within the time prescribed in subparagraph (3), the 
Applicant may file a written request with the NASD Board requesting 
that the NASD Board direct the National Business Conduct Committee to 
serve its decision immediately or to show good cause for an extension 
of time. Within seven days after receipt of such a request, the NASD 
Board shall direct the National Business Conduct Committee to serve its 
written decision immediately or to show good cause for an extension of 
time. If the National Business Conduct Committee shows good cause for 
an extension of time, the NASD Board may extend the 15 day time limit 
by not more than 15 days.

1016. Discretionary Review by Boards

    (a) Discretionary Review by the NASD Regulation Board
    (1) Call For Review By Director
    A Director may call a membership proceeding for review by the NASD 
Regulation Board if the call for review is made within the period 
prescribed in paragraph (2).
    (2) Seven Day Period, Waiver
    After receiving the proposed written decision of the National 
Business Conduct Committee pursuant to Rule 1015, a Director shall have 
not less than seven days to determine if the membership proceeding 
should be called for review. A Director shall call a membership 
proceeding for review by notifying the General Counsel of NASD 
Regulation. By a unanimous vote of the NASD Regulation Board, the NASD 
Regulation Board may shorten the period to less than seven days. By an 
affirmative vote of the majority of the NASD Regulation Board then in 
office, the NASD Regulation Board may, during the seven day period, 
vote to extend the period to more than seven days.
    (3) Review at Next Meeting
    If a Director calls a membership proceeding for review within the 
time prescribed in subparagraph (2), the NASD Regulation Board shall 
review the membership proceeding not later than the next meeting of the 
NASD Regulation Board. The NASD Regulation Board may direct the 
Applicant and the Department to file briefs in connection with review 
proceedings pursuant to this paragraph.
    (4) Decision of NASD Regulation Board, Including Remand
    After review, the NASD Regulation Board may affirm, modify, or 
reverse the proposed written decision of the National Business Conduct 
Committee. Alternatively, the NASD Regulation Board may remand the 
membership proceeding with instructions. The NASD Regulation Board 
shall prepare a proposed written decision that includes all of the 
elements described in Rule 1015(h)(2).
    (5) Issuance of Decision After Expiration of Call for Review Period
    The NASD Regulation Board shall provide its proposed written 
decision to the NASD Board. The NASD Board may call the membership 
proceeding for review pursuant to paragraph (b). If the NASD Board does 
not call the membership proceeding for review, the proposed written 
decision of the NASD Regulation Board shall become final. The NASD 
Regulation Board shall serve the Applicant with a written notice 
specifying the date on which the call for review period expired and 
stating that a final written decision will be served within 15 days 
after such date. The NASD Regulation Board shall serve its final 
written decision within 15 days after the date on which the call for 
review period expired. The decision shall constitute the final action 
of the Association for purposes of SEC Rule 19d-3, unless the NASD 
Regulation Board remands the membership proceeding.
    (6) Failure to Issue Decision
    If the NASD Regulation Board fails to serve its final written 
decision within the time prescribed in subparagraph (5), the Applicant 
may file a written request with the NASD Board requesting that the NASD 
Board direct the NASD Regulation Board to serve its decision 
immediately or to show good cause for an extension of time. Within 
seven days after receipt of such a request, the NASD Board shall direct 
the NASD Regulation Board to serve its written decision immediately or 
to show good cause for an extension of time. If the NASD Regulation 
Board shows good cause for an extension of time, the NASD Board may 
extend the 15 day time limit by not more than 15 days.
    (b) Discretionary Review by the NASD Board
    (1) Call for Review by Governor
    A Governor may call a membership proceeding for review by the NASD 
Board if the call for review is made within the period prescribed in 
subparagraph (2).
    (2) Seven Day Period; Waiver
    (A) Membership Proceeding Called for Review by NASD Regulation 
Board

[[Page 25317]]

    If the NASD Regulation Board reviewed the membership proceeding 
under paragraph (a), a Governor shall make his or her call for review 
at the next meeting of the NASD Board that is at least seven days after 
the date on which the NASD Board receives the proposed written decision 
of the NASD Regulation Board.
    (B) Membership Proceeding Not Called For Review By NASD Regulation 
Board
    If no Director of the NASD Regulation Board called the membership 
proceeding for review under paragraph (a), a Governor shall make his or 
her call for review at the next meeting of the NASD Board that is at 
least seven days after the date on which the NASD Board receives the 
proposed written decision of the National Business Conduct Committee.
    (C) Waiver
    By unanimous vote of the NASD Board, the NASD Board may shorten the 
period in subparagraph (1) or (2) to less than seven days. By an 
affirmative vote of the majority of the NASD Board then in office, the 
NASD Board may, during the seven day period in subparagraph (1) or (2), 
vote to extend the period in subparagraph (1) or (2) to more than seven 
days.
    (3) Review At Next Meeting
    If a Governor calls a membership proceeding for review within the 
time prescribed in subparagraph (2), the NASD Board shall review the 
membership proceeding not later than the next meeting of the NASD 
Board. The NASD Board may order the Applicant and the Department to 
file briefs in connection with review proceedings pursuant to this 
paragraph.
    (4) Decision of NASD Board, Including Remand
    After review, the NASD Board may affirm, modify, or reverse: (1) 
the proposed written decision of the NASD Regulation Board, or (2) if 
the NASD Regulation Board did not call the membership proceeding for 
review under paragraph (a), the proposed written decision of the 
National Business Conduct Committee. Alternatively, the NASD Board may 
remand the membership proceeding with instructions. The NASD Board 
shall prepare a written decision that includes all of the elements 
described in Rule 1015(h)(2).
    (5) Issuance of Decision
    The NASD Board shall serve its written decision on the Applicant 
within 15 days after the meeting at which it conducted its review. The 
decision shall constitute the final action of the Association for 
purposes of SEC Rule 19d-3, unless the NASD Board remands the 
membership proceeding.

1017. Application to Commission for Review

    A person aggrieved by final action of the Association under Rule 
1015 or 1016 may apply for review by the Commission pursuant to Section 
19(d)(2) of the Act. The filing of an application for review shall not 
stay the effectiveness of a decision constituting final action of the 
Association, unless the Commission otherwise orders.

1018. Removal or Modification of Business Restrictions

    (a) Application
    (1) A member of the Association may seek modification or removal of 
a restriction on its business activities imposed pursuant to the Rule 
1010 Series by filing a written application with the Department at the 
district office for the district in which the member's principal place 
of business is located. The application shall present facts showing 
that the circumstances that gave rise to the restriction have changed 
and state with specificity why the restriction should be modified or 
removed in light of the standards set forth in Rule 1014 and the 
articulated rationale for the imposition of the restriction. A copy of 
the decision pertaining to such restriction shall be appended to the 
application.
    (2) Within 30 days after the receipt of an application to remove or 
modify a restriction, the Department shall determine whether the 
application is complete and, if not, shall request additional 
information or documents. Unless otherwise agreed to by the Department 
and the Applicant, the Applicant shall file any additional information 
or documents with the Department within 30 days after the Department's 
request. The Department may require the Applicant to participate in a 
membership interview pursuant to Rule 1013 within 30 days after the 
receipt of the application or within 30 days after the filing of any 
additional documents or information requested by the Department.
    (3) Absent a showing of good cause, an application to modify or 
remove a restriction shall lapse if an Applicant fails to respond 
within 30 days after a request for information or documents. A lapse 
shall require the Applicant to submit a new application to modify or 
remove a restriction.
    (b) Department Decision
    (1) In evaluating an application submitted under paragraph (a), the 
Department shall consider whether maintenance of the restriction is 
appropriate in light of:
    (A) the standards set forth in Rule 1014;
    (B) the circumstances that gave rise to the imposition of the 
restrictions;
    (C) the Applicant's operations since the restrictions were imposed;
    (D) a change in ownership or control or supervisors and principals; 
and
    (E) any new evidence submitted in connection with the application.
    (2) Within 30 days after receipt of an application under paragraph 
(a), or within 30 days after the submission of additional information 
or documents, whichever is later, the Department shall issue a written 
decision. The decision shall state whether the application to modify or 
remove the restriction is granted or denied in whole or in part, and 
shall provide a rationale for the Department's decision, referencing 
the applicable standard in Rule 1014. If the Department fails to issue 
a decision within the such time, the Applicant may file a written 
request with the NASD Board requesting that the NASD Board direct the 
Department to issue a decision. Within seven days after receipt of such 
a request, the NASD Board shall direct the Department to issue a 
written decision immediately or to show good cause for an extension of 
time. If the Department shows good cause for an extension of time, the 
NASD Board may extend the 30 day time limit by not more than 30 days.
    (3) If the Department modifies or removes a restriction on the 
Applicant's business activities, the membership agreement submitted 
under Rule 1014 shall be modified accordingly.
    (c) Request for Review
    An Applicant may file a written request for review of the 
Department's decision with the National Business Conduct Committee 
pursuant to Rule 1015. The procedures set forth in Rule 1015 shall 
apply to such a review, and the National Business Conduct Committee's 
decision shall be subject to discretionary review by the NASD 
Regulation Board and the NASD Board pursuant to Rule 1016.
    (d) Removal or Modification of Restriction on Department's 
Initiative
    The Department shall modify or remove a restriction on its own 
initiative if the Department determines such action is appropriate in 
light of the considerations set forth in paragraph (b)(1). The 
Department shall notify the member in writing of the Department's 
determination and inform the member that it may apply for further 
modification or removal of a restriction by filing an application under 
paragraph (a).

[[Page 25318]]

1019. Change in Ownership, Control, or Operations

    (a) Notice
    At least 30 days prior to the occurrence of any of the following 
changes in ownership, control, or operations, a member shall file a 
written notice of the change with the Department at the district office 
in the district in which the member's principal place of business is 
located:
    (1) a merger of the member with another member;
    (2) an acquisition by the member of another member;
    (3) an acquisition of substantially all of the member's assets;
    (4) a change in the equity ownership or partnership capital of the 
member that results in one person or entity owning or controlling 25 
percent or more of the equity or partnership capital; or
    (5) a material change in the member's business operations.
    (b) Review
    The Department shall review a change in ownership, control, or 
operations described in paragraph (a) prior to the change taking 
effect. The Department may maintain existing restrictions on the 
member's business activities and place new interim restrictions on the 
member based on the standards in Rule 1014, pending final Department 
action. The Department may condition continued membership on the 
submission of additional information or documents and participation in 
a membership interview pursuant to Rule 1013 and on prompt compliance 
with the standards and requirements in Rule 1014, in which case all 
procedural protections under the Rule 1010 Series shall apply, 
including the time limits required for issuance of a decision.
* * * * *

Complaints, Investigations and Sanctions

Table of Contents

8000. Investigations and Sanctions
    8100. General Provisions

    8110. Availability of Manual to Customers
    8120. Definitions
    8200. Investigations
    8210. Provision of Information and Testimony and Inspection of 
Books
    8220. Suspension for Failure to Provide Requested Information

     Notice to Members and Persons Associated with Members
     Hearing
     Decision
     Notice to Membership
     Termination of Suspension
     Copies of Notices and Decisions to Members
     Other Action Not Foreclosed

    8300. Sanctions
    8310. Sanctions for Violation of the Rules

    IM-8310-1. Effect of a Suspension, Revocation, Cancellation, or Bar
    IM-8310-2. Release of Disciplinary Information

    8320. Payment of Fines, Other Monetary Sanctions, or Costs; Summary 
Action for Failure to Pay
    8330. Costs of Proceedings
* * * * *

Rule 8000 Series

* * * * *

8000. [Complaints,] Investigations and Sanctions

8100. [Complaints] General Provisions

8110. Availability [of Certificate, By-Laws and Rules] of Manual to 
Customers

    Every member of the Association shall keep in [each branch office 
maintained by him, in the form to be supplied by the Board of 
Governors, a copy of the Certificate of Incorporation, By-Laws and 
Rules of the Association, and of all additions and amendments from time 
to time made thereto, and of all published interpretive rulings made by 
the Board of Governors, all of which shall be available for the 
examination of any customer who makes requests therefor] its main 
office and each of its branch offices a current copy of the 
Association's Manual and all amendments to it. Upon request, a member 
shall make the Manual and amendments available to any customer for 
examination.

[8120. Complaints by Public Against Members for Violations of 
Rules]

    [Any person feeling aggrieved by any act, practice or omission of 
any member or any person associated with a member of the Association, 
which such person believes to be in violation of the Act, the rules and 
regulations thereunder, the rules of the Municipal Securities 
Rulemaking Board, or any of the Rules of the Association, may, on the 
form to be supplied by the Board of Governors, file a complaint against 
such member or such persons associated with a member in regard thereto 
with any District Business Conduct Committee of the Association, and 
any such complaint shall be handled in accordance with the Code of 
Procedure, as set forth in the Rule 9000 Series.]

8120. Definitions

    (a) Unless otherwise provided, terms used in the Rule 8000 Series 
shall have the meaning as defined in Rule 0120.
    (b) The term ``Adjudicator'' shall have the meaning as defined in 
Rule 9120.

[8130. Complaints by District Business Conduct Committees]

    [Any District Business Conduct Committee which, on information and 
belief, is of the opinion that any act, practice, or omission of any 
member of the Association or any person associated with a member is in 
violation of the Act, the rules and regulations thereunder, the rules 
of the Municipal Securities Rulemaking Board, or any of the Rules of 
the Association, may, on the form to be supplied by the Board of 
Governors, file a complaint against such member or such person 
associated with a member in regard thereto with itself or with any 
other District Business Conduct Committee of the Association, as the 
necessities of the complaint may require, and any such complaint shall 
be handled in accordance with the Rule 9000 Series and in the same 
manner as if it had been filed by an individual or member.]

[8140. Complaints by the Board of Governors]

    [The Board of Governors shall have authority when on the basis of 
information and belief it is of the opinion that any act, practice or 
omission of any member of the Association or of any person associated 
with a member is in violation of the Act, the rules and regulations 
thereunder, the rules of the Municipal Securities Rulemaking Board, or 
any Rule of the Association to file a complaint against such member or 
such person associated with a member in respect thereto or to instruct 
any District Business Conduct Committee to do so, and any such 
complaint shall be handled in accordance with the Rule 9000 Series.]

8200. Investigations

8210. [Reports] Provision of Information and Testimony and 
Inspection of Books [for Purpose of Investigating Complaints]

    [(a) For the purpose of any investigation, or determination as to 
filing of a complaint or any hearing of any complaint against any 
member of the Association or any person associated with a member made 
or held in accordance with the Rule 9000 Series, or made or held by 
another domestic or foreign self-regulatory organization, association, 
securities or contract market or regulator of such markets,

[[Page 25319]]

with whom the Association has entered into an agreement providing for 
the exchange of information and other forms of material assistance 
solely for market surveillance, investigative, enforcement or other 
regulatory purposes, any District Business Conduct Committee, the 
Market Surveillance Committee, or the Board of Governors, or any duly 
authorized member or members of any such Committees or Board or any 
duly authorized agent or agents of any such Committee or Board]
    (a) Authority of Adjudicator and Association Staff
    For the purpose of an investigation, complaint, examination, or 
proceeding authorized by the NASD By-Laws or the Rules of the 
Association, an Adjudicator or Association staff shall have the right 
to:[:]
    (1) [to] require [any] a member [of the Association], person 
associated with a member, or person [no longer associated with a member 
when such person is] subject to the Association's jurisdiction to 
[report, either informally or on the record, orally or in writing with 
regard] provide information orally, in writing, or electronically (if 
the requested information is, or is required to be, maintained in 
electronic form) and to testify, under oath or affirmation administered 
by a court reporter or a notary public if requested, with respect to 
any matter involved in [any such investigation or hearing, and] the 
investigation, complaint, examination, or proceeding; and
    [(2) to investigate the books, records and accounts of any such 
member or person with relation to any matter involved in any such 
investigation or hearing.
    (b) No such member or person shall fail to make any report as 
required in this Rule, or fail to permit any inspection of books, 
records and accounts as may be validly called for under this Rule. Any 
notice requiring an oral or written report or calling for an inspection 
of books, records and accounts pursuant to this Rule shall be deemed to 
have been received by the member or person to whom it is directed by 
the mailing thereof to the last known address of such member or person 
as reflected on the Association's records.]
    (2) inspect the books, records, and accounts of such member or 
person with respect to any matter involved in the investigation, 
complaint, examination, or proceeding.
    (b) Other SRO's and Regulators
    Association staff also may exercise the authority set forth in 
paragraph (a) for the purpose of an investigation, complaint, 
examination, or proceeding conducted by another domestic or foreign 
self-regulatory organization, association, securities or contract 
market, or regulator of such markets with which the Association has 
entered into an agreement providing for the exchange of information and 
other forms of material assistance solely for market surveillance, 
investigative, enforcement, or other regulatory purposes.
    (c) Requirement to Comply
    No member or person shall fail to provide information or testimony 
or to permit an inspection of books, records, or accounts pursuant to 
this Rule.
    (d) Receipt of Notice
    A notice under this Rule shall be deemed to have been received by 
the member or person to whom it is directed by the mailing thereof to 
the last known address of such member or person as reflected on the 
Association's records, unless the Adjudicator or Association staff 
responsible for serving the member or associated person has actual 
knowledge that the address is out of date. In such case, a copy of the 
notice shall be served on the member at its last known address, or in 
the case of an associated person, at the associated person's last known 
residential address and the business address in the Central 
Registration Depository of the member with which the person is employed 
or affiliated.
    (e) Electronic Interface
    In carrying out its responsibilities under this Rule, the 
Association may, as appropriate, establish programs for the submission 
of information to the Association on a regular basis through a direct 
or indirect electronic interface between the Association and members.

8220. Suspension [of Members] for Failure to [Furnish] Provide 
Requested Information [Duly Requested]

    [(a) The President is hereby directed and authorized to notify 
members of the Association who fail to provide information with respect 
to their business practices and/or who fail to keep membership 
applications and supporting documents current and/or who fail to 
furnish such other information or reports or other material or data 
duly requested by the Association pursuant to the powers duly vested in 
it by its Certificate of Incorporation, By-Laws and such other duly 
authorized resolutions and directives as are necessary in the conduct 
of the business of the Association, that the continued failure to 
furnish duly requested information, reports, data or other material, 
constitutes grounds for suspension from membership.]
    [(b) After fifteen (15) days' notice in writing thereof, and 
continued failure to furnish the information, reports, data or other 
material as described in paragraph (a), the President is hereby 
directed and authorized to suspend the membership of any such member on 
behalf of the Board of Governors, and to cause notification thereof in 
the next following membership supplement, to the effect that the 
membership has been suspended for failure to furnish such duly 
requested information.]
    [(c) Prior to such notice, in writing to the member, the Executive 
Committee of the Board of Governors shall be notified in writing of 
such contemplated action by the President.]
    [(d) The President shall advise the member concerned, in writing, 
of the suspension.]
    [(e) It is essential for the promotion of the Association's 
welfare, object and purposes and more particularly for the 
administration and enforcement of its Rules:
    (1) that any District Business Conduct Committee, any Market 
Surveillance Committee, or any duly authorized member or members of any 
such Committees, or any duly authorized agent or agents of any such 
Committees, or any Association examiner duly authorized by the 
President shall have the right, in order to and solely for the purpose 
of determining whether any member is complying with the Rules of the 
Association:
    (A) to require any such member to submit a report in writing with 
regard to any matter connected with such member's business or business 
practices, and
    (B) to inspect the books, records and accounts of any such member; 
and
    (2) that any such Committee or any such member or members thereof, 
or any such agent or agents thereof, or any such examiner, be and 
hereby is granted such rights.]

8221. Notice

    (a) Notice to Member
    If a member fails to provide any information, report, material, 
data, or testimony requested pursuant to the NASD By-Laws or the Rules 
of the Association, or fails to keep its membership application or 
supporting documents current, the National Business Conduct Committee 
shall provide written notice to such member specifying the nature of 
the failure and stating that the failure to take such action within 20 
days after service of the notice constitutes grounds for suspension 
from membership.
    (b) Notice to Person Associated with Member

[[Page 25320]]

    If a person associated with a member fails to provide any 
information, report, material, data, or testimony requested pursuant to 
the NASD By-Laws or the Rules of the Association, the National Business 
Conduct Committee shall provide written notice to such person 
specifying the nature of the failure and stating that the failure to 
take such action within 20 days after service of the notice constitutes 
grounds for suspending the association of the person with the member.
    (c) Service of Notice
    The National Business Conduct Committee shall serve the member or 
associated person with such notice via personal service or commercial 
courier.

8222. Hearing

    (a) Request for Hearing
    Within five days after the date of service of a notice issued under 
Rule 8221, a member or associated person may file with the National 
Business Conduct Committee a written request for an expedited hearing 
before a subcommittee of the National Business Conduct Committee. The 
request shall state with specificity why the member or associated 
person believes that there are insufficient grounds for suspension or 
any other reason for setting aside the notice issued by the National 
Business Conduct Committee.
    (b) Hearing Procedures
    (1) Appointment of Subcommittee
    If a hearing is requested, the National Business Conduct Committee 
shall appoint a subcommittee to conduct the hearing and decide whether 
the member or associated person should be suspended. The subcommittee 
shall be composed of a member of the National Business Conduct 
Committee and one or more current or past members of the NASD 
Regulation Board.
    (2) Time of Hearing
    The hearing shall be held within 20 days after the date of service 
of the notice issued under Rule 8221. Not later than seven days before 
the hearing, the subcommittee shall serve the member or associated 
person with written notice of the date and time of the hearing via 
commercial courier or facsimile and notify the appropriate department 
or office of NASD Regulation of the date and time of the hearing. The 
appropriate department or office of NASD Regulation (hereinafter 
``appropriate department or office'' in the Rule 8220 Series) shall be 
the department or office that issued the request for the information, 
report, material, data, or testimony that the member or associated 
person failed to provide, or in the case of a member that failed to 
keep its membership application or supporting documents current, the 
Department of Member Regulation.
    (3) Transmission of Documents
    Within seven days before the hearing, the subcommittee shall serve 
the member or associated person via commercial courier with all 
documents that were considered in connection with the National Business 
Conduct Committee's decision to issue a notice under Rule 8221.
    (4) Counsel
    The member or associated person and the appropriate department or 
office may be represented by counsel at a hearing conducted under this 
Rule.
    (5) Evidence
    Formal rules of evidence shall not apply to a hearing under this 
Rule. Not later than four days before the hearing, the member or 
associated person and the appropriate department or office shall 
exchange copies of proposed hearing exhibits and witness lists and 
provide copies of the same to the subcommittee.
    (6) Witnesses
    A person who is subject to the jurisdiction of the Association 
shall testify under oath or affirmation. The oath or affirmation shall 
be administered by a court reporter or a notary public.
    (7) Additional Information
    At any time during its consideration, the subcommittee may direct 
the member or associated person or the appropriate department or office 
to submit additional information. Any additional information submitted 
shall be provided to all parties before the subcommittee renders its 
decision.
    (8) Transcript
    The hearing shall be recorded and a transcript prepared by a court 
reporter. The member or associated person may purchase a copy of the 
transcript from the court reporter.
    (9) Record
    The record shall consist of all documents that were considered in 
connection with the National Business Conduct Committee's decision to 
issue a notice under Rule 8221, the notice issued under Rule 8221, the 
request for hearing filed under Rule 8222, the transcript of the 
hearing, and each document or other item of evidence presented to or 
considered by the Subcommittee. The Office of the General Counsel of 
NASD Regulation shall be the custodian of the record.
    (10) Failure to Appear at Hearing
    If a member or associated person fails to appear at a hearing for 
which it has notice, the subcommittee may dismiss the request for a 
hearing as abandoned, and the notice of the National Business Conduct 
Committee issued under Rule 8221 shall become the final action of the 
Association. Upon a showing of good cause, the subcommittee may 
withdraw a dismissal entered pursuant to this subparagraph.

8223. Decision

    (a) Subcommittee
    (1) Proposed Written Decision
    The subcommittee may suspend the membership of a member or suspend 
the association of a person with a member for failure to take the 
action required by the notice issued under Rule 8221. The subcommittee 
shall prepare a proposed written decision, and if the subcommittee 
determines that a suspension should be imposed, the proposed written 
decision shall state the grounds for the suspension and the conditions 
for terminating the suspension. The subcommittee shall provide its 
proposed written decision to the NASD Board of Governors.
    (2) Issuance of Decision After Expiration of Call for Review Period
    If no Governor calls the suspension proceeding for review within 
the time prescribed in paragraph (b)(1), the subcommittee's proposed 
written decision shall become final, and the subcommittee shall serve 
the final written decision on the member or associated person via 
commercial courier or facsimile.
    (b) NASD Board of Governors
    (1) Call For Review by Governor
    A Governor may call the suspension proceeding for review if the 
call for review is made not later than ten days after the Governor 
receives the subcommittee's proposed written decision. By a unanimous 
vote of the NASD Board of Governors, the NASD Board of Governors may 
shorten the call for review period to less than ten days. By an 
affirmative vote of the majority of the NASD Board of Governors then in 
office, the NASD Board of Governors may, during the ten day period, 
vote to extend the period to more than ten days.
    (2) Review and Decision
    If a Governor calls the suspension proceeding for review within the 
time prescribed in subparagraph (1), the NASD Board of Governors shall 
conduct a review not later than its next meeting. The NASD Board of 
Governors may affirm, modify, or reverse the decision of the 
subcommittee. Not later than seven days after the NASD Board of 
Governors meeting, the NASD Board of Governors shall serve a final 
written decision on the member or associated person via commercial 
courier or facsimile. The decision shall state the disposition of the 
suspension proceeding, and if a suspension is imposed, state the

[[Page 25321]]

grounds for the suspension and the conditions for terminating the 
suspension.
    (c) Effective Date.
    A final written decision served under this Rule shall become 
effective upon service and shall constitute final action of the 
Association.

8224. Notice to Membership

    The Association shall provide notice of a suspension under the Rule 
8220 Series and the grounds therefor in the next membership supplement.

8225. Termination of Suspension

    A suspended member or associated person may file a written request 
for termination of the suspension on the ground of full compliance with 
the notice issued under Rule 8221 or, if applicable, the conditions of 
a decision under Rule 8223, with the head of the appropriate department 
or office. The head of the appropriate department or office shall 
respond to the request in writing within five days after receipt of the 
request. If the head of the appropriate department or office grants the 
request, he or she shall serve the member or associated person with 
written notice of the termination of the suspension via commercial 
courier or facsimile. If the head of the department or office denies 
the request, the suspended member or associated person may file a 
written request for relief with the National Business Conduct 
Committee. The National Business Conduct Committee shall respond to the 
request in writing within ten days after receipt of the request. The 
National Business Conduct Committee's response shall be served on the 
member or associated person via commercial courier or facsimile.

8226. Copies of Notices and Decisions to Member

    A copy of a notice or decision under the Rule 8220 Series that is 
served on a person associated with a member shall be served on such 
member.

8227. Other Action Not Foreclosed

    Action by the Association under the Rule 8220 Series shall not 
foreclose action by the Association under any other Rule.

8300. Sanctions

8310. Sanctions for Violation of the Rules

    [Any District Business Conduct Committee, Market Surveillance 
Committee, the National Business Conduct Committee (NBCC), any other 
committee exercising powers assigned by the Board, or the Board, in the 
administration and enforcement of these Rules, the Act, the rules and 
regulations there under, or the rules of the Municipal Securities 
Rulemaking Board, and after compliance with the Rule 9000 series, may:]
    (a) Imposition of Sanction
    After compliance with the Rule 9000 Series, the Association may 
impose one or more of the following sanctions on a member or associated 
person for each violation of the federal securities laws, rules or 
regulations thereunder, the rules of the Municipal Securities 
Rulemaking Board, or Rules of the Association, or may impose one or 
more of the following sanctions on a member or associated person for 
any neglect or refusal to comply with an order, direction, or decision 
issued under the Rules of the Association:
    [(a)](1) censure [any] member or person associated with a member [, 
and/or];
    [(b)](2) impose a fine upon [any] a member or person associated 
with a member [, and/or ];
    [(c)](3) suspend the membership of [any] a member or suspend the 
registration of a person associated with a member [, if any,] for a 
definite period [, and/or for] or a period contingent on the 
performance of a particular act[, and/or];
    [(d)(4) expel [any] a member, cancel the membership of a member, or 
revoke or cancel the registration of [any] a person associated with a 
member [, if any, and/or ];
    [(e)](5) suspend or bar a member or person associated with a member 
from association with all members [, and/or]; or
    [(f)](6) impose any other fitting sanction [deemed appropriate 
under the circumstances, ].
    [for each or any violation of any of these Rules by a member or 
person associated with a member or for any neglect or refusal to comply 
with any orders, directions or decisions issued by any such committee 
or by the Board in the enforcement of these Rules, including any 
interpretative ruling made by the Board, as any such committee or the 
Board, in its discretion, may deem to be just; provided, however, that 
no such sanction imposed by any such committee shall take effect until 
the period for appeal therefrom or review thereof by the National 
Business Conduct Committee or the Board, as applicable, has expired and 
any such appeal or review has been completed in accordance with the 
Rule 9000 Series; and provided, further, that all parties to any]
    (b) Assent to Sanction
    Each party to a proceeding resulting in a sanction shall be deemed 
to have assented to [or to have acquiesced in] the imposition of [such] 
the sanction unless [any party aggrieved thereby shall have made] such 
party files a written application for appeal, review [thereof], or 
relief pursuant to the Rule 9000 Series[, within fifteen (15) days 
after the date of the decision rendered in such proceeding].

IM-8310-1. Effect of a Suspension, Revocation, Cancellation, or Bar

    If the Association or the Commission issues an order [which] that 
imposes a suspension, revocation, or cancellation of the registration[, 
if any,] of a person associated with a member or bars [that] a person 
from further association with any member, a member shall not allow 
[that] such person to remain associated with [that member] it in any 
capacity [whatever], including a clerical or ministerial [functions. 
When an individual is suspended, a member, in addition to the above,] 
capacity. If the Association or the Commission suspends a person 
associated with a member, the member also shall not pay or credit any 
salary, or any commission, profit, or other remuneration [which] that 
results directly or indirectly from any security transaction [which], 
that [individual] the associated person might have earned during the 
period of suspension.

IM-8310-2. Release of Disciplinary Information

    [No change.]

8320. Payment of Fines, Other Monetary Sanctions, or Costs; Summary 
Action for Failure to Pay 

    (a) Payment to Treasurer
    All fines and other monetary sanctions shall be paid to the 
Treasurer of the Association and shall be used for the general 
corporate purposes.
    (b) Summary Suspension or Expulsion
    [Any member who fails promptly to pay any] After seven days notice 
in writing, the Association may summarily suspend or expel from 
membership a member that fails to: 
    (1) pay promptly a fine or other monetary sanction imposed pursuant 
to Rule 8310[,] or [any costs] cost imposed pursuant to Rule 8330 
[after] when such fine, monetary sanction, or [costs have become] cost 
becomes finally due and payable[, may after seven (7) days' notice in 
writing be summarily suspended or expelled from membership in the 
Association. A member may also be summarily suspended or expelled from 
membership in the Association if the

[[Page 25322]]

member fails to immediately terminate the association of any person who 
fails promptly to pay any]; or
    (2) terminate immediately the association of a person who fails to 
pay promptly a fine or other monetary sanction imposed pursuant to Rule 
8310[,] or [any costs] a cost imposed pursuant to Rule 8330 [after] 
when such fine, monetary sanction, or cost [has become] becomes finally 
due and payable [after seven (7) days' notice in writing. The].
    (c) Summary Revocation of Registration
    After seven days notice in writing, the Association may summarily 
revoke the registration of a person associated with a member[, if any, 
may be summarily revoked] if such person fails [promptly] to pay [any] 
promptly a fine or other monetary sanction imposed pursuant to Rule 
8310[, or any costs] or a cost imposed pursuant to Rule 8330 [after] 
when such fine, monetary sanction, or cost [has become] becomes finally 
due and payable [after seven (7) days' notice in writing].

8330. Costs of Proceedings

    [Any] A member or [any] person associated with a member disciplined 
pursuant to Rule 8310 shall bear such [part of the costs of the 
proceedings as any committee referred to in such Rule or the Board] 
costs of the proceeding as the Adjudicator deems fair and appropriate 
[in] under the circumstances.
* * * * *

Code of Procedure

Table of Contents

9000. Code of Procedure
    9100. Application and Purpose

    9110. Application

    9120. Definitions

    9130. Service; Filing of Papers

    9131. Service of Complaint and Document Initiating a Proceeding
    9132. Service of Orders, Notices and Decisions by Adjudicator
    9133. Service of Papers Other Than Complaints, Orders, Notices, or 
Decisions 
    9134. Methods of, Procedures for Service
    9135. Filing of Papers With Adjudicator: Procedure
    9136. Filing of Papers: Form
    9137. Filing of Papers: Signature Requirement and Effect
    9138. Computation of Time

    9140. Proceedings

    9141. Appearance and Practice; Notice of Appearance
    9142. Withdrawal By Attorney or Representative
    9143. Ex Parte Communications
    9144. Separation of Functions
    9145. Rules of Evidence; Official Notice
    9146. Motions 
    9147. Rulings on Procedural Matters
    9148. Interlocutory Review

    9150. Exclusion of Person From Rule 9000 Proceeding

    9160. Recusal or Disqualification

    9200. Disciplinary Proceedings

    9210. Complaint and Answer

    9211. Issuance of Complaints
    9212. Complaints--Requirements, Service, Amendment, Withdrawal and 
Docketing
    9213. Assignment of Hearing Officer and Appointment of Panelists to 
Hearing Panel or Extended Hearing Panel
    9214. Consolidation of Disciplinary Proceedings
    9215. Answers to Complaints
    9216. Acceptance, Waiver, and Consent; Plan Pursuant to SEC Rule 
19d-1(c)(2)

    IM-9216. Violations Appropriate For Disposition Under Plan Pursuant 
to SEC Rule 19d-1(c)(2)

    9220. Request for Hearing; Appointment of Hearing Panel or Extended 
Hearing Panel; Extensions of Time, Postponements, Adjournments

    9221. Request for Hearing
    9222. Extensions of Time, Postponements, and Adjournments 

    9230. Appointment of Hearing Panel, Extending Hearing Panel

    9231. Appointment By the Chief Hearing Officer of Hearing Panel or 
Extended Hearing Panel
    9232. Criteria for Selection of Panelists; Replacement Panelists
    9233. Hearing Panel or Extended Hearing Panel: Recusal and 
Disqualification of Hearing Officers
    9234. Hearing Panel or Extended Hearing Panel: Recusal and 
Disqualification of Panelists
    9235. Hearing Officer Authority

    9240. Pre-hearing Conferences and Submissions 

    9241. Pre-hearing Conferences
    9242. Pre-hearing Submissions

    9250. Discovery

    9251. Inspection and Copying of Documents In Possession of Staff
    9252. Requests for Information
    9253. Production of Witness Statements

    9260. Hearing and Decision

    9261. Evidence and Procedure in Hearings

    9262. Testimony

    9263. Evidence: Admissibility

    9264. Motion for Summary Disposition

    9265. Record of Hearings

    9266. Proposed Findings of Fact, Conclusions of Law, and Post-
Hearing Briefs

    9267. Record; Supplemental Documents Attached to Record; Retention 
of Record and Supplemental Documents Attached to Record; Copies
    9268. Decision of the Hearing Panel or Extended Hearing Panel
    9269. Failure to Appear at Hearings; Default

    9270. Settlement Procedure

    9280. Contemptuous Conduct

    9300. Review of Disciplinary Proceedings by the National Business 
Conduct Committee, NASD Regulation and NASD Boards, and Application for 
SEC Review

    9310. Appeal to or Review by National Business Conduct Committee

    9311. Appeals By Any Party; Cross-Appeal Review Proceedings 
Initiated By The National Business Conduct Committee

    9320. Transmission of Record; Extensions of Time, Postponements, 
Adjournments

    9321. Transmission of Record
    9322. Extensions of Time, Postponements, Adjournments

    9330. Appointment of Subcommittee or Extended Proceeding Committee; 
Disqualification and Recusal

    9331. Appointment by National Business Conduct Committee of 
Subcommittee or Extended Proceeding Committee
    9332. Disqualification and Recusal

    9340. Proceedings

    9341. Oral Argument
    9342. Failure to Appear at Oral Argument
    9343. Disposition Without Oral Argument
    9344. Failure to Participate Below; Abandonment of Appeal
    9345. Subcommittee or Extended Proceeding Committee Recommendation 
to National Business Conduct Committee
    9346. Evidence in National Business Conduct Committee Proceedings
    9347. Filing of Papers In National Business Conduct Committee 
Proceedings
    9348. Powers of the National Business Conduct Committee on Review
    9349. National Business Conduct Committee Formal Consideration;

[[Page 25323]]

Decision

    9350. Discretionary Review by Boards

    9351. Discretionary Review by NASD Regulation Board
    9352. Discretionary Review by NASD Board

    9360. Effectiveness of Sanctions

    9370. Application to Commission for Review
* * * * *

Rule 9000 Series

* * * * *

9000. Code of Procedure

9100. Application and Purpose

9110. Application

    (a) Proceedings
    The Rule 9000 Series is the Code of Procedure and includes 
proceedings for disciplining a member or person associated with a 
member; proceedings for regulating the activities of a member 
experiencing financial or operational difficulties; proceedings for 
approving or disapproving a change in business operations that will 
result in a change in exemptive status under SEC Rule 15c3-3; 
proceedings for summary suspension of a member or person associated 
with a member; proceedings for the non-summary suspension, cancellation 
or bar of a member or a person; and proceedings for obtaining relief 
from the eligibility requirements of the NASD By-Laws and the Rules of 
the Association. The Rule 9100 Series is of general applicability to 
all proceedings set forth in Rule 9000 Series, except the proceedings 
set forth in the Rule 9700 Series and the Rule 9800 Series, unless a 
Rule in the Rule 9200 Series, the Rule 9300 Series, the Rule 9400 
Series, or the Rule 9500 Series specifically provides otherwise.
    (b) Rights, Duties and Obligations of Members and Associated 
Persons
    Unless otherwise specified, a person associated with a member shall 
have the same rights as a member and shall be subject to the same 
duties and obligations under the Code.
    (c) Incorporation of Defined Terms and Cross References
    Unless otherwise provided, terms used in the Rule 9000 Series shall 
have the meaning as defined in Rule 0120 and Rule 9120. References 
within the Rule 9000 Series to Association offices or departments refer 
to offices so designated by the NASD, NASD Regulation or Nasdaq.

9120. Definitions

    (a) ``Adjudicator''
    The term ``Adjudicator'' means: (1) a body, board, committee, other 
group, or natural person that presides over a proceeding and renders a 
decision; (2) a body, board, committee, other group, or natural person 
that presides over a proceeding and renders a recommended or proposed 
decision which is acted upon by an Adjudicator described in (1); or (3) 
a natural person who serves on a body, board, committee, or other group 
described in (1) or (2). The term includes a Subcommittee as defined in 
paragraph (z), an Extended Proceeding Committee as defined in paragraph 
(k), and a Statutory Disqualification Committee as defined in paragraph 
(y).
    (b) ``Chief Hearing Officer''
    The term ``Chief Hearing Officer'' means the Hearing Officer 
designated by the President of NASD Regulation to manage the Office of 
Hearing Officers, or his or her delegatee.
    (c) ``Code''
    The term ``Code'' refers to this Code of Procedure.
    (d) ``Complainant''
    The term ``Complainant'' means, in the Rule 9200 Series, a person 
who files a complaint to initiate a disciplinary proceeding governed by 
the Rule 9200 Series and, in the Rule 9300 Series, the person who 
initiated the disciplinary proceeding.
    (e) ``Director''
    The term ``Director'' means a member of the Board of Directors of 
NASD Regulation, excluding the Chief Executive Officer of the NASD.
    (f) ``District Committee''
    The term ``District Committee'' means a district committee elected 
pursuant to Article VIII of the NASD Regulation By-Laws.
    (g) ``Document''
    The term ``Document'' means a writing, drawing, graph, chart, 
photograph, recording, or any other data compilation, including data 
stored by computer, from which information can be obtained.
    (h) ``Extended Hearing''
    The term ``Extended Hearing'' means a disciplinary proceeding 
described in Rule 9231(c).
    (i) ``Extended Hearing Panel''
    The term ``Extended Hearing Panel'' means a decisional body that is 
constituted under Rule 9231(c) to conduct a disciplinary proceeding 
that is classified as an ``Extended Hearing'' and is governed by the 
Rule 9200 Series.
    (j) ``Extended Proceeding''
    The term ``Extended Proceeding'' means a disciplinary proceeding 
described in Rule 9331(a)(2).
    (k) ``Extended Proceeding Committee''
    The term ``Extended Proceeding Committee'' means an appellate body 
that is appointed by the National Business Conduct Committee and 
constituted under Rule 9331(a)(2) to participate in the National 
Business Conduct Committee's consideration of a disciplinary proceeding 
that is classified as an ``Extended Proceeding'' and governed by the 
Rule 9300 Series.
    (l) ``Governor''
    The term ``Governor'' means a member of the Board of Governors of 
the NASD.
    (m) ``Head of Enforcement''
    The term ``Head of Enforcement'' means the individual designated by 
the President of NASD Regulation to manage the Department of 
Enforcement, or his or her delegatee.
    (n) ``Hearing Officer''
    The term ``Hearing Officer'' means an employee of NASD Regulation 
who is an attorney and who is appointed by the Chief Hearing Officer to 
act in an adjudicative role and fulfill various adjudicative 
responsibilities and duties described in the Rule 9200 Series regarding 
disciplinary proceedings brought against members and associated 
persons.
    (o) ``Hearing Panel''
    The term ``Hearing Panel'' means a decisional body that is 
constituted under Rule 9231 to conduct a disciplinary proceeding 
governed by the Rule 9200 Series or that is constituted under the Rule 
9500 Series to conduct a proceeding.
    (p) ``Interested Association Staff''
    The term ``Interested Association Staff'' means, in the context of:
    (1) a disciplinary proceeding under the Rule 9200 Series and the 
Rule 9300 Series:
    (A) the Head of Enforcement;
    (B) a Department of Enforcement employee who reports, directly or 
indirectly, to the Head of Enforcement;
    (C) an Association employee who directly participated in the 
authorization of the complaint; or
    (D) an Association employee who directly participated in an 
examination, investigation, prosecution, or litigation related to a 
specific disciplinary proceeding, and a district director or department 
head to whom such employee reports;
    (2) a proceeding under the Rule 9400 Series or the Rule 9530 
Series:
    (A) the head of the Department of Member Regulation;
    (B) a Department of Member Regulation employee who reports, 
directly or indirectly, to the head of the Department of Member 
Regulation;
    (C) an Association employee who directly participated in the 
authorization of or the initial decision in the proceeding; or
    (D) an Association employee who directly participated in an 
examination,

[[Page 25324]]

investigation, prosecution, or litigation related to a specific 
proceeding, and a district director or department head to whom such 
employee reports; or
    (3) a proceeding under the Rule 9510 or 9520 Series:
    (A) the head of the department or office that issues the notice;
    (B) an Association employee who reports, directly or indirectly, to 
such person;
    (C) an Association employee who directly participated in the 
initiation of the proceeding; or
    (D) an Association employee who directly participated in an 
examination, investigation, prosecution, or litigation related to a 
specific proceeding, and a district director or department head to whom 
such employee reports.
    (q) ``Market Regulation Committee''
    The term ``Market Regulation Committee'' means the committee of 
NASD Regulation designated to consider the federal securities laws and 
the rules and regulations adopted thereunder and various Rules of the 
Association and policies relating to:
    (1) the quotations of securities;
    (2) the execution of transactions;
    (3) the reporting of transactions; and
    (4) trading practices, including rules prohibiting manipulation and 
insider trading, and those Rules designated as Trading Rules (Rule 3300 
Series), the Nasdaq Stock Market Rules (Rule 4000 Series), other Nasdaq 
and NASD Market Rules (Rule 5000 Series), NASD Systems and Programs 
Rules (Rule 6000 Series), and Charges for Services and Equipment Rules 
(Rule 7000 Series).
    (r) ``NASD Board''
    The term ``NASD Board'' means the Board of Governors of the NASD.
    (s) ``NASD Regulation Board''
    The term ``NASD Regulation Board'' means the Board of Directors of 
NASD Regulation.
    (t) ``Panelist''
    The term ``Panelist,'' as used in the Rule 9200 Series, means a 
member of a Hearing Panel or Extended Hearing Panel who is not a 
Hearing Officer. As used in the Rule 9300 Series, the term means a 
current or former Director or a former Governor who is appointed to 
serve on a Subcommittee or an Extended Proceeding Committee.
    (u) ``Party''
    With respect to a particular proceeding, the term ``Party'' means:
    (1) a Complainant or a Respondent;
    (2) in the Rule 9400 Series and the Rule 9530 Series, the 
Department of Member Regulation and:
    (A) a member that is the subject of a notice under Rule 9412;
    (B) a member that submits an application under Rule 9422; or
    (3) in the Rule 9510 Series and the Rule 9520 Series, the 
department or office that issues the notice and:
    (A) a member or person that is the subject of a notice under Rule 
9512;
    (B) a member or person that is the subject of a notice under Rule 
9522; or
    (C) a member that is the subject of a notice or files an 
application under Rule 9532.
    (v) ``Practicing Before the Association''
    The term ``practicing before the Association'' means representing 
one or more other persons in any proceeding incorporated in Rule 9110, 
but shall not include appearing pro se.
    (w) ``Primary District Committee''
    The term ``Primary District Committee'' means, in a disciplinary 
proceeding under the Rule 9200 Series, the District Committee 
designated by the Chief Hearing Officer pursuant to Rule 9232 to 
provide one or more of the Panelists to a Hearing Panel or, if 
applicable, to an Extended Hearing Panel, for such disciplinary 
proceeding.
    (x) ``Respondent''
    The term ``Respondent'' means, in a disciplinary proceeding 
governed by the Rule 9200 Series and in an appeal or review governed by 
the Rule 9300 Series, an NASD member or associated person against whom 
a complaint is issued.
    (y) ``Statutory Disqualification Committee''
    The term ``Statutory Disqualification Committee'' means a 
Subcommittee of the National Business Conduct Committee that is 
composed of current members of the NASD Regulation Board that makes a 
recommended decision to grant or deny an application for relief from 
the eligibility requirements of the Association to the National 
Business Conduct Committee pursuant to the Rule 9530 Series.
    (z) ``Subcommittee''
    The term ``Subcommittee'' means an appellate body that is appointed 
by the National Business Conduct Committee:
    (1) constituted by Rule 9331(a) to participate in the National 
Business Conduct Committee's consideration of a disciplinary proceeding 
pursuant to the Rule 9300 Series; or
    (2) constituted under the Rule 9400 Series or the Rule 9500 Series 
to conduct a review proceeding.

9130. Service; Filing of Papers

9131. Service of Complaint and Document Initiating a Proceeding

    (a) Service on Each Party
    A complaint shall be served on each Party by the Complainant or 
Complainant's counsel or other person the Complainant designates to 
represent him or her in a proceeding. A document initiating a 
proceeding shall be served on each Party by the Party initiating such 
proceeding or his or her counsel or representative.
    (b) How Served
    A complaint or document initiating a proceeding shall be served 
pursuant to Rule 9134.
    (c) Filing Requirement
    A complaint that is served upon a Respondent and each document 
initiating a proceeding that is served upon a Party, along with the 
certificate of service executed in connection with the service upon 
such Respondent or Party, shall be filed with the Association pursuant 
to Rule 9135.

9132. Service of Orders, Notices and Decisions by Adjudicator

    (a) Service on Each Party
    An order, notice, or decision issued by a Hearing Officer, Hearing 
Panel or Extended Hearing Panel under the Rule 9200 Series shall be 
served on each Party, or each Party's counsel, or other person the 
Party designates to represent him or her in a proceeding by the Office 
of Hearing Officers. An order, notice, or decision issued by any other 
Adjudicator shall be served by that Adjudicator.
    (b) How Served
    An order, notice, or decision shall be served pursuant to Rule 
9134.
    (c) Service Upon Counsel or Other Person Acting In Representative 
Capacity
    Whenever service is required to be made upon a person represented 
by counsel or a representative who has filed a notice of appearance 
pursuant to Rule 9141, service shall be made upon counsel or the 
representative. The Adjudicator, at its discretion, may also order that 
service be made upon the person.

9133. Service of Papers Other Than Complaints, Orders, Notices, or 
Decisions

    (a) Service on Each Party
    Other than a complaint, order, notice, or decision, any paper, 
including an answer and a motion, shall be served on each Party by the 
Party on whose behalf such paper was prepared or by his or her counsel 
or representative.
    (b) How Served
    The paper shall be served pursuant to Rule 9134.
    (c) Filing Requirement
    The paper that is served upon a Party, along with the certificate 
of service executed in connection with the service upon such Party, 
shall be filed with the Association pursuant to Rule 9135.
    (d) Service upon Counsel or Other Person Acting in Representative 
Capacity
    Whenever service is required to be made upon a person represented 
by

[[Page 25325]]

counsel or a representative who has filed a notice of appearance 
pursuant to Rule 9141, service shall be made upon counsel or the 
representative. The Adjudicator, at its discretion, may also order that 
service be made upon the person.

9134. Methods of, Procedures for Service

    (a) Methods
    The following methods of service are permitted:
    (1) Personal Service
    Personal service may be accomplished by handing a copy of the 
papers to the person required to be served; leaving a copy at the 
person's office with an employee or other person in charge thereof; or 
leaving a copy at the person's dwelling or usual place of abode with a 
person of suitable age and discretion then residing therein;
    (2) Service by Mail by U.S. Postal Service
    Service by mail may be accomplished by mailing the papers through 
the U.S. Postal Service by using first class mail, first class 
certified mail, first class registered mail, or Express Mail, except 
that a complaint shall be served upon a Respondent by U.S. Postal 
Service first class certified mail or Express Mail; or
    (3) Service by Commercial Courier
    Service by commercial courier may be accomplished by sending the 
papers through a commercial courier service that generates a written 
confirmation of receipt or of attempts at delivery.
    (b) Procedures
    (1) Service on Natural Persons
    Papers served on a natural person may be served at the natural 
person's residential address, as reflected in the Central Registration 
Depository, if applicable. When a Party or other person responsible for 
serving such person has actual knowledge that the natural person's 
Central Registration Depository address is out of date, duplicate 
copies shall be served on the natural person at the natural person's 
last known residential address and the business address in the Central 
Registration Depository of the entity with which the natural person is 
employed or affiliated. Papers may also be served at the business 
address of the entity with which the natural person is employed or 
affiliated, as reflected in the Central Registration Depository, or at 
a business address, such as a branch office, at which the natural 
person is employed, or at which the natural person is physically 
present during a normal business day. If a natural person is 
represented by counsel or a representative, papers served on the 
natural person, excluding a complaint or a document initiating a 
proceeding, shall be served on the counsel or representative.
    (2) Service on Entities
    Papers served on an entity shall be made by service on an officer, 
partner of a partnership, managing or general agent, or any other agent 
authorized by appointment or by law to accept service. Such papers 
shall be served at the entity's business address as reflected in the 
Central Registration Depository, if applicable; provided, however, that 
when the Party or other person responsible for serving such entity has 
actual knowledge that an entity's Central Registration Depository 
address is out of date, duplicate copies shall be served at the 
entity's last known address. If an entity is represented by counsel or 
a representative, papers served on such entity, excluding a complaint 
or document initiating a proceeding, shall be served on such counsel or 
representative.
    (3) When Service Is Complete
    Personal service and service by commercial courier or express 
delivery are complete upon delivery. Service by mail is complete upon 
mailing.

9135. Filing of Papers with Adjudicator: Procedure

    (a) When to File
    Papers that are required to be filed with an Adjudicator within a 
time limit specified by the Adjudicator or within a time limit 
specified by the Rules shall be deemed timely if received within the 
time limit specified, unless otherwise ordered by an Adjudicator. Other 
papers that are required to be filed shall be deemed timely if, on the 
same day such papers are served, they are also hand-delivered, mailed 
via U.S. Postal service first class mail, or sent by courier to the 
Association.
    (b) Where to File
    All papers required to be filed pursuant to the Rule 9200 Series 
and any notice of appeal or review required to be filed pursuant to the 
Rule 9300 Series shall be filed with the Office of Hearing Officers. 
All other papers required to be filed pursuant to the Rule 9000 Series 
shall be filed where specified in the Rule, or if not specified in the 
Rule, with the Adjudicator, unless the Adjudicator orders otherwise.
    (c) Certificate of Service
    Papers filed with an Adjudicator or the Office of Hearing Officers 
shall be accompanied by a certificate of service stating the name of 
the person or persons served, the date on which service is made, the 
method of service and, if service is not made in person, the address to 
which service is made. Such certificate shall be executed by the person 
who made the service. If the method of service on a Party is different 
from the method of service on any other Party, the certificate shall 
state why such different method was used.

9136. Filing of Papers: Form

    (a) Specifications
    Papers filed in connection with any proceeding under the Rule 9200 
Series and the Rule 9300 Series shall:
    (1) be on unglazed white paper measuring 8\1/2\  x  11 inches, but 
to the extent that the reduction of a larger document would render it 
illegible, such document may be filed on larger paper;
    (2) be typewritten or printed in either 10 or 12 point typeface or 
otherwise reproduced by a process that produces a permanent and plainly 
legible copy;
    (3) include at the head of the paper, or on a title page, the title 
of the proceeding, the names of the Parties, the subject of the 
particular paper or pleading, and the number assigned to the 
proceeding;
    (4) be paginated at the bottom of the page and with all margins at 
least one inch wide;
    (5) be double-spaced, with double-spaced footnotes and single-
spaced indented quotations; and
    (6) be stapled, clipped, or otherwise fastened in the upper left 
corner, but not bound.
    (b) Signature Required
    All papers shall be signed and dated pursuant to Rule 9137.
    (c) Number of Copies
    A signed original and three copies of all papers shall be filed 
with the Adjudicator.
    (d) Form of Briefs
    A brief containing more than ten pages shall include a table of 
contents, and an alphabetized table of cases, statutes, and other 
authorities cited, with references to the pages of the brief wherein 
they are cited.
    (e) Scandalous or Impertinent Matter
    Any scandalous or impertinent matter contained in any brief, 
pleading, or other filing, or in connection with any oral presentation 
in a proceeding may be stricken on order of an Adjudicator. Any matter 
stricken by an Adjudicator by this Rule shall be marked ``Stricken'' 
and preserved. Matters stricken in a proceeding governed by the Rule 
9200 Series shall be preserved under Rule 9267(b).

9137. Filing of Papers: Signature Requirement and Effect

    (a) General Requirements
    Following the issuance of a complaint in a disciplinary proceeding, 
or the initiation of another proceeding, every filing of a Party 
represented by counsel or a representative shall be signed by at

[[Page 25326]]

least one counsel or representative of record in his or her name and 
shall state the business address and telephone number of such counsel 
or representative. A Party who appears on his or her own behalf shall 
sign his or her individual name and state his or her address and 
telephone number on every filing.
    (b) Effect of Signature
    (1) The signature of a counsel, representative or Party shall 
constitute a certification that:
    (A) the person signing the filing has read the filing;
    (B) to the best of his or her knowledge, information, and belief, 
formed after reasonable inquiry, the filing is well grounded in fact 
and is warranted by existing law or a good faith argument for the 
extension, modification, or reversal of existing law; and
    (C) the filing is not made for any improper purpose, such as to 
harass, cause unnecessary delay, or needlessly to increase the cost of 
adjudication.
    (2) If a filing is not signed, an Adjudicator may strike the 
filing, unless it is signed promptly after the omission is called to 
the attention of the person making the filing.

9138. Computation of Time

    (a) Calendar Day
    In the Rule 9000 Series, ``day'' means calendar day.
    (b) Formula
    In computing any period of time, the day of the act, event, or 
default from which the period of time designated in the Code begins to 
run shall not be included. The last day of the period so computed shall 
be included, unless it is a Saturday, Sunday, or Federal holiday, in 
which event the period runs until the end of the next day that is not a 
Saturday, Sunday, or Federal holiday. Intermediate Saturdays, Sundays, 
and Federal holidays shall be excluded from the computation when the 
period prescribed is ten days or less, not including any additional 
time for service by mail allowed by paragraph (c).
    (c) Additional Time For Service by Mail
    If service is made by U.S. Postal Service first class, certified, 
or registered mail, three days shall be added to the prescribed period 
for response.

9140. Proceedings

9141. Appearance and Practice; Notice of Appearance

    (a) Representing Oneself
    In any proceeding, a person may appear on his or her own behalf. 
When a person first makes any filing or otherwise appears on his or her 
own behalf before an Adjudicator in a proceeding, he or she shall file 
with the Adjudicator, or otherwise state on the record, and keep 
current, an address at which any notice or other written communication 
required to be served upon or furnished to him or her may be sent and a 
telephone number where he or she may be reached during business hours.
    (b) Representing Others
    A person shall not be represented before an Adjudicator, except as 
provided in this paragraph. Subject to the prohibitions of Rules 9150 
and 9280, a person may be represented in any proceeding by an attorney 
at law admitted to practice before the highest court of any state of 
the United States, the District of Columbia, or any commonwealth, 
territory, or possession of the United States. A member of a 
partnership may represent the partnership; and a bona fide officer of a 
corporation, trust, or association may represent the corporation, 
trust, or association. When a person first makes any filing or 
otherwise appears in a representative capacity before an Adjudicator in 
a proceeding, that person shall file with the Adjudicator, and keep 
current, a written notice stating the name of the proceeding; the 
representative's name, business address, and telephone number; and the 
name and address of the person or persons represented. Any individual 
appearing or practicing in a representative capacity before an 
Adjudicator may be required to file a power of attorney with the 
Adjudicator showing his or her authority to act in such capacity.

9142. Withdrawal by Attorney or Representative

    An attorney for a Party or other person authorized to represent 
others by Rule 9141 shall withdraw by giving notice not later than 30 
days before the date of withdrawal. The notice shall set forth the good 
cause for withdrawal.

9143. Ex Parte Communications

    (a) Prohibited Communications
    Unless on notice and opportunity for all Parties to participate, or 
to the extent required for the disposition of ex parte matters as 
authorized by the Rule 9000 Series:
    (1) No Party, or counsel to or representative of a Party, or 
Interested Association Staff shall make or knowingly cause to be made 
an ex parte communication relevant to the merits of a proceeding to a 
Governor, a Director, or an Adjudicator who is participating in a 
decision with respect to that proceeding, or to an Association employee 
who is participating or advising in the decision of a Governor, a 
Director, or an Adjudicator with respect to that proceeding; and
    (2) No Governor, Director, or Adjudicator who is participating in a 
decision with respect to a proceeding, or no Association employee who 
is participating or advising in the decision of a Governor, a Director, 
or an Adjudicator with respect to a proceeding shall make or knowingly 
cause to be made to a Party, a counsel or representative to a Party, or 
Interested Association Staff an ex parte communication relevant to the 
merits of that proceeding.
    (b) Disclosure of Prohibited Communication
    A Governor, a Director, or an Adjudicator who is participating in a 
decision with respect to a proceeding, or an Association employee who 
is participating or advising in the decision of a Governor, a Director, 
or an Adjudicator, who receives, makes, or knowingly causes to be made 
a communication prohibited by this Rule shall place in the record of 
the proceeding:
    (1) all such written communications;
    (2) memoranda stating the substance of all such oral 
communications; and
    (3) all written responses and memoranda stating the substance of 
all oral responses to all such communications.
    (c) Remedies
    Upon receipt of a communication made or knowingly caused to be made 
by any Party, any counsel or representative to a Party, or any 
Interested Association Staff in violation of subparagraphs (a)(1) or 
(a)(2), the Association or an Adjudicator may, to the extent consistent 
with the interests of justice, the policies underlying the Act, and the 
Association's Rules, order the Party responsible for the communication, 
or the Party who may benefit from the ex parte communication made, to 
show cause why the Party's claim or interest in the proceeding should 
not be dismissed, denied, disregarded, or otherwise adversely affected 
by reason of such ex parte communication.
    (d) Timing
    In a disciplinary proceeding governed by the Rule 9200 Series and 
the Rule 9300 Series, the prohibitions of this Rule shall apply 
beginning with the authorization of a complaint as provided in Rule 
9211, unless the person responsible for the communication has knowledge 
that the complaint shall be authorized, in which case the prohibitions 
shall apply beginning at the time of his or her acquisition of such 
knowledge.

[[Page 25327]]

    (e) Waiver of Ex Parte Prohibition
    (1) Offer of Settlement
    If a Respondent submits an offer of settlement under Rule 9270, the 
submission constitutes a waiver by such Respondent of any claim that 
the prohibitions against ex parte communications were violated by a 
person or body in connection with such person's or body's participation 
in discussions regarding the terms and conditions of the offer of 
settlement and the order of acceptance, or other consideration of the 
offer of settlement and order of acceptance, including acceptance or 
rejection of such offer of settlement and order of acceptance.
    (2) Letter of Acceptance, Waiver, and Consent
    If a member or a person associated with a member submits an 
executed letter of acceptance, waiver, and consent under Rule 9216(a), 
the submission constitutes a waiver by such member or person associated 
with a member of any claim that the prohibitions against ex parte 
communications were violated by a person or body in connection with 
such person's or body's participation in discussions regarding the 
terms and conditions of the letter of acceptance, waiver, and consent, 
or other consideration of the letter of acceptance, waiver, and 
consent, including acceptance or rejection of such letter of 
acceptance, waiver, and consent.
    (3) Minor Rule Violation Plan Letter
    If a member or a person associated with a member submits an 
executed minor rule violation plan letter under Rule 9216(b), the 
submission constitutes a waiver by such member or person associated 
with a member of any claim that the prohibitions against ex parte 
communications by a person or body in connection with such person's or 
body's participation in discussions regarding the terms and conditions 
of the minor rule violation plan letter, or other consideration of the 
minor rule violation plan letter, including acceptance or rejection of 
such minor rule plan violation letter.

9144. Separation of Functions

    (a) Interested Association Staff
    Except as counsel or a witness in a proceeding or as provided in 
the Rule 9400 Series, Interested Association Staff is prohibited from 
advising an Adjudicator regarding a decision or otherwise participating 
in a decision of an Adjudicator. An Adjudicator is prohibited from 
advising Interested Association Staff regarding a decision or otherwise 
participating in a decision of Interested Association Staff, including 
the decision to issue a complaint and a decision whether to appeal or 
cross-appeal a disciplinary proceeding to the National Business Conduct 
Committee.
    (b) Separation of Adjudicators
    A Hearing Officer, including the Chief Hearing Officer, or a 
Panelist of a Hearing Panel or an Extended Hearing Panel, is prohibited 
from participating in: a decision whether to issue a complaint pursuant 
to Rule 9211; a decision whether to appeal a disciplinary proceeding, 
or to file a cross-appeal with, the National Business Conduct Committee 
pursuant to Rule 9311; and a discussion or decision relating to a call 
for review, a review, or an appeal pursuant to the Rule 9300 Series. A 
Director is prohibited from participating in a discussion or decision 
relating to the above referenced acts with the Adjudicators referenced 
above, or a Governor or the NASD Board. A Governor is prohibited from 
participating in a discussion or a decision relating to the above 
referenced acts with the Adjudicators referenced above, or a Director 
or the NASD Regulation Board.
    (c) Waiver of Prohibitions of Separation of Functions
    (1) Offer of Settlement
    If a Respondent submits an offer of settlement under Rule 9270, the 
submission constitutes a waiver by such Respondent of any claim of 
violation of paragraph (a) or (b) by a person or body in connection 
with such person's or body's participation in discussions regarding the 
terms and conditions of the offer of settlement and the order of 
acceptance, or other consideration of the offer of settlement and order 
of acceptance, including acceptance or rejection of such offer of 
settlement and order of acceptance.
    (2) Letter of Acceptance, Waiver, and Consent
    If a member or a person associated with a member submits an 
executed letter of acceptance, waiver, and consent under Rule 9216(a), 
the submission constitutes a waiver by such member or person associated 
with a member of any claim of violation of paragraph (a) or (b) by a 
person or body in connection with such person's or body's participation 
in discussions regarding the terms and conditions of the letter of 
acceptance, waiver, and consent, or other consideration of the proposed 
letter of acceptance, waiver, and consent, including acceptance or 
rejection of such letter of acceptance, waiver, and consent.
    (3) Minor Rule Violation Plan Letter
    If a member or a person associated with a member submits an 
executed minor rule violation plan letter under Rule 9216(b), the 
submission constitutes a waiver by such member or person associated 
with a member of any claim of violation of paragraph (a) or (b) by a 
person or body in connection with such person's or body's participation 
in discussions regarding the terms and conditions of the minor rule 
violation plan letter or other consideration of the minor rule 
violation plan letter, including acceptance or rejection of such minor 
rule violation plan letter.

9145. Rules of Evidence; Official Notice

    (a) Rules of Evidence
    The formal rules of evidence shall not apply in a proceeding 
brought under the Rule 9000 Series.
    (b) Official Notice
    In a proceeding governed by the Rule 9000 Series, an Adjudicator 
may take official notice of such matters as might be judicially noticed 
by a court, or of other matters within the specialized knowledge of the 
Association as an expert body. Before an Adjudicator proposes to take 
official notice of a matter, it shall permit a Party the opportunity to 
oppose or otherwise comment upon the proposal to take official notice.

9146. Motions

    (a) General Requirement for Motions
    A Party may make a written or oral motion, subject to limitations 
set forth below.
    (b) Adjudicator May Require a Written Motion
    If a Party makes an oral motion, an Adjudicator may order that such 
motion be set forth in writing, after considering the facts and 
circumstances, including whether:
    (1) the hearing or conference in which the Party makes such motion 
is being recorded; and
    (2) the opposing Parties shall be fully informed and shall have 
adequate notice and opportunity to respond to such motion.
    (c) Specificity
    All motions shall state the specific relief requested and the basis 
therefor.
    (d) Time For Filing Opposition or Other Response to Motion
    Unless otherwise ordered by an Adjudicator, any Party may file an 
opposition or other response to a written motion; the opposition or 
response shall be filed within 14 days after service of the motion. If 
no response is filed within the response period, the Party failing to 
respond shall be deemed to have waived any objection to the granting of 
the motion. A Party shall be afforded an opportunity to respond to an 
oral motion at the time the oral motion is

[[Page 25328]]

made, unless the Adjudicator orders that the Party shall be granted 
additional time to respond.
    (e) Oral Argument
    An Adjudicator may allow oral argument on motions. Oral argument 
may take place in person or by telephone.
    (f) Frivolous Motions
    An Adjudicator may deny dilatory, repetitive, or frivolous motions 
without awaiting a response.
    (g) No Stay
    Unless otherwise ordered by an Adjudicator, the filing of a motion 
does not stay a proceeding.
    (h) Reply
    The moving Party shall have no right to reply to the opposition or 
other response of the other Parties. An Adjudicator may permit a reply 
to be filed. When permitted, a movant's reply submission shall be filed 
within five days after service of the opposition or other response.
    (i) Page Limit, Format Requirements
    Unless otherwise ordered by an Adjudicator, submissions in support 
of or in opposition to motions shall not exceed ten double-spaced 
pages, including double-spaced footnotes, exclusive of pages containing 
any table of contents, table of authorities, or addenda.
    (j) Disposition of Procedural Motions; Disposition of Motions for 
Summary Disposition
    In the Rule 9200 Series, a motion on a procedural matter may be 
decided by a Hearing Officer; a motion for summary disposition of a 
cause of action set forth in a complaint shall be decided by a majority 
vote of the Hearing Panel or, if applicable, the Extended Hearing 
Panel. In the Rule 9300 Series, a motion on a procedural matter may be 
decided by a Subcommittee, an Extended Proceeding Committee, or the 
National Business Conduct Committee; a motion for summary disposition 
of a cause of action shall be decided by the National Business Conduct 
Committee. In the Rule 9400 Series and the Rule 9500 Series, a motion 
shall be decided by an Adjudicator.
    (k) General
    All motions, oppositions or responses, replies, and any other 
filings made by a Party in a proceeding shall comply with Rules 9133, 
9134, 9135, 9136 and 9137.

9147. Rulings on Procedural Matters

    The NASD Board, the NASD Regulation Board, the National Business 
Conduct Committee, a Hearing Officer or any other Adjudicator shall 
have full authority, except as otherwise provided by this Code, to rule 
on a procedural motion and other procedural and administrative matters 
arising during the course of a proceeding conducted pursuant to this 
Code, subject to the rights of review or appeal provided by this Code.

9148. Interlocutory Review

    Except as provided in Rule 9280, there shall be no interlocutory 
review of a ruling or order issued by any Adjudicator in a proceeding 
governed by this Code. If an Adjudicator grants interlocutory review of 
a ruling or order, such review shall not stay a proceeding, except 
under Rule 9280 or as otherwise ordered by the Adjudicator.

9150. Exclusion of Person from Rule 9000 Proceeding

    (a) Exclusion
    An Adjudicator may exclude an attorney for a Party or other person 
authorized to represent others by Rule 9141 from acting as counsel, 
acting in any representative capacity, or otherwise appearing in a 
particular Rule 9000 Series proceeding for contemptuous conduct under 
Rule 9280 or unethical or improper professional conduct in that 
proceeding. A person excluded under Rule 9280 may seek review of such 
exclusion under Rule 9280.
    (b) Other Proceedings Not Precluded
    Prohibiting an attorney or other person authorized to represent 
others by Rule 9141 from practicing or appearing in an Association 
proceeding shall not preclude the Association from initiating other 
proceedings against such person.

9160. Recusal or Disqualification

    No person shall participate as an Adjudicator in a matter governed 
by this Code as to which he or she has a conflict of interest or bias, 
or circumstances otherwise exist where his or her fairness might 
reasonably be questioned. In any such case the person shall recuse 
himself or herself, or shall be disqualified as follows:
    (a) NASD Board
    The Chair of the NASD Board shall have authority to order the 
disqualification of a Governor or a member of a Hearing Panel appointed 
under Rule 9513, and the Vice Chair of the NASD Board shall have 
authority to order the disqualification of the Chair of the NASD Board;
    (b) NASD Regulation Board
    The Chair of the NASD Regulation Board shall have authority to 
order the disqualification of a Director or a member of a Hearing Panel 
appointed under Rule 9523, and the Vice Chair of the NASD Regulation 
Board shall have authority to order the disqualification of the Chair 
of the NASD Regulation Board;
    (c) National Business Conduct Committee or Certain Subcommittees
    The Chair of the National Business Conduct Committee shall have 
authority to order the disqualification of a member of the National 
Business Conduct Committee, a Subcommittee appointed pursuant to the 
Rule 9400 Series, and the Statutory Disqualification Committee; and the 
Vice Chair of the National Business Conduct Committee shall have 
authority to order the disqualification of the Chair of the National 
Business Conduct Committee;
    (d) Rule 9331 Subcommittee or Extended Proceeding Committee
    Disqualification of a Panelist of a Subcommittee or Extended 
Proceeding Committee appointed pursuant to Rule 9331 shall be governed 
by Rule 9332;
    (e) Panelist of Hearing Panel or Extended Hearing Panel
    Disqualification of a Panelist of a Hearing Panel or Extended 
Hearing Panel shall be governed by Rule 9234;
    (f) Hearing Officer
    Disqualification of a Hearing Officer of a Hearing Panel or an 
Extended Hearing Panel shall be governed by Rule 9233; and
    (g) NASD Regulation Staff As Adjudicator
    The President of NASD Regulation shall have authority to order the 
disqualification of a member of the staff of the Department of Member 
Regulation participating in a Rule 9400 Series decision.
    9200. Disciplinary Proceedings
    9210. Complaint and Answer
    9211. Issuance of Complaints
    (a) Complaints Initiated and Filed by Department of Enforcement
    If the Department of Enforcement believes that any NASD member or 
associated person is violating or has violated any rule, regulation, or 
statutory provision, including the federal securities laws and the 
regulations thereunder, which the Association has jurisdiction to 
enforce, the Department of Enforcement may authorize and issue a 
complaint as set forth in Rule 9212. At the time of authorization and 
issuance of a complaint, the Department of Enforcement may propose: (1) 
an appropriate location for the hearing; and (2) if the complaint 
alleges at least one cause of action involving a violation of a statute 
or a rule described in Rule 9120(q), that the Chief Hearing Officer 
select as a Panelist for the Hearing Panel, a current or former member 
of the Market Regulation Committee who is associated with a member of 
the

[[Page 25329]]

Association, or, if applicable, select as a Panelist for an Extended 
Hearing Panel, a current or former member of the Market Regulation 
Committee who is or was associated with a member of the Association.
    (b) Complaints Initiated by the NASD Regulation Board or the NASD 
Board
    The NASD Regulation Board and the NASD Board each shall have the 
authority to direct the Department of Enforcement to issue a complaint 
when, on the basis of information and belief, either of such boards is 
of the opinion that any NASD member or associated person is violating 
or has violated any rule, regulation, or statutory provision, including 
the federal securities laws and the regulations thereunder, which the 
Association has jurisdiction to enforce. The Department of Enforcement 
shall authorize and issue the complaint as set forth in Rule 9212. At 
the time of authorization and issuance of a complaint, the Department 
of Enforcement may propose: (1) An appropriate location for the 
hearing; and (2) if the complaint alleges at least one cause of action 
involving a violation of a statute or a rule described in Rule 9120(q), 
that the Chief Hearing Officer select as a Panelist for the Hearing 
Panel, a current or former member of the Market Regulation Committee 
who is associated with a member of the Association, or, if applicable, 
select as a Panelist for an Extended Hearing Panel, a current or former 
member of the Market Regulation Committee who is or was associated with 
a member of the Association.
    (c) Commencement of Disciplinary Proceeding
    A disciplinary proceeding shall begin when the complaint is served 
and filed.

9212. Complaints--Requirements, Service, Amendment, Withdrawal, and 
Docketing

    (a) Form, Content, Notice, Docketing, and Service
    Each complaint shall be in writing and signed by a Complainant. The 
complaint shall specify in reasonable detail the conduct alleged to 
constitute the violative activity and the rule, regulation, or 
statutory provision the Respondent is alleged to be violating or to 
have violated. If the complaint consists of several causes of action, 
each cause shall be stated separately. Complaints shall be served by 
the Complainant on each Party pursuant to Rules 9131 and 9134, and 
filed at the time of service with the Office of Hearing Officers 
pursuant to Rules 9135, 9136, and 9137.
    (b) Amendments to Complaints
    Upon motion by a Complainant, the Hearing Officer may, at any time 
after considering good cause shown by a Complainant and any unfair 
prejudice to any Respondent, permit a Complainant to amend a complaint 
to include new matters of fact or law.
    (c) Withdrawal of Complaints
    With prior leave of the Hearing Officer, a Complainant may withdraw 
a complaint. If a Complainant withdraws the complaint before the 
earlier of (1) The Hearing Panel's or, if applicable, the Extended 
Hearing Panel's, issuance of a ruling on a motion for summary 
disposition, or (2) the start of the hearing on the merits, the 
Complainant's withdrawal of the complaint shall be without prejudice 
and such Complainant shall be permitted to refile a case based on 
allegations concerning the same facts and circumstances that are set 
forth in the withdrawn complaint. If the Complainant filing the 
complaint requests to withdraw such complaint after the occurrence of 
either of the two events set forth in (1) and (2) in this paragraph, 
the Hearing Panel or, if applicable, the Extended Hearing Panel, after 
considering the facts and circumstances of the request, shall determine 
whether the withdrawal shall be granted with prejudice.
    (d) Disciplinary Proceeding Docket
    The Office of Hearing Officers shall promptly record each complaint 
filed with it in the Association's disciplinary proceeding docket, and 
record in the disciplinary proceeding docket each event, filing, and 
change in the status of a disciplinary proceeding.

9213. Assignment of Hearing Officer and Appointment of Panelists to 
Hearing Panel or Extended Hearing Panel

    (a) Assignment of Hearing Officer
    As soon as practicable after a Complainant has filed his or her 
complaint with the Office of Hearing Officers, the Chief Hearing 
Officer shall assign a Hearing Officer to preside over the disciplinary 
proceeding and shall serve the Parties with notice of the Hearing 
Officer's assignment pursuant to Rule 9132.
    (b) Appointment of Panelists
    As soon as practicable after assigning a Hearing Officer to preside 
over a disciplinary proceeding, the Chief Hearing Officer shall appoint 
Panelists pursuant to Rules 9231 and 9232 to a Hearing Panel or, if the 
Chief Hearing Officer determines that an Extended Hearing Panel should 
be appointed, to an Extended Hearing Panel.

9214. Consolidation of Disciplinary Proceedings

    (a) Initiated by Chief Hearing Officer
    The Chief Hearing Officer may order the consolidation of two or 
more disciplinary proceedings, upon his or her own motion, under 
circumstances where such consolidation would further the efficiency of 
the disciplinary process, and where the subject complaints involve 
common questions of law or fact, or one or more of the same 
Respondents. In determining whether to order the consolidation of such 
disciplinary proceedings, the Chief Hearing Officer shall consider: (1) 
Whether the same or similar evidence reasonably would be expected to be 
offered at each of the hearings; (2) whether the proposed consolidation 
would conserve the time and resources of the Parties; and (3) whether 
any unfair prejudice would be suffered by one or more Parties as a 
result of the consolidation. If the Chief Hearing Officer proposes to 
consolidate two or more disciplinary proceedings, the Chief Hearing 
Officer shall serve upon the Parties notice of the proposed 
consolidation of disciplinary proceedings, together with a copy of each 
relevant complaint and any answer that has been filed thereto, pursuant 
to Rule 9132. The Parties shall have 14 days after service to file a 
response, stating any arguments in favor of or opposition to 
consolidation.
    (b) Initiated by a Party
    A Party may file a motion to request the consolidation of two or 
more disciplinary proceedings if such consolidation would further the 
efficiency of the disciplinary process, if the subject complaints 
involve common questions of law or fact or one or more of the same 
Respondents, or if one or more of the factors favoring consolidation 
set forth in paragraph (a) exist. If a Party moves to consolidate two 
or more disciplinary proceedings, the Party shall file such motion, 
together with a copy of each relevant complaint and any answer thereto 
that has been filed, with the Office of Hearing Officers, and shall 
serve the same upon the Parties pursuant to Rule 9133. The Parties 
shall have 14 days after service to file a response, stating any 
arguments in favor of or opposition to consolidation.
    (c) Impact on Hearing Panel or Extended Hearing Panel
    If the Chief Hearing Officer issues an order to consolidate two or 
more disciplinary proceedings for which Hearing Panels or, if 
applicable, Extended Hearing Panels, have been appointed, the Chief 
Hearing Officer's order shall specify which Hearing Panel or, if 
applicable, Extended Hearing Panel, shall preside over the consolidated 
disciplinary proceeding, or

[[Page 25330]]

shall appoint a new Hearing Panel or, if applicable, Extended Hearing 
Panel, to preside, based on the criteria set forth in Rules 9231 and 
9232.

9215. Answers to Complaints

    (a) Form, Service, Notice
    Each Respondent named in a complaint shall answer and serve an 
answer to the complaint on all other Parties within 25 days after 
service of the complaint on such Respondent pursuant to Rule 9133, and 
at the time of service file such answer with the Office of Hearing 
Officers pursuant to Rules 9135, 9136 and 9137. The Hearing Officer 
assigned to a disciplinary proceeding pursuant to Rule 9213 may extend 
such period for good cause. Upon the receipt of a Respondent's answer, 
the Office of Hearing Officers shall promptly send written notice of 
the receipt of such answer to all Parties.
    (b) Content, Affirmative Defenses
    Unless otherwise ordered by the Hearing Officer, an answer shall 
specifically admit, deny, or state that the Respondent does not have 
and is unable to obtain sufficient information to admit or deny, each 
allegation in the complaint. When a Respondent intends to deny only 
part of an allegation, the Respondent shall specify so much of it as is 
admitted and deny only the remainder. A statement of lack of 
information shall be deemed a denial. Any allegation not denied shall 
be deemed admitted. Any affirmative defense shall be asserted in the 
answer.
    (c) Motion for More Definite Statement
    A Respondent may file with an answer a motion for a more definite 
statement of specified matters of fact or law to be considered or 
determined. Such motion shall state why each such matter of fact or law 
should be required to be made more definite. If the motion is granted, 
the order granting such motion shall set the periods for filing such a 
statement and any answer thereto.
    (d) Amendments to Answer
    Upon motion by a Respondent, the Hearing Officer may, after 
considering good cause shown by the Respondent and any unfair prejudice 
which may result to any other Party, permit an answer to be amended.
    (e) Extension of Time to Answer Amended Complaint
    If a complaint is amended pursuant to Rule 9212(b), the time for 
filing an answer or amended answer shall be extended to 14 days after 
service of the amended complaint. If any Respondent has already filed 
an answer, such Respondent shall have 15 days after service of the 
amended complaint, unless otherwise ordered by the Hearing Officer, 
within which to file an amended answer.
    (f) Failure to Answer, Default
    If the Respondent does not file an answer with the Office of 
Hearing Officers within the time required, the Hearing Officer shall 
order the Department of Enforcement to send a second notice to such 
Respondent requiring an answer within 14 days after service of the 
second notice, or within such longer period as the Hearing Officer in 
his or her discretion may order. The second notice shall state that 
failure of the Respondent to reply within the period specified shall 
allow the Hearing Officer, in the exercise of his or her discretion, 
to: (1) treat as admitted by the Respondent the allegations in the 
complaint; and (2) enter a default decision against the Respondent 
pursuant to Rule 9269. If no answer is filed with the Office of Hearing 
Officers within the time required by the second notice, the allegations 
of the complaint may be considered admitted by such Respondent and a 
default decision may be issued by the Hearing Officer. A Respondent 
may, for good cause shown, move to set aside a default pursuant to Rule 
9146.

9216. Acceptance, Waiver, and Consent; Plan Pursuant to SEC Rule 19d-
1(c)(2)

    (a) Acceptance, Waiver, and Consent Procedures
    (1) Notwithstanding Rule 9211, if the Department of Enforcement has 
reason to believe a violation has occurred and the member or associated 
person does not dispute the violation, the Department of Enforcement 
may prepare and request that the member or associated person execute a 
letter accepting a finding of violation, consenting to the imposition 
of sanctions, and agreeing to waive such member's or associated 
person's right to a hearing before a Hearing Panel or, if applicable, 
an Extended Hearing Panel, and any right of appeal to the National 
Business Conduct Committee, the Commission, and the courts, or to 
otherwise challenge the validity of the letter, if the letter is 
accepted. The letter shall describe the act or practice engaged in or 
omitted, the rule, regulation, or statutory provision violated, and the 
sanction or sanctions to be imposed.
    (2) If a member or person associated with a member submits an 
executed letter of acceptance, waiver, and consent, by the submission 
such member or person associated with a member also waives:
    (A) any right of such member or person associated with a member to 
claim bias or prejudgment of the General Counsel of NASD Regulation, or 
his or her delegatee, the National Business Conduct Committee, or any 
member of the National Business Conduct Committee, in connection with 
such person's or body's participation in discussions regarding the 
terms and conditions of the letter of acceptance, waiver, and consent, 
or other consideration of the letter of acceptance, waiver, and 
consent, including acceptance or rejection of such letter of 
acceptance, waiver, and consent; and
    (B) any right of such member or person associated with a member to 
claim that a person violated the ex parte prohibitions of Rule 9143 or 
the separation of functions prohibitions of Rule 9144, in connection 
with such person's or body's participation in discussions regarding the 
terms and conditions of the letter of acceptance, waiver, and consent, 
or other consideration of the letter of acceptance, waiver, and 
consent, including acceptance or rejection of such letter of 
acceptance, waiver, and consent.
    If a letter of acceptance, waiver, and consent is rejected, the 
member or associated person shall be bound by the waivers made under 
subparagraphs (a)(1) and (2) for conduct by persons or bodies occurring 
during the period beginning on the date the letter of acceptance, 
waiver, and consent was executed and submitted and ending upon the 
rejection of the letter of acceptance, waiver, and consent.
    (3) If the member or associated person executes the letter of 
acceptance, waiver, and consent, it shall be submitted to the National 
Business Conduct Committee. The Chair and the Vice Chair of the 
National Business Conduct Committee (or either one, acting alone, in 
the event the other is recused or disqualified) or by the General 
Counsel of NASD Regulation, or his or her delegatee, may accept such 
letter or refer it to the National Business Conduct Committee for 
acceptance or rejection by the National Business Conduct Committee. The 
Chair and the Vice Chair of the National Business Conduct Committee (or 
either one, acting alone, in the event the other is recused or 
disqualified) may reject such letter or refer it to the National 
Business Conduct Committee for acceptance or rejection by the National 
Business Conduct Committee.
    (4) If the letter is accepted by the National Business Conduct 
Committee, the Chair and the Vice Chair of the National Business 
Conduct Committee (or either one, acting alone, in the event the other 
is recused or disqualified), or

[[Page 25331]]

the General Counsel of NASD Regulation, or his or her delegatee, it 
shall be deemed final and shall constitute the complaint, answer, and 
decision in the matter. If the letter is rejected by the Chair and Vice 
Chair of the National Conduct Committee (or either one, acting alone, 
in the event the other is recused or disqualified) or the National 
Business Conduct Committee, NASD Regulation may take any other 
appropriate disciplinary action with respect to the alleged violation 
or violations. If the letter is rejected, the member or associated 
person shall not be prejudiced by the execution of the letter of 
acceptance, waiver, and consent under subparagraph (a)(1) and the 
letter may not be introduced into evidence in connection with the 
determination of the issues set forth in any complaint or in any other 
proceeding.
    (b) Procedure for Violation Under Plan Pursuant to SEC Rule 19d-
1(c)(2)
    (1) Notwithstanding Rule 9211, NASD Regulation or the National 
Business Conduct Committee may, subject to the requirements set forth 
in subparagraphs (b)(2) through (b)(4) and in SEC Rule 19d-1(c)(2), 
impose a fine (not to exceed $2,500) and/or a censure on any member or 
associated person with respect to any rule listed in IM-9216. If the 
Department of Enforcement has reason to believe a violation has 
occurred and if the member or associated person does not dispute the 
violation, the Department of Enforcement may prepare and request that 
the member or associated person execute a minor rule violation plan 
letter accepting a finding of violation, consenting to the imposition 
of sanctions, and agreeing to waive such member's or associated 
person's right to a hearing before a Hearing Panel or, if applicable, 
an Extended Hearing Panel, and any right of appeal to the National 
Business Conduct Committee, the Commission, and the courts, or to 
otherwise challenge the validity of the letter, if the letter is 
accepted. The letter shall describe the act or practice engaged in or 
omitted, the rule, regulation, or statutory provision violated, and the 
sanction or sanctions to be imposed.
    (2) If a member or person associated with a member submits an 
executed minor rule violation plan letter, by the submission such 
member or person associated with a member also waives:
    (A) any right of such member or person associated with a member to 
claim bias or prejudgment of the General Counsel of NASD Regulation, or 
his or her delegatee, the National Business Conduct Committee, or any 
member of the National Business Conduct Committee, in connection with 
such person's or body's participation in discussions regarding the 
terms and conditions of the minor rule violation plan letter or other 
consideration of the minor rule violation plan letter, including 
acceptance or rejection of such minor rule violation plan letter; and
    (B) any right of such member or person associated with a member to 
claim that a person violated the ex parte prohibitions of Rule 9143 or 
the separation of functions prohibitions of Rule 9144, in connection 
with such person's or body's participation in discussions regarding the 
terms and conditions of the minor rule violation plan letter or other 
consideration of the minor rule violation plan letter, including 
acceptance or rejection of such minor rule violation plan letter.
    If a minor rule violation plan letter is rejected, the member or 
person associated with a member shall be bound by the waivers made 
under subparagraphs (b) (1) and (2) for conduct by persons or bodies 
occurring during the period beginning on the date the minor rule 
violation plan letter was executed and submitted and ending upon the 
rejection of the minor rule violation plan letter.
    (3) If the member or associated person executes the minor rule 
violation plan letter, it shall be submitted to the National Business 
Conduct Committee. The Chair and the Vice Chair of the National 
Business Conduct Committee (or either one, acting alone, in the event 
the other is recused or disqualified) or the General Counsel of NASD 
Regulation, or his or her delegatee, may accept such letter or refer it 
to the National Business Conduct Committee for acceptance or rejection 
by the National Business Conduct Committee. The Chair and the Vice 
Chair of the National Business Conduct Committee (or either one, acting 
alone, in the event the other is recused or disqualified) may reject 
such letter or refer it to the National Business Conduct Committee for 
acceptance or rejection by the National Business Conduct Committee.
    (4) If the letter is accepted by the National Business Conduct 
Committee, the Chair and the Vice Chair of the National Business 
Conduct Committee (or either one, acting alone, in the event the other 
is recused or disqualified), or the General Counsel of NASD Regulation, 
or his or her delegatee, it shall be deemed final and the Association 
shall report the violation to the Commission as required by the 
Commission pursuant to a plan approved under SEC Rule 19d-1(c)(2). If 
the letter is rejected by the Chair and the Vice Chair of the National 
Business Conduct Committee (or either one, acting alone, in the event 
the other is recused or disqualified), or by the National Business 
Conduct Committee, NASD Regulation may take any other appropriate 
disciplinary action with respect to the alleged violation or 
violations. If the letter is rejected, the member or associated person 
shall not be prejudiced by the execution of the minor rule violation 
plan letter under subparagraph (b)(1) and the letter may not be 
introduced into evidence in connection with the determination of the 
issues set forth in any complaint or in any other proceeding.

IM-9216. Violations Appropriate for Disposition Under Plan Pursuant to 
SEC Rule 19d-1(c)(2)

     Rule 2210 (b) and (c) and Rule 2220 (b) and (c)--Failure 
to have advertisements and sales literature approved by a principal 
prior to use; failure to maintain separate files of advertisements and 
sales literature containing required information; and failure to file 
advertisements with the Association within the required time limits.
     Rule 3360--Failure to timely file reports of short 
positions on Form NS-1.
     Rule 3110--Failure to keep and preserve books, accounts, 
records, memoranda, and correspondence in conformance with all 
applicable laws, rules, regulations and statements of policy 
promulgated thereunder, and with the Rules of the Association.

9220. Request for Hearing; Appointment of Hearing Panel or Extended 
Hearing Panel; Extensions of Time, Postponements, Adjournments

9221. Request for Hearing

    (a) Respondent Request for Hearing
    With the filing of any Respondent's answer, such Respondent may: 
(1) request a hearing; (2) propose an appropriate location for the 
hearing; and (3) propose, if the complaint alleges at least one cause 
of action involving a violation of a statute or rule described in Rule 
9120(q), that the Chief Hearing Officer select as a Panelist for a 
Hearing Panel a current or former member of the Market Regulation 
Committee who is associated with a member of the Association or, if 
applicable, select as a Panelist for an Extended Hearing Panel, a 
current or former member of the Market Regulation Committee who is or 
was associated with a member of the Association. If a Respondent 
requests a hearing, a hearing shall be granted. A

[[Page 25332]]

Respondent who fails to request a hearing with the filing of his or her 
answer waives the right to a hearing unless a Hearing Officer, Hearing 
Panel, or, if applicable, an Extended Hearing Panel, grants, for good 
cause shown, a later filed motion by such Respondent requesting a 
hearing.
    (b) Hearing Officer Order Requiring Hearing
    In the absence of a request for a hearing from any Respondent, the 
Hearing Officer may order any complaint set down for hearing.
    (c) Authority of Hearing Panel, Extended Hearing Panel to Order 
Hearing
    If all Respondents waive a hearing, and the Hearing Officer does 
not order a hearing on his or her own motion, the Hearing Panel or, if 
applicable, the Extended Hearing Panel, may order a hearing or may 
consider the matter on the record, as defined in Rule 9267. If fewer 
than all Respondents waive a hearing, the Hearing Officer, the Hearing 
Panel, or, if applicable, the Extended Hearing Panel, may, in the 
exercise of its discretion, order that a hearing be held as to all 
Respondents. Alternatively, the Hearing Officer, the Hearing Panel, or, 
if applicable, the Extended Hearing Panel, may conduct a hearing as to 
only those Respondents who requested a hearing and consider the matter 
on the record as to those Respondents who waived a hearing.
    (d) Notice of Hearing
    The Hearing Officer shall issue a notice stating the date, time, 
and place of the hearing, and whether the hearing shall be held before 
a Hearing Panel or an Extended Hearing Panel, and shall serve such 
notice on the Parties at least 28 days before the hearing, unless (1) 
in the discretion of the Hearing Officer, he or she determines that 
extraordinary circumstances require a shorter notice period, or (2) the 
Parties waive the notice period.

9222. Extensions of Time, Postponements, and Adjournments

    (a) Availability
    At any time prior to the issuance of the decision of the Hearing 
Panel or, if applicable, the Extended Hearing Panel, the Hearing 
Officer may, for good cause shown, extend or shorten any time limits 
prescribed by the Code for the filing of any papers and may, consistent 
with paragraph (b), postpone or adjourn any hearing.
    (b) Limitations on Postponements, Adjournments, and Extensions
    A hearing shall begin at the time and place ordered, unless the 
Hearing Officer, for good cause shown, changes the place of the 
hearing, postpones the commencement of the hearing, or adjourns a 
convened hearing for a reasonable period of time, subject to the 
limitations in subparagraph (b)(2).
    (1) Additional Considerations
    In considering a motion for the postponement of the start of a 
hearing or, adjournment once a hearing has begun, the Hearing Officer 
shall consider:
    (A) the length of the proceeding to date;
    (B) the number of postponements, adjournments, or extensions 
already granted;
    (C) the stage of the proceedings at the time of the request;
    (D) potential harm to the investing public if an extension of time, 
adjournment, or postponement is granted; and
    (E) such other matters as justice may require.
    (2) Time Limit
    Postponements, adjournments, or extensions of time for filing 
papers shall not exceed 28 days unless the Hearing Officer states on 
the record or provides by written order the reasons a longer period is 
necessary.

9230. Appointment of Hearing Panel, Extending Hearing Panel

9231. Appointment by the Chief Hearing Officer of Hearing Panel or 
Extended Hearing Panel

    (a) Appointment
    The Chief Hearing Officer shall appoint a Hearing Panel or an 
Extended Hearing Panel to conduct the disciplinary proceeding and issue 
a decision.
    (b) Hearing Panel
    The Hearing Panel shall be composed of a Hearing Officer and two 
Panelists, except as provided in Rule 9234 (a), (c), (d), or (e). The 
Hearing Officer will serve as the chair of the Hearing Panel. Each 
Panelist shall be associated with a member of the Association.
    (1) Except as provided in (2), a person shall be eligible to be 
selected as a Panelist only if the person is:
    (A) a current member of a District Committee;
    (B) a person who previously served on a disciplinary hearing panel;
    (C) a former member of the National Business Conduct Committee;
    (D) a person who previously served on a disciplinary subcommittee 
of the National Business Conduct Committee, including a Subcommittee, 
an Extended Proceeding Committee, or their predecessor subcommittees; 
or,
    (E) a person who previously was a Director, a member of the Nasdaq 
Board of Directors, or a Governor, but does not sit currently on any of 
the boards.
    (2) If the complaint alleges at least one cause of action involving 
a violation of a statute or a rule described in Rule 9120(q), the Chief 
Hearing Officer may select as a Panelist a current member of the Market 
Regulation Committee or a former member of the Market Regulation 
Committee who previously served on a disciplinary hearing panel.
    (c) Extended Hearing Panel
    Upon consideration of the complexity of the issues involved, the 
probable length of the hearing, or other factors that the Chief Hearing 
Officer deems material, the Chief Hearing Officer may determine that a 
matter shall be designated an Extended Hearing, and that such matter 
shall be considered by an Extended Hearing Panel. The Extended Hearing 
Panel shall be composed of a Hearing Officer and two Panelists, except 
as provided in Rule 9234 (a), (c), (d), or (e). The Hearing Officer 
will serve as the chair of the Extended Hearing Panel. The Panelists 
shall be associated with a member of the Association, or retired 
therefrom. A person retired from employment with a member of the 
Association shall have retired from such employment not earlier than 
four years before the date the complaint was filed. The Chief Hearing 
Officer shall have discretion to compensate any or all Panelists of an 
Extended Hearing Panel at the rate then in effect for arbitrators 
appointed under the Rule 10000 Series.
    (1) Except as provided in (2), a person shall be eligible to be 
selected as a Panelist only if the person is:
    (A) a current member of a District Committee;
    (B) a person who previously served on a disciplinary hearing panel;
    (C) a former member of the National Business Conduct Committee;
    (D) a person who previously served on a disciplinary subcommittee 
of the National Business Conduct Committee, including a Subcommittee, 
an Extended Proceeding Committee, or their predecessor subcommittees; 
or,
    (E) a person who previously was a Director, a member of the Nasdaq 
Board of Directors, or a Governor, but does not sit currently on any of 
the boards.
    (2) If the complaint alleges at least one cause of action involving 
a violation of a statute or a rule described in Rule 9120(q), the Chief 
Hearing Officer may select as a Panelist a current member of the Market 
Regulation Committee, or a former member of the Market Regulation 
Committee, who, at the time of his or her membership on the Market 
Regulation Committee, was associated with a member of the Association. 
In order to be eligible to sit as a Panelist on an Extended Hearing 
Panel, a former

[[Page 25333]]

member of the Market Regulation Committee shall have served previously 
on a disciplinary hearing panel.

9232. Criteria for Selection of Panelists and Replacement Panelists

    (a) Chief Hearing Officer Selection Alternatives
    Following a determination of whether a Hearing Panel or an Extended 
Hearing Panel should be appointed, the Chief Hearing Officer shall 
determine:
    (1) which District Committee shall be the Primary District 
Committee from which Panelists may be selected; and
    (2) whether one of the Panelists may be selected from the Market 
Regulation Committee.
    (b) Criteria for Selection of Panelist from Market Regulation 
Committee
    The Chief Hearing Officer may select a Panelist from the Market 
Regulation Committee, as provided in Rule 9231, to serve in a 
disciplinary proceeding if the complaint alleges at least one cause of 
action involving a violation of a statute or a rule described in Rule 
9120(q).
    (c) Criteria for Designation of Primary District Committee
    The Chief Hearing Officer shall designate a District Committee as 
the Primary District Committee based upon relevant facts and 
circumstances of the case, including but not limited to:
    (1) the location of a Respondent's principal office if the 
Respondent is or was a member firm;
    (2) the location of a Respondent's office at the time of the 
alleged misconduct if the Respondent is or was an associated person;
    (3) the location of the office of a member or an associated person, 
or a former member or associated person, where the alleged misconduct 
occurred;
    (4) the location of witnesses at the time of the filing of the 
complaint, especially the location of witnesses who are or were 
customers of a Respondent;
    (5) the location, at the time of the alleged misconduct, of the 
main, branch, or other office in which supervisory personnel, who are 
or were responsible for the supervision of a Respondent, were employed; 
and
    (6) the location, at the time of the alleged misconduct, of the 
main, branch, or other office in which supervisory personnel, who are 
or were responsible for the supervision of the office, division, 
function, or segment of the member where the alleged misconduct 
occurred, were employed.
    (d) Criteria for Appointment of a Panelist
    After the Chief Hearing Officer designates the Primary District 
Committee, the Chief Hearing Officer shall select Panelists from the 
current members of the Primary District Committee, the other categories 
of persons eligible to serve as Panelists as set forth in Rule 
9231(b)(1) (A) through (E) or, if applicable, in Rule 9231(c)(1) (A) 
through (E), who are located in the same geographic area as the Primary 
District Committee, and, if applicable, from the current or former 
members of the Market Regulation Committee, based upon the following 
criteria:
    (1) expertise;
    (2) the absence of any conflict of interest or bias, and any 
appearance thereof;
    (3) availability; and,
    (4) the frequency with which a person has served as a Panelist on 
Hearing Panels or Extended Hearing Panels during the past two years.
    (e) Appointment of Panelists from Other than Primary District 
Committee.
    Designation of the Primary District Committee does not preclude the 
Chief Hearing Officer from selecting one or more Panelists from other 
categories of eligible Panelists if the Chief Hearing Officer 
determines that one or more persons from other categories of eligible 
Panelists more clearly meet the criteria of paragraph (d) (1) through 
(4) and the public interest or the administration of NASD Regulation's 
regulatory and enforcement program would be enhanced by the selection 
of one or more Panelists from other categories of eligible Panelists 
other than Panelists from the Primary District Committee.

9233. Hearing Panel or Extended Hearing Panel: Recusal and 
Disqualification of Hearing Officers

    (a) Recusal, Withdrawal of Hearing Officer
    If at any time a Hearing Officer determines that he or she has a 
conflict of interest or bias or circumstances otherwise exist where his 
or her fairness might reasonably be questioned, the Hearing Officer 
shall notify the Chief Hearing Officer and the Chief Hearing Officer 
shall issue and serve on the Parties a notice stating that the Hearing 
Officer has withdrawn from the matter. In the event that a Hearing 
Officer withdraws, is incapacitated, or otherwise is unable to continue 
service after being appointed, the Chief Hearing Officer shall appoint 
a replacement Hearing Officer.
    (b) Motion for Disqualification
    A Party may move for the disqualification of a Hearing Officer. A 
motion shall be based upon a reasonable, good faith belief that a 
conflict of interest or bias exists or circumstances otherwise exist 
where the Hearing Officer's fairness might reasonably be questioned, 
and shall be accompanied by an affidavit setting forth in detail the 
facts alleged to constitute grounds for disqualification, and the dates 
on which the Party learned of those facts. Such motions shall be filed 
not later than 15 days after the later of:
    (1) when the Party learned of the facts believed to constitute the 
disqualification; or
    (2) when the Party was notified of the assignment of the Hearing 
Officer.
    (c) Disposition of Disqualification Motion
    A motion for disqualification of a Hearing Officer shall be decided 
by the Chief Hearing Officer who shall promptly investigate whether 
disqualification is required and issue a written ruling on the motion. 
In the event of a disqualification of the Hearing Officer, the Chief 
Hearing Officer shall appoint a replacement Hearing Officer.

9234. Hearing Panel or Extended Hearing Panel: Recusal and 
Disqualification of Panelists

    (a) Recusal, Withdrawal of Panelist
    If at any time a Panelist of a Hearing Panel or an Extended Hearing 
Panel determines that he or she has a conflict of interest or bias or 
circumstances otherwise exist where his or her fairness might 
reasonably be questioned, the Panelist shall notify the Hearing Officer 
and the Hearing Officer shall issue and serve on the Parties a notice 
stating that the Panelist has withdrawn from the matter. In the event 
that a Panelist withdraws, is incapacitated, or otherwise is unable to 
continue service after being appointed, the Chief Hearing Officer may, 
in the exercise of discretion, determine whether to appoint a 
replacement Panelist. In the event that both Panelists withdraw, are 
incapacitated, or otherwise are unable to continue service after being 
appointed, the Chief Hearing Officer shall appoint two replacement 
Panelists.
    (b) Disqualification: Motion of Party; Order of Chief Hearing 
Officer
    (1) A Party may file a motion to disqualify a Panelist of a Hearing 
Panel or an Extended Hearing Panel. A motion shall be based upon a 
reasonable, good faith belief that a conflict of interest or bias 
exists or circumstances otherwise exist where the Panelist's fairness 
might reasonably be questioned, and shall be accompanied by an 
affidavit setting forth in detail the facts alleged to constitute 
grounds for disqualification, and (2) the dates on which the Party 
learned of those facts.
    (2) Such motions shall be filed not later than 15 days after the 
later of:

[[Page 25334]]

    (A) when the Party learned of the facts believed to constitute the 
disqualification; or
    (B) when the Party was notified of the appointment of the Panelist.
    (3) The Chief Hearing Officer may order the disqualification of a 
Panelist of a Hearing Panel or an Extended Hearing Panel if the Chief 
Hearing Officer determines that a conflict of interest or bias or 
circumstances otherwise exist where the Panelist's fairness might 
reasonably be questioned, and shall state the facts constituting the 
grounds for disqualification.
    (c) Disposition of Disqualification Motion: Challenge to Single 
Member of Hearing Panel
    If a Party files a motion to disqualify a Panelist of a Hearing 
Panel or an Extended Hearing Panel, the Hearing Officer shall promptly 
investigate whether disqualification is required and shall issue a 
written ruling on the motion. In the event a Panelist is disqualified, 
the Chief Hearing Officer may, in the exercise of discretion, appoint a 
replacement Panelist.
    (d) Disposition of Disqualification Motion: Challenge to Both 
Panelists of Hearing Panel or Extended Hearing Panel
    If a Party files a motion to disqualify both Panelists of a Hearing 
Panel or an Extended Hearing Panel, the Hearing Officer shall promptly 
investigate whether disqualification is required and shall issue a 
written ruling on the motion. In the event one Panelist is 
disqualified, the Chief Hearing Officer may, in the exercise of 
discretion, appoint a replacement Panelist. In the event both Panelists 
are disqualified, the Chief Hearing Officer shall promptly appoint two 
persons as replacement Panelists.
    (e) Disposition of Disqualification Motion: Challenge to Both 
Panelists of Hearing Panel or Extended Hearing Panel and Hearing 
Officer
    If a Party files a motion to disqualify both Panelists of a Hearing 
Panel or an Extended Hearing Panel, and the Hearing Officer, the Chief 
Hearing Officer shall promptly investigate whether disqualification is 
required and shall issue a written ruling on the motion. In the event a 
Panelist is disqualified, the Chief Hearing Officer may, in the 
exercise of discretion, appoint a replacement Panelist. In the event 
both Panelists are disqualified, the Chief Hearing Officer shall 
promptly appoint two persons as replacement Panelists. In the event a 
Hearing Officer and a Panelist are disqualified, the Chief Hearing 
Officer shall promptly appoint a Hearing Officer. In the event both 
Panelists and the Hearing Officer are disqualified, the Chief Hearing 
Officer shall promptly appoint a Hearing Officer and two persons as 
replacement Panelists.
    (f) Criteria for Replacement Panelist
    If the Chief Hearing Officer appoints a replacement Panelist by 
operation of this Rule, the Chief Hearing Officer shall do so using the 
criteria set forth in Rule 9232.

9235. Hearing Officer Authority

    (a) Hearing Officer Authority
    The Hearing Officer shall be selected by the Chief Hearing Officer 
and shall have authority to do all things necessary and appropriate to 
discharge his or her duties. In addition to the powers exercised by all 
members of the Hearing Panel or, if applicable, the Extended Hearing 
Panel, the powers of the Hearing Officer include, but are not limited 
to:
    (1) holding pre-hearing and other conferences and requiring the 
attendance at any such conference of at least one representative of 
each Party who has authority to negotiate the resolution of issues in 
controversy;
    (2) regulating the course of the hearing;
    (3) ordering the Parties to present oral arguments at any stage of 
the disciplinary proceeding;
    (4) resolving any and all procedural and evidentiary matters, 
discovery requests, and other non-dispositive motions, subject to any 
limitations set forth elsewhere in this Code;
    (5) reopening any hearing, upon notice to all Parties, prior to the 
issuance of the decision of the Hearing Panel or, if applicable, the 
Extended Hearing Panel;
    (6) creating and maintaining the official record of the 
disciplinary proceeding; and
    (7) drafting a decision that represents the views of the majority 
of the Hearing Panel or, if applicable, the Extended Hearing Panel.

9240. Pre-hearing Conferences and Submissions

9241. Pre-hearing Conferences

    (a) Purposes of Conferences
    The purposes of pre-hearing conferences include, but are not 
limited to:
    (1) expediting the disposition of the proceeding;
    (2) establishing procedures to manage the proceeding efficiently; 
and
    (3) improving the quality of the hearing through more thorough 
preparation.
    (b) Procedure
    On his or her own motion or at the request of a Party, the Hearing 
Officer may, in his or her discretion, order counsel or any Party to 
meet for a pre-hearing conference. Such conferences also may be held 
with one or more persons participating by telephone or other remote 
means.
    (c) Subjects to be Discussed
    At a pre-hearing conference, the Hearing Officer may consider and 
take action with respect to any or all of the following:
    (1) simplification and clarification of the issues;
    (2) exchange of witness and exhibit lists and copies of exhibits;
    (3) stipulations, admissions of fact, and stipulations concerning 
the contents, authenticity, or admissibility into evidence of 
documents;
    (4) matters of which official notice may be taken;
    (5) the schedule for exchanging pre-hearing motions or briefs, if 
any;
    (6) the method of service and filing of papers by the Parties;
    (7) determination of hearing dates;
    (8) amendments to the complaint or answers thereto;
    (9) production of documents as set forth in Rule 9251; and
    (10) such other matters as may aid in the orderly and expeditious 
disposition of the proceeding.
    (d) Scheduling of Pre-hearing Conferences
    An initial pre-hearing conference, unless determined by the Hearing 
Officer to be unnecessary or premature, shall be held within 21 days 
after service of an answer, or after the expiration of the second 
period provided for filing an answer as set forth in Rule 9215(f). When 
a complaint names multiple Respondents, the 21-day period shall 
commence from the later of (i) the date on which the last timely answer 
was filed, or (ii) if one or more Respondents have failed to answer, 
from the expiration of the second period provided for filing an answer 
under Rule 9215(f).
    (e) Pre-hearing Orders
    At or following the conclusion of any conference held pursuant to 
this Rule, the Hearing Officer shall enter a ruling or order that 
recites any agreements reached and any procedural determinations made 
by the Hearing Officer.
    (f) Failure to Appear: Default
    A Party who fails to appear, in person or through counsel or a 
representative, at a pre-hearing conference of which he or she has been 
duly notified, may be deemed in default pursuant to Rule 9269. A Party 
may, for good cause shown, file a motion to set aside the default.

[[Page 25335]]

9242. Pre-hearing Submissions

    (a) Requirement to Furnish Information
    Prior to a hearing before a Hearing Panel or, if applicable, an 
Extended Hearing Panel, the Hearing Officer, in the exercise of his or 
her discretion, may order Parties to furnish such information as deemed 
appropriate, including any or all of the following:
    (1) an outline or narrative summary of their case or defense;
    (2) the legal theories upon which they shall rely;
    (3) a list and copies of documents that they intend to introduce at 
the hearing;
    (4) a list of witnesses who shall testify on their behalf, 
including the witnesses' names, occupations, addresses, and a brief 
summary of their expected testimony; and,
    (5) if a witness shall be called to testify as an expert, a 
statement of the expert's qualifications, a listing of other 
proceedings in which the expert has given expert testimony, a list of 
the expert's publications, and copies of those publications that are 
not readily available to the other Parties and the Hearing Panel or, if 
applicable, the Extended Hearing Panel.

9250. Discovery

9251. Inspection and Copying of Documents in Possession of Staff

    (a) Documents to be Available for Inspection and Copying
    (1) Unless otherwise provided by this Rule, or by order of the 
Hearing Officer, the Department of Enforcement shall make available for 
inspection and copying by any Respondent Documents prepared or obtained 
by Interested Association Staff in connection with the investigation 
that led to the institution of proceedings. Such Documents include but 
are not limited to:
    (A) requests for information issued pursuant to Rule 8210;
    (B) every other written request directed to persons not employed by 
the Association to provide documents or to be interviewed;
    (C) the Documents provided in response to any such requests 
described in (A) and (B) above;
    (D) all transcripts and transcript exhibits; and
    (E) all other Documents obtained from persons not employed by the 
Association.
    (2) The Department of Enforcement shall promptly inform the Hearing 
Officer and each other Party if, after the issuance of a complaint, 
requests for information under Rule 8210 are issued under the same 
investigative file number under which the investigation leading to the 
institution of disciplinary proceedings was conducted. If Interested 
Association Staff receives Documents pursuant to a request for 
information under Rule 8210 after Documents have been made available to 
a Respondent for inspection and copying as set forth in paragraph (a), 
and if such Documents are material and relevant to the disciplinary 
proceeding in which such Respondent is a Party, the additional 
Documents shall be made available to the Respondent not later than 14 
days after the Interested Association Staff receives such Documents. If 
a hearing on the merits is scheduled to begin, Interested Association 
Staff shall make the additional Documents available to the Respondent 
not less than ten days before the hearing. If Interested Association 
Staff receives such Documents ten or fewer days before a hearing on the 
merits is scheduled to begin or after such hearing begins, Interested 
Association Staff shall make the additional Documents available 
immediately to the Respondent.
    (3) Nothing in subparagraph (a)(1) shall limit the discretion of 
the Department of Enforcement to make available any other Document or 
the authority of the Hearing Officer to order the production of any 
other Document.
    (b) Documents That May Be Withheld
    (1) The Department of Enforcement may withhold a Document if:
    (A) the Document is privileged or constitutes attorney work 
product;
    (B) the Document is an examination or inspection report, an 
internal memorandum, or other note or writing prepared by an 
Association employee that shall not be offered in evidence;
    (C) the Document would disclose the identity of a confidential 
source or Association examination or investigatory techniques; or
    (D) the Hearing Officer grants leave to withhold a Document or 
category of Documents as not relevant to the subject matter of the 
proceeding, or for other good cause shown.
    (2) Nothing in subparagraph (b)(1) authorizes the Department of 
Enforcement to withhold a Document, or a part thereof, that contains 
material exculpatory evidence.
    (c) Withheld Document List
    The Hearing Officer may require the Department of Enforcement to 
submit to the Hearing Officer a list of Documents withheld pursuant to 
subparagraphs (b)(1)(A) through (b)(1)(D) or to submit to the Hearing 
Officer any Document withheld. Upon review, the Hearing Officer may 
order the Department of Enforcement to make the list or any Document 
withheld available to the other Parties for inspection and copying.
    (d) Timing of Inspection and Copying
    The Hearing Officer shall determine the schedule of production of 
documents pursuant to this Rule. Unless otherwise ordered by the 
Hearing Officer, the Department of Enforcement shall commence making 
Documents available to a Respondent for inspection and copying pursuant 
to this Rule not later than 21 days after service of the Respondent's 
answer or, if there are multiple Respondents, not later than 21 days 
after the last timely answer is filed. If a Respondent in a multi-
Respondent case fails to answer, the Department of Enforcement shall 
make Documents available to all other Respondents not later than the 
later of:
    (1) 21 days after the filing date of the last timely answer, or
    (2) the expiration of the second period provided for filing an 
answer as set forth in Rule 9215(f).
    (e) Place and Time of Inspection and Copying
    Documents subject to inspection and copying pursuant to this Rule 
shall be made available to the Respondent for inspection and copying at 
the Association office where they are ordinarily maintained, or at such 
other Association office as the Hearing Officer, in his or her 
discretion, shall designate, or as the Parties otherwise agree. A 
Respondent shall be given access to the Documents at the Association's 
offices during normal business hours. A Respondent shall not be given 
custody of the Documents or be permitted to remove the Documents from 
the Association's offices.
    (f) Copying Costs
    A Respondent may obtain a photocopy of all Documents made available 
for inspection. A Respondent shall be responsible for the cost of 
photocopying. Unless otherwise ordered, charges for copies made at the 
request of a Respondent shall be at a rate to be established by the 
NASD Regulation Board.
    (g) Failure to Make Documents Available--Harmless Error
    In the event that a Document required to be made available to a 
Respondent pursuant to this Rule is not made available by the 
Department of Enforcement, no rehearing or amended decision of a 
proceeding already heard or decided shall be required unless the 
Respondent establishes that the failure to make the Document available 
was not harmless error. The Hearing Officer shall determine whether the 
failure to make the document available was not harmless error, applying 
applicable Association, Commission, and federal judicial precedent.

[[Page 25336]]

9252. Requests for Information

    (a) Content and Timing of Requests
    A Respondent who requests that the Association invoke Rule 8210 to 
compel the production of Documents or testimony at the hearing shall do 
so in writing and serve copies on all Parties. Such request shall: be 
submitted to the Hearing Officer no later than 21 days before the 
scheduled hearing date; describe with specificity the Documents, the 
category or type of Documents, or the testimony sought; state why the 
Documents, the category or type of Documents, or the testimony are 
material; describe the requesting Party's previous efforts to obtain 
the Documents, the category or type of Documents, or the testimony 
through other means; and state whether the custodian of each Document, 
or the custodian of the category or type of Documents, or each proposed 
witness is subject to the Association's jurisdiction.
    (b) Standards for Issuance
    A request that the Association compel the production of Documents 
or testimony shall be granted only upon a showing that: the information 
sought is relevant, material, and non-cumulative; the requesting Party 
has previously attempted in good faith to obtain the desired Documents 
and testimony through other means but has been unsuccessful in such 
efforts; and each of the persons from whom the Documents and testimony 
are sought is subject to the Association's jurisdiction. In addition, 
the Hearing Officer shall consider whether the request is unreasonable, 
oppressive, excessive in scope, or unduly burdensome, and whether the 
request should be denied, limited, or modified.
    (c) Limitations on Requests
    If, after consideration of all the circumstances, the Hearing 
Officer determines that a request submitted pursuant to this Rule is 
unreasonable, oppressive, excessive in scope, or unduly burdensome, he 
or she shall deny the request, or grant it only upon such conditions as 
fairness requires. In making the foregoing determination, the Hearing 
Officer may inquire of the other Parties whether they shall stipulate 
to the facts sought to be proved by the Documents or testimony sought. 
If the Hearing Officer grants the request, the Hearing Officer shall 
order that requested Documents be produced to all Parties not less than 
ten days before the hearing, and order that witnesses whose testimony 
was requested appear and testify at the hearing. If the Hearing Officer 
grants the request ten or fewer days before a hearing on the merits is 
scheduled to begin or after such hearing begins, the Documents or 
testimony shall be produced immediately to all Parties.

9253. Production of Witness Statements

    (a) Availability
    A Respondent in a disciplinary proceeding may file a motion 
requesting that the Department of Enforcement produce for inspection 
and copying a statement of any person called or to be called as a 
witness by the Department of Enforcement that pertains, or is expected 
to pertain, to his or her direct testimony, including statements that 
would be required to be produced pursuant to the Jencks Act, 18 U.S.C. 
3500. The production shall be made at a time and place fixed by the 
Hearing Officer and shall be made available to all Parties. Such 
production shall be made under conditions intended to preserve the 
items to be inspected or copied.
    (b) Failure to Produce--Harmless Error
    In the event that a statement required to be made available for 
inspection and copying by a Respondent is not provided by the 
Department of Enforcement, there shall be no rehearing of a proceeding 
already heard, or issuance of an amended decision in a proceeding 
already decided, unless the Respondent establishes that the failure to 
provide the statement was not harmless error. The Hearing Officer shall 
determine whether the failure to provide any statement was not harmless 
error, applying applicable Association, Commission, and federal 
judicial precedent.

9260. Hearing and Decision

9261. Evidence and Procedure in Hearings

    (a) Submission of Documentary Evidence and List of Witnesses Before 
Hearing
    No later than ten days before the hearing, or at such earlier date 
as may be specified by the Hearing Officer, each Party shall submit to 
all other Parties and to the Hearing Officer copies of documentary 
evidence and the names of the witnesses each Party intends to present 
at the hearing.
    (b) Party's Right to Be Heard
    If a hearing is held, a Party shall be entitled to be heard in 
person, by counsel, or by the Party's representative.
    (c) Request to Submit Additional Evidence
    Notwithstanding paragraph (a), a Party, for good cause shown, may 
seek to submit any additional evidence at the hearing as the Hearing 
Officer, in his or her discretion, determines may be relevant and 
necessary for a complete record.

9262. Testimony

    A person who is subject to the jurisdiction of the Association 
shall testify under oath or affirmation. The oath or affirmation shall 
be administered by a court reporter or a notary public.

9263. Evidence: Admissibility

    (a) Criteria for Receiving and Excluding Evidence
    A Hearing Officer shall receive relevant evidence, and may exclude 
all evidence that is irrelevant, immaterial, unduly repetitious, or 
unduly prejudicial.
    (b) Objections
    Objections to the admission or exclusion of evidence shall be made 
on the record and shall succinctly state the grounds relied upon. 
Excluded material shall be deemed a supplemental document, which shall 
be attached to the record and retained under Rule 9267.

9264. Motion for Summary Disposition

    (a) Pre-hearing
    After a Respondent's answer has been filed and Documents have been 
made available to that Respondent for inspection and copying pursuant 
to Rule 9251, the Respondent or the Complainant, without leave of the 
Hearing Officer, may make a motion for summary disposition of any or 
all the causes of action in the complaint with respect to that 
Respondent. All pre-hearing motions for summary disposition and 
supporting papers shall be filed at least 21 days before the time set 
for the hearing, or at such earlier time as ordered by the Hearing 
Officer. Notwithstanding the provisions of Rule 9146(d), any opposition 
or response to a pre-hearing motion for summary disposition shall be 
filed at least seven days before the time set for the hearing.
    (b) After Commencement of Hearing on Merits
    After the Complainant has completed presentation of its case in 
chief as to a Respondent, that Respondent or the Complainant, without 
leave of the Hearing Officer, may make a motion for summary disposition 
as to any or all of the causes of action in the complaint with respect 
to that Respondent. If the Complainant has not completed its case in 
chief, the Complainant or Respondent may move for summary disposition 
only with leave of the Hearing Officer.
    (c) Form of Papers
    A motion for summary disposition pursuant to paragraph (a) shall be 
accompanied by the following: a statement of undisputed facts; a

[[Page 25337]]

supporting memorandum of points and authorities; and affidavits or 
declarations that set forth such facts as would be admissible at the 
hearing and show affirmatively that the affiant is competent to testify 
to the matters stated therein. A memorandum of points and authorities 
in support or opposition shall not exceed 35 pages.
    (d) Rulings on Motion
    Pursuant to Rule 9146, the Hearing Panel or, if applicable, the 
Extended Hearing Panel, shall promptly grant or deny the motion for 
summary disposition or shall defer decision on the motion. The Hearing 
Panel or, if applicable, the Extended Hearing Panel, may grant the 
motion for summary disposition if there is no genuine issue with regard 
to any material fact and the Party making the motion is entitled to 
summary disposition as a matter of law. With respect to motions 
pursuant to paragraph (a), the facts alleged in the pleadings against 
whom the motion is made shall be taken as true, except as modified by 
stipulations or admissions made by the non-moving Party, uncontested 
affidavits or declarations, or facts officially noticed pursuant to 
Rule 9145. If a Party opposing a motion for summary disposition made 
pursuant to paragraph (a) cannot present, for reasons stated in that 
Party's affidavit or declaration before hearing, facts essential to 
justify that Party's opposition, the Hearing Panel or, if applicable, 
the Extended Hearing Panel, may deny the motion for summary disposition 
or defer the decision on the motion.

9265. Record of Hearings

    (a) Recordation
    A hearing shall be recorded by a court reporter and a transcript 
shall be prepared. Unless otherwise ordered by a Hearing Officer, a 
pre-hearing conference shall be recorded by a court reporter and a 
transcript shall be prepared.
    (b) Availability of a Transcript
    A transcript of a pre-hearing conference and a transcript of a 
hearing shall be available to a Party for purchase from the court 
reporter at prescribed rates. A witness may purchase from the court 
reporter a transcript of his or her own testimony.
    (c) Transcript Correction
    Prior to the filing of post-hearing briefs or proposed findings and 
conclusions, or within such earlier time as ordered by the Hearing 
Officer, a Party or witness may seek to correct his or her transcript. 
A proposed correction of the transcript shall be submitted to the 
Hearing Officer by affidavit. Upon notice to all Parties to the 
disciplinary proceeding, the Hearing Officer may order the correction 
to the transcript as requested or sua sponte.

9266. Proposed Findings of Fact, Conclusions of Law, and Post-Hearing 
Briefs

    (a) Discretion of Hearing Officer to Require Proposed Findings of 
Fact, Conclusions of Law, and Post-Hearing Briefs
    At the discretion of the Hearing Officer, the Parties may be 
ordered to file proposed findings of facts and conclusions of law, or 
post-hearing briefs, or both. The Hearing Officer may order that such 
proposed findings and conclusions be filed together with, or as part 
of, post-hearing briefs.
    (b) Reference to Record Required
    Proposed findings of fact or other statements of fact in briefs 
shall be supported by specific references to the record.
    (c) Period for Filing
    In any case in which the Hearing Officer ordered the filing of 
proposed findings or conclusions of law, or post-hearing briefs, the 
Hearing Officer shall, after consultation with the Parties, prescribe 
the period within which proposed findings and conclusions of law and 
post-hearing briefs are to be filed. Such period shall be reasonable 
under all the circumstances but the total period allowed for the filing 
of post-hearing submissions shall not exceed 60 days after the 
conclusion of the hearing unless the Hearing Officer, for good cause 
shown, permits a different period and sets forth in an order the 
reasons why a longer period is necessary.
    (d) Form, Length of Papers
    Unless the Hearing Officer orders otherwise, each post-hearing 
submission shall not exceed 25 pages, exclusive of cover sheets, tables 
of contents, and tables of authorities.

9267. Record; Supplemental Documents Attached to Record; Retention of 
Record and Supplement Documents Attached To Record; Copies

    (a) Contents of the Record, Retention Of
    The record shall consist of:
    (1) the complaint, answers, each notice of hearing, pre-hearing 
order, and any amendments thereto;
    (2) each application, motion, submission, and other paper, and any 
amendments, motions, objections, and exceptions to or regarding them;
    (3) each transcript of a pre-hearing conference and of a hearing, 
and each stipulation, transcript of testimony, Document, and other item 
admitted into evidence;
    (4) each written communication accepted at the discretion of the 
Hearing Officer;
    (5) with respect to a motion to disqualify a Hearing Officer under 
Rule 9233 or a Panelist under Rule 9234, each affidavit or transcript 
of testimony taken and the ruling made in connection with the request;
    (6) all proposed findings and conclusions;
    (7) each written ruling, order, and decision issued by the Chief 
Hearing Officer, Hearing Officer, Hearing Panel or, if applicable, 
Extended Hearing Panel; and
    (8) any other document or item accepted into the record by the 
Hearing Officer, Hearing Panel or, if applicable, Extended Hearing 
Panel.
    (b) Supplemental Documents Attached To Record; Retention Of
    A supplemental Document attached to the record shall be a Document 
not admitted by the Hearing Officer, Hearing Panel or, if applicable, 
the Extended Hearing Panel, and any matter stricken from any filing or 
stricken during an oral presentation, including any matter stricken 
from any filing or stricken during any oral presentation because the 
Adjudicator determined it was scandalous or impertinent as provided in 
Rule 9136(e). Such Documents shall not constitute part of the record, 
but shall be retained until the date upon which the Association's 
decision becomes final disciplinary action or, if applicable, upon the 
conclusion of any review by the Commission or the federal courts.
    (c) Substitution of Copies
    Parties may submit to the Hearing Officer for substitution a true 
copy of a Document in the record.

9268. Decision of the Hearing Panel or Extended Hearing Panel

    (a) Majority Decision
    Within 60 days after the final date allowed for filing findings of 
fact, conclusions of law, and post-hearing briefs, or by a date 
established at the discretion of the Chief Hearing Officer, the Hearing 
Officer shall prepare a written decision that reflects the views of the 
Hearing Panel or, if applicable, the Extended Hearing Panel, as 
determined by majority vote.
    (b) Contents of Decision; Signature
    Each member of the Hearing Panel or, if applicable, the Extended 
Hearing Panel, shall sign the decision. Members of the Hearing Panel 
or, if applicable, the Extended Hearing Panel, may indicate next to 
their signatures whether they dissent from the decision. The decision 
shall include:
    (1) a statement describing the investigative or other origin of the 
disciplinary proceeding;

[[Page 25338]]

    (2) the specific statutory or rule provisions that were alleged to 
have been violated;
    (3) a statement setting forth the findings of fact with respect to 
any act or practice the Respondent was alleged to have committed or 
omitted;
    (4) the conclusions of the Hearing Panel, or Extended Hearing 
Panel, as to whether the Respondent violated any provision alleged in 
the complaint;
    (5) a statement of the Hearing Panel, or the Extended Hearing 
Panel, in support of the disposition of the principal issues raised in 
the proceeding; and
    (6) a statement describing any sanction imposed, the reasons 
therefor, and the date upon which such sanction shall become effective.
    (c) Dissenting Opinion
    Within 65 days after the final date allowed for filing findings of 
fact and conclusions of law, and post-hearings briefs, or by a date 
established at the discretion of the Chief Hearing Officer, the Hearing 
Officer or any Panelist may prepare a written dissenting opinion.
    (d) Service, Notice, And Dissemination Requirements
    The Office of Hearing Officers shall promptly serve the decision of 
the Hearing Panel, or the Extended Hearing Panel, and any dissenting 
opinion on the Parties; publish notice of the decision and any 
dissenting opinion in the Central Registration Depository; and provide 
a copy of the decision and any dissenting opinion to each member of the 
Association with which a Respondent is associated.
    (e) Appeal or Review
    If not timely appealed pursuant to Rule 9311 or timely called for 
review pursuant to Rule 9312, the majority decision shall constitute 
final disciplinary action of the Association for purposes of SEC Rule 
19d-1(c)(1).

9269. Failure to Appear at Hearings; Default

    (a) Failure to Appear May Result in Default Decision
    A Party who fails to appear at a hearing of which he or she has 
been duly notified may be deemed to be in default. As a consequence of 
the default, the allegations against a non-appearing Respondent may be 
deemed admitted and a default decision entered by the Hearing Officer. 
If the non-appearing Party is the Department of Enforcement, the 
Hearing Officer may order that the complaint be dismissed with 
prejudice. In addition, the Hearing Officer may order that the non-
appearing Party pay the costs incurred by other Parties in connection 
with their appearance at the hearing.
    (b) Request to Set Aside Default
    A Party may, for good cause shown, file a motion to set aside a 
default, dismissal, and the imposition of costs.

9270. Settlement Procedure

    (a) When Offer Allowed; No Stay of Proceeding
    A Respondent who is notified that a proceeding has been instituted 
against him or her, or a Respondent to a proceeding already instituted, 
may propose in writing an offer of settlement at any time. If a 
Respondent proposes an offer of settlement 30 or fewer days before the 
hearing on the merits is scheduled to begin, or after the hearing on 
the merits has begun, the making of an offer of settlement shall not 
stay the proceeding, unless otherwise decided by the Hearing Panel or, 
if applicable, the Extended Hearing Panel.
    (b) Settlement Offer Shall Conform to Rule
    A Respondent who makes an offer of settlement shall do so in 
conformity with the provisions of this Rule and shall not make such an 
offer of settlement frivolously or propose a sanction inconsistent with 
the seriousness of the violations to be found.
    (c) Content and Signature Requirements
    An offer of settlement shall be in writing and signed by the person 
making the offer, and, if the person is represented by counsel or a 
representative, signed also by the counsel or representative. The offer 
of settlement shall contain in reasonable detail:
    (1) a statement describing the investigative or other origin of the 
disciplinary action;
    (2) the specific statutory or rule provisions that the member or 
associated person is alleged to have violated;
    (3) a statement containing the acts or practices which the member 
or associated person is alleged to have engaged in or omitted;
    (4) a statement consenting to findings of fact and violations 
consistent with the statements contained in the offer of settlement 
required by subparagraphs (c)( 2) and (c)(3); and,
    (5) a proposed sanction to be imposed that is consistent with the 
Association's then current sanction guidelines or, if inconsistent with 
the sanction guidelines, a detailed statement supporting the proposed 
sanction.
    (d) Waiver
    If a Respondent submits an offer of settlement, by the submission 
such Respondent waives:
    (1) any right of such Respondent to a hearing before a Hearing 
Panel or, if applicable, an Extended Hearing Panel, and any right of 
appeal to the National Business Conduct Committee, the Commission, and 
the courts, or any right otherwise to challenge or contest the validity 
of the order issued, if the offer of settlement and order of acceptance 
are accepted;
    (2) any right of such Respondent to claim bias or prejudgment of 
the Chief Hearing Officer, Hearing Officer, a Hearing Panel or, if 
applicable, an Extended Hearing Panel, a Panelist on a Hearing Panel, 
or, if applicable, an Extended Hearing Panel, the General Counsel of 
NASD Regulation, or his or her delegatee, the National Business Conduct 
Committee, or any member of the National Business Conduct Committee, in 
connection with such person's or body's participation in discussions 
regarding the terms and conditions of the offer of settlement and the 
order of acceptance, or other consideration of the offer of settlement 
and order of acceptance, including acceptance, or rejection of such 
offer of settlement and order of acceptance; and
    (3) any right of such Respondent to claim that a person or body 
violated the ex parte prohibitions of Rule 9143 or the separation of 
functions prohibitions of Rule 9144, in connection with such person's 
or body's participation in discussion regarding the terms and 
conditions of the offer of settlement and the order of acceptance, or 
other consideration of the offer of settlement and order of settlement, 
including acceptance or rejection of such offer of settlement and order 
of acceptance.
    If an offer of settlement and an order of acceptance are rejected, 
the Respondent shall be bound by the waivers made in this paragraph (d) 
for conduct by persons or bodies occurring during the period beginning 
from date the offer of settlement was submitted and ending upon the 
rejection of the offer of settlement and order of acceptance.
    (e) Uncontested Offers of Settlement
    If a Respondent makes an offer of settlement and the Department of 
Enforcement does not oppose it, the offer of settlement is uncontested. 
If an offer of settlement is determined to be uncontested by the 
Department of Enforcement before a hearing on the merits has begun, the 
Department of Enforcement shall transmit the uncontested offer of 
settlement and a proposed order of acceptance to the National Business 
Conduct Committee with its recommendation. If an offer of settlement is 
determined to be uncontested by the Department of Enforcement after a 
hearing on the merits has begun, the Department of

[[Page 25339]]

Enforcement shall transmit the offer of settlement and a proposed order 
of acceptance to the Hearing Panel or, if applicable, the Extended 
Hearing Panel for acceptance or rejection. If accepted by the Hearing 
Panel or, if applicable, Extended Hearing Panel, the offer of 
settlement and the order of acceptance shall be forwarded to the 
National Business Conduct Committee to accept or reject.
    (1) A proposed order of acceptance shall make findings of fact, 
including a statement of the rule, regulation, or statutory provision 
violated, and impose sanctions consistent with the terms of the offer 
of settlement.
    (2) Before an offer of settlement and an order of acceptance shall 
become effective, they shall be submitted to and accepted by the 
National Business Conduct Committee. The Chair and the Vice Chair of 
the National Business Conduct Committee (or either one, acting alone, 
in the event the other is recused or disqualified) or the General 
Counsel of NASD Regulation, or his or her delegatee, may accept such 
offer of settlement and order of acceptance or refer them to the 
National Business Conduct Committee for acceptance or rejection by the 
National Business Conduct Committee. The Chair and the Vice Chair of 
the National Business Conduct Committee (or either one, acting alone, 
in the event the other is recused or disqualified) may reject such 
offer of settlement and order of acceptance or refer them to the 
National Business Conduct Committee for acceptance or rejection by the 
National Business Conduct Committee.
    (3) If the offer of settlement and order of acceptance are accepted 
by the National Business Conduct Committee, the Chair and the Vice 
Chair of the National Business Conduct Committee (or either one, acting 
alone, in the event the other is recused or disqualified), or the 
General Counsel of NASD Regulation, or his or her delegatee, they shall 
become final and the National Business Conduct Committee, the Chair and 
the Vice Chair of the National Business Conduct Committee (or either 
one, acting alone, in the event the other is recused or disqualified), 
or the General Counsel of NASD Regulation, or his or her delegatee, 
shall communicate the acceptance to the Hearing Officer who shall 
thereafter issue the order.
    (f) Contested Offers of Settlement
    If a Respondent makes an offer of settlement and the Department of 
Enforcement opposes it, the offer of settlement is contested. When the 
Department of Enforcement opposes an offer of settlement, the 
Respondent's written offer and the Department of Enforcement's written 
opposition shall be submitted to a Hearing Panel or, if applicable, an 
Extended Hearing Panel. The Hearing Panel or, if applicable, the 
Extended Hearing Panel, may order the Department of Enforcement and the 
Respondent to attend a settlement conference.
    (1) If a contested offer of settlement is approved by the Hearing 
Panel or, if applicable, Extended Hearing Panel, the Hearing Officer 
shall draft an order of acceptance of the offer of settlement. The 
order of acceptance shall make findings of fact, including a statement 
of the rule, regulation, or statutory provision violated, and impose 
sanctions consistent with the terms of the offer of settlement. The 
offer of settlement, any written opposition thereto, and the order of 
acceptance shall be forwarded to the National Business Conduct 
Committee to accept or reject.
    (2) Before an offer of settlement and order of acceptance shall 
become effective, they shall be submitted to, and accepted by, the 
National Business Conduct Committee. The Chair and the Vice Chair of 
the National Business Conduct Committee (or either one, acting alone, 
in the event the other is recused or disqualified) may accept or reject 
such offer of settlement and order of acceptance or refer them to the 
National Business Conduct Committee for acceptance or rejection by the 
National Business Conduct Committee.
    (3) If the offer of settlement and order of acceptance are accepted 
by the National Business Conduct Committee or the Chair and the Vice 
Chair of the National Business Conduct Committee (or either one, acting 
alone, in the event the other is recused or disqualified), the National 
Business Conduct Committee or the Chair or the Vice Chair of the 
National Business Conduct Committee (or either one, acting alone, in 
the event the other is recused or disqualified) shall communicate the 
acceptance to the Hearing Officer who shall thereafter issue the order.
    (g) Final Disciplinary Action of Association
    The proceeding shall conclude as of the date the order of 
acceptance is issued. The order of acceptance shall constitute final 
disciplinary action of the Association. The sanction shall take effect 
as set forth in the order.
    (h) Rejection of Offer of Settlement
    If an uncontested offer of settlement or an order of acceptance is 
rejected by the Hearing Panel or, if applicable, the Extended Hearing 
Panel, the Chair and Vice Chair of the National Business Conduct 
Committee (or either one, acting alone, in the event the other is 
recused or disqualified), or the National Business Conduct Committee, 
the Respondent shall be notified in writing and the offer of settlement 
and proposed order of acceptance shall be deemed withdrawn. If a 
contested offer of settlement or an order of acceptance is rejected by 
the Hearing Panel or, if applicable, the Extended Hearing Panel, the 
Chair and Vice Chair of the National Business Conduct Committee (or 
either one, acting alone, in the event the other is recused or 
disqualified), or the National Business Conduct Committee, the 
Respondent shall be notified in writing and the offer of settlement and 
proposed order of acceptance shall be deemed withdrawn. The rejected 
offer and proposed order of acceptance shall not constitute a part of 
the record in any proceeding against the Respondent making the offer.
    (i) Disciplinary Proceeding With Multiple Respondents
    When a disciplinary proceeding names multiple Respondents, 
settlement offers may be accepted or rejected as to any one or all of 
the Respondents submitting offers. The proceedings shall thereafter be 
terminated as to those Respondents whose offers of settlement are 
accepted, but such Respondents may be required to participate in any 
hearing conducted as to those Respondents that did not submit offers of 
settlement or whose offers of settlement were rejected.
    (j) No Prejudice from Rejected Offer of Settlement
    If an offer of settlement is rejected by a Hearing Panel or, if 
applicable, an Extended Hearing Panel, the Chair and the Vice Chair of 
the National Business Conduct Committee (or either one, acting alone, 
in the event the other is recused or disqualified), or the National 
Business Conduct Committee, the Respondent shall not be prejudiced by 
the offer, which may not be introduced into evidence in connection with 
the determination of the issues involved in the pending complaint or in 
any other proceeding.

9280. Contemptuous Conduct

    (a) Persons Subject to Sanctions
    If a Party, attorney for a Party, or other person authorized to 
represent others by Rule 9141, engages in conduct in violation of an 
order of a Hearing Officer, a Hearing Panel or, if applicable, an 
Extended Hearing Panel, or other contemptuous conduct during a 
proceeding, a Hearing Officer, Hearing Panel or, if applicable, an 
Extended Hearing Panel, may:
    (1) subject the Party, attorney for a Party, or other person 
authorized to represent others by Rule 9141, to the

[[Page 25340]]

sanctions set forth in paragraph (b); and,
    (2) exclude an attorney for a Party, or other person authorized to 
represent others by Rule 9141, under Rule 9150.
    (b) Sanctions Other Than Exclusion
    A Hearing Officer, Hearing Panel or, if applicable, an Extended 
Hearing Panel, may make such orders as are just in regard to a Party, 
an attorney for a Party, or other person authorized to represent others 
by Rule 9141.
    (1) Such orders may include:
    (A) an order providing that the matters on which the order is made 
or any other designated facts shall be taken to be established for the 
purposes of the disciplinary proceeding in accordance with the claim of 
the Party obtaining the order;
    (B) an order providing that the disobedient Party may not support 
or oppose designated claims or defenses, or may not introduce 
designated matters in evidence;
    (C) an order providing that pleadings or a specified part of the 
pleading shall be stricken, or an order providing that the proceeding 
shall be stayed until the Party subject to the order obeys it;
    (D) in lieu of any of the foregoing orders or in addition thereto, 
an order providing that contemptuous conduct includes the failure to 
obey any order; and
    (E) an order as provided in subparagraphs (A), (B), and (C) where a 
Party has failed to comply with an order to produce a person for 
examination, unless the Party failing to comply shows that such Party 
is unable to produce such person for examination.
    (2) A Party that without substantial justification fails to 
disclose information required by the Rule 9250 Series or otherwise 
required by order of the Hearing Officer, Hearing Panel or, if 
applicable, the Extended Hearing Panel, shall not, unless such failure 
is harmless, be permitted to use as evidence at a hearing, in a motion 
or in any other filing of papers, or in oral argument, any witness or 
information not so disclosed. In addition to, or in lieu of this 
sanction, the Hearing Officer, Hearing Panel or, if applicable, the 
Extended Hearing Panel, on motion and after affording an opportunity to 
be heard, may impose other appropriate sanctions. These sanctions may 
include any of the sanctions provided for in subparagraphs (A), (B), 
and (C) of subparagraph (b)(1).
    (c) National Business Conduct Committee Review of Exclusions
    If an attorney for a Party, or other person authorized to represent 
others by Rule 9141, is excluded from a disciplinary hearing or 
conference, or any portion thereof, such attorney or other person may 
seek review of the exclusion by filing a motion to vacate with the 
National Business Conduct Committee. Such motion to vacate shall be 
filed and served on all Parties within five days after service of the 
exclusion order. Any response shall be filed with the National Business 
Conduct Committee and served on all Parties within five days after the 
service of the motion to vacate. The National Business Conduct 
Committee shall consider such motion on an expedited basis and promptly 
issue a written decision The filing of a motion to vacate shall stay 
all aspects of the disciplinary proceeding until at least seven days 
after service of the decision of the National Business Conduct 
Committee. The National Business Conduct Committee review proceedings 
shall be conducted on the basis of the written record without oral 
argument.
    (d) Adjournment
    The hearing, conferences, or other activities relating to the 
disciplinary proceeding shall be stayed pending the National Business 
Conduct Committee's review of an exclusion order in paragraph (c). In 
the event that the National Business Conduct Committee upholds an 
exclusion of an attorney or other person authorized to represent others 
by Rule 9141, the Hearing Officer may, upon motion by a Party 
represented by an attorney or other person subject to an order of 
exclusion, grant an adjournment to allow the retention of new counsel 
or selection of a new representative. In determining whether to grant 
an adjournment or the length of an adjournment, the Hearing Officer 
shall consider whether there are other counsel or representatives of 
record on behalf of the Party, the availability of other counsel or 
other members of an excluded attorney's firm, or the availability of 
other representatives for the Party, and any other relevant factors.

9300. Review of Disciplinary Proceedings by the National Business 
Conduct Committee, NASD Regulation and NASD Boards, and Application for 
SEC review

9310. Appeal to or Review by National Business Conduct Committee

9311. Appeal by Any Party; Cross-Appeal

    (a) Time to File Notice of Appeal
    A Respondent or Complainant may file a written notice of appeal 
within 15 days after service of a decision issued pursuant to Rule 9268 
or Rule 9269.
    (b) Effect
    An appeal to the National Business Conduct Committee from a 
decision issued pursuant to Rule 9268 or Rule 9269 shall operate as a 
stay of that decision until the National Business Conduct Committee 
issues a decision pursuant to Rule 9349 or, in cases called for 
discretionary review by the NASD Regulation or NASD Boards, until a 
decision is issued pursuant to Rule 9351 or Rule 9352.
    (c) Notice of Appeal Content and Signature Requirements
    A Party appealing pursuant to this Rule shall file a written notice 
of appeal with the Office of Hearing Officers and serve the notice on 
the Parties. The notice of appeal shall be signed by the appealing 
Party, or his or her counsel or representative, and shall contain:
    (1) the name of the disciplinary proceeding;
    (2) the disciplinary proceeding docket number;
    (3) the name of the Party on whose behalf the appeal is made;
    (4) a statement on whether oral argument before the National 
Business Conduct Committee is requested; and,
    (5) a brief statement of the findings, conclusions, or sanctions as 
to which exceptions are taken.
    (d) Notice of Cross-Appeal
    A Party who is served with a notice of appeal may file a written 
notice of cross-appeal and serve the notice of cross-appeal on the 
Parties. The notice of cross-appeal shall be filed within five days 
after service of the notice of appeal. The notice of cross-appeal shall 
be signed by the Party cross-appealing, or his or her counsel, and 
shall contain the information set forth in subparagraphs (c)(1)-(2) and 
(c)(4)-(5), and the name of the Party on whose behalf the cross-appeal 
is made.
    (e) Waiver of Issues Not Raised
    The National Business Conduct Committee may, in its discretion, 
deem waived any issue not raised in the notice of appeal or cross-
appeal.
    (f) Withdrawal of Notice of Appeal or Cross-Appeal
    A Party may withdraw a notice of appeal or a notice of cross-appeal 
filed by him or her at any time by filing a written notice of 
withdrawal of appeal or cross-appeal with the Office of Hearing 
Officers and serving notice thereof on the Parties. The notice of 
withdrawal of appeal or cross-appeal shall contain: the name of the 
disciplinary proceeding; the disciplinary proceeding docket number; and 
the name of the Party on whose behalf the notice of appeal or cross-
appeal was filed previously. The notice of withdrawal of appeal or 
cross-appeal shall be signed by the Party, or his or her counsel or 
representative. Upon the withdrawal of a notice of appeal, any 
outstanding cross-appeal shall be

[[Page 25341]]

treated as an appeal unless it is withdrawn.

9312. Review Proceedings Initiated by the National Business Conduct 
Committee

    (a) Call for Review
    (1) Rule 9268 Decision
    A decision issued pursuant to Rule 9268 may be subject to a call 
for review by any member of the National Business Conduct Committee or, 
pursuant to authority delegated from the National Business Conduct 
Committee, by any member of the Review Subcommittee of the National 
Business Conduct Committee. The Review Subcommittee shall be composed 
of two to four persons who are current members of the National Business 
Conduct Committee. At least 50 percent of the persons making up the 
Review Subcommittee shall be Non-Industry Directors, as defined in 
Article I of the NASD Regulation By-Laws. A decision issued pursuant to 
Rule 9268 shall be subject to a call for review within 45 days after 
the date of service of the decision. If called for review, such 
decision shall be reviewed by the National Business Conduct Committee.
    (2) Rule 9269 Decision
    A default decision issued pursuant to Rule 9269 shall be subject to 
a call for review by the General Counsel of NASD Regulation, or his or 
her delegatee, on his or her own motion within 45 days after the date 
of service of the decision. If called for review, such decision shall 
be reviewed by the National Business Conduct Committee.
    (b) Effect
    Institution of review by a member of the National Business Conduct 
Committee on his or her own motion, a member of the Review Subcommittee 
on his or her own motion, or the General Counsel of NASD Regulation, or 
his or her delegatee, on his or her own motion shall operate as a stay 
of a final decision issued pursuant to Rule 9268 or Rule 9269 as to all 
Parties subject to the notice of review, until the National Business 
Conduct Committee issues a decision pursuant to Rule 9349, or, in cases 
called for discretionary review by the NASD Regulation or NASD Boards, 
until a decision is issued pursuant to Rule 9351 or Rule 9352.
    (c) Requirements
    If a member of the National Business Conduct Committee, a member of 
the Review Subcommittee, or the General Counsel of NASD Regulation, or 
his or her delegatee, determines to call a case for review, a written 
notice of review shall be served promptly on each Party to the 
proceeding and filed with the Office of Hearing Officers. Such notice 
of review shall contain:
    (1) the name of the disciplinary proceeding;
    (2) the disciplinary proceeding docket number; and,
    (3) a brief statement of the findings, conclusions, or sanctions 
with respect to which the National Business Conduct Committee, the 
Review Subcommittee, or the General Counsel of NASD Regulation, or his 
or her delegatee, determined that a call for review was necessary.
    The statement contained in the notice of review shall not limit the 
scope of the National Business Conduct Committee's authority under Rule 
9346 to review any issues raised in the decision rendered pursuant to 
Rule 9268 or Rule 9269. The National Business Conduct Committee shall 
provide the Parties with notice of, and an opportunity to submit briefs 
on, any issue not set forth in the notice of review that shall be 
considered by the National Business Conduct Committee.
    (d) Effect of Withdrawal of Notice of Appeal, Cross-Appeal
    If the review of a disciplinary proceeding by the National Business 
Conduct Committee is terminated before the National Business Conduct 
Committee issues a decision on the merits because all appealing Parties 
file a notice of withdrawal of appeal and no Party previously filed a 
notice of cross-appeal, or all Parties who previously filed a notice of 
cross-appeal file a notice of withdrawal of cross-appeal:
    (1) a member of the National Business Conduct Committee or of the 
Review Subcommittee shall have the right to call for review a decision 
issued pursuant to Rule 9268 in accordance with Rule 9312(a)(1), except 
that the 45 day period during which a call for review may be made shall 
begin on the day the Association receives the last filed notice of 
withdrawal of appeal or, if applicable, the last filed notice of 
withdrawal of cross-appeal; and,
    2) the General Counsel of NASD Regulation, or his or her delegatee, 
shall have the right to call for review a decision issued pursuant to 
Rule 9269 in accordance with Rule 9312(a)(2), except that the 45 day 
period during which a call for review may be made shall begin on the 
day the Association receives the last filed notice of withdrawal of 
appeal or, if applicable, the last filed notice of withdrawal of cross-
appeal.

9320. Transmission of Record; Extensions of Time, Postponements, 
Adjournments

9321. Transmission of Record

    Within 21 days after the filing of a notice of appeal or notice of 
review, or at such later time as the National Business Conduct 
Committee may designate, the Office of Hearing Officers shall assemble 
and prepare an index to the record, transmit the record and the index 
to the National Business Conduct Committee, and serve copies of the 
index upon all Parties. The Hearing Officer who participated in the 
disciplinary proceeding, or the Chief Hearing Officer, shall certify 
that the record transmitted to the National Business Conduct Committee 
is complete.

9322. Extensions of Time, Postponements, and Adjournments

    (a) Availability
    At any time prior to the issuance of a decision pursuant to Rule 
9349, the National Business Conduct Committee may, for good cause 
shown, extend or shorten any time limits prescribed by the Code for the 
filing of any papers and may, consistent with paragraph (b), postpone 
or adjourn any hearing.
    (b) Limitations on Postponements, Adjournments, and Extensions
    Oral argument shall begin at the time and place ordered, unless the 
National Business Conduct Committee, for good cause shown, postpones or 
changes the location of the oral argument, subject to the limitations 
in paragraph (b)(2).
    (1) Additional Considerations
    In considering a motion for postponement of oral argument, the 
National Business Conduct Committee shall consider, in addition to any 
other relevant factors:
    (A) the length of time the disciplinary proceeding has been pending 
to date;
    (B) the number of postponements, adjournments, or extensions 
already granted;
    (C) the stage of the proceedings at the time of the request; and
    (D) potential harm to the investing public if an extension of time, 
adjournment, or postponement is granted; and
    (E) any other such matters that justice may require.
    (2) Time Limit
    Postponements, adjournments, or extensions of time for filing 
papers shall not exceed 28 days, unless the National Business Conduct 
Committee determines otherwise.

9330. Appointment of Subcommittee or Extended Proceeding Committee; 
Disqualification and Recusal

9331. Appointment by National Business Conduct Committee of 
Subcommittee or Extended Proceeding Committee

    (a) Appointment by National Business Conduct Committee
    Following the filing of a notice of appeal pursuant to Rule 9311 or 
a

[[Page 25342]]

notice of review pursuant to Rule 9312, the National Business Conduct 
Committee shall designate a Subcommittee or an Extended Proceeding 
Committee to participate, subject to Rule 9345, in a disciplinary 
proceeding appealed or called for review.
    (1) Subcommittee
    Except as provided in subparagraph (2), for each disciplinary 
proceeding appealed or called for review, the National Business Conduct 
Committee shall appoint a Subcommittee to participate, subject to Rule 
9345, in the appeal or review. A Subcommittee shall be composed of two 
or more persons who shall be current or former Directors, or former 
Governors.
    (2) Extended Proceeding Committee
    Upon consideration of the volume and complexity of the certified 
record, or other factors the National Business Conduct Committee deems 
material, the National Business Conduct Committee may determine that a 
disciplinary proceeding appealed or called for review shall be 
designated an Extended Proceeding and shall appoint an Extended 
Proceeding Committee to participate, subject to Rule 9345, in the 
appeal or review. The Extended Proceeding Committee shall be composed 
of two or more persons who shall be current or former Directors, or 
former Governors. The Chair of the National Business Conduct Committee 
shall have discretion to compensate any or all Panelists of an Extended 
Proceeding Committee at the rate then in effect for arbitrators 
appointed under the Rule 10000 Series.
    (b) Function
    If a hearing is held, the Subcommittee or, if applicable, the 
Extended Proceeding Committee, shall hear oral arguments and consider, 
if allowed, any new evidence. Based on the hearing and the record on 
appeal or review, the Subcommittee or, if applicable, the Extended 
Hearing Committee, shall make a recommendation to the National Business 
Conduct Committee regarding the disposition of all matters on appeal, 
cross-appeal, or review. The recommendation shall be in the form of a 
written recommended decision.

9332. Disqualification and Recusal

    (a) Recusal, Withdrawal of Member or Panelist
    If at any time a member of the National Business Conduct Committee, 
or a Panelist of a Subcommittee or an Extended Proceeding Committee, 
determines that he or she has a conflict of interest or bias or 
circumstances otherwise exist where his or her fairness might 
reasonably be questioned, the member or the Panelist shall notify the 
Chair or the Vice-Chair of the National Business Conduct Committee, and 
the Chair or the Vice-Chair of the National Business Conduct Committee 
shall issue and serve on the Parties a notice stating that the member 
or Panelist has withdrawn from the matter. In the event that a Panelist 
withdraws, is incapacitated, or is otherwise unable to continue his or 
her service after a hearing has been convened, the Chair or Vice-Chair 
of the National Business Conduct Committee shall appoint a replacement 
Panelist.
    (b) Motion for Disqualification
    A Party may move for the disqualification of a member of the 
National Business Conduct Committee, or a Panelist of a Subcommittee or 
an Extended Proceeding Committee. All such motions shall be based upon 
a reasonable, good faith belief that a conflict of interest or bias 
exists, or circumstances otherwise exist where his or her fairness 
might reasonably be questioned, and shall be accompanied by an 
affidavit setting forth in detail the facts alleged to constitute 
grounds for disqualification, and the dates on which the Party learned 
of those facts. Such motions shall be filed not later than 15 days 
after the later of:
    (1) when the Party learned of the facts believed to constitute the 
disqualification; or
    (2) when the Party was notified of the composition of the 
Subcommittee or, if applicable, the Extended Proceeding Committee.
    (c) Disposition of Disqualification Motions: Challenges to Single 
Member of National Business Conduct Committee or Single Panelist of 
Subcommittee or Extended Hearing Committee
    Motions for disqualification of a member of the National Business 
Conduct Committee, or a Panelist of a Subcommittee or an Extended 
Proceeding Committee shall be decided by the Chair or Vice-Chair of the 
National Business Conduct Committee, who shall promptly determine 
whether disqualification is required, and issue a written ruling on the 
motion. If a Panelist is disqualified, the Chair or the Vice-Chair of 
the National Business Conduct Committee shall appoint a replacement 
Panelist.
    (d) Disposition of Disqualification Motions: Challenges to Multiple 
Panelists
    (1) National Business Conduct Committee
    If a Party files a motion to disqualify more than one member of the 
National Business Conduct Committee, the Chair or the Vice-Chair of the 
National Business Conduct Committee shall promptly determine whether 
disqualification is required, and shall issue a written ruling on the 
matter. In the event of such disqualification, the remaining members of 
the National Business Conduct Committee shall consider the review or 
appeal of the disciplinary matter.
    (2) Subcommittee; Extended Proceeding Committee
    If a Party files a motion to disqualify more than one Panelist of a 
Subcommittee or an Extended Proceeding Committee, the Chair or the 
Vice-Chair of the National Business Conduct Committee shall promptly 
determine whether disqualification is required, and shall issue a 
written ruling on the motion. If multiple Panelists are disqualified, 
the Chair or the Vice-Chair of the National Business Conduct Committee 
shall appoint replacement Panelists.

9340. Proceedings

9341. Oral Argument

    (a) Request for Oral Argument
    A Party may request oral argument before the Subcommittee or, if 
applicable, the Extended Proceeding Committee. Oral argument shall be 
requested in writing either in the Party's notice of appeal or cross-
appeal, or within 15 days after service of the National Business 
Conduct Committee's notice of review. Subject to the limitations of 
Rules 9342 and 9344, oral argument shall be granted if timely 
requested. The right to oral argument set forth in this Rule is 
unaffected by a Party's waiver of, or failure to request, a hearing 
pursuant to the Rule 9200 Series.
    (b) Discretion to Proceed With or Without Oral Argument
    In the absence of a request for oral argument, the Subcommittee or, 
if applicable, the Extended Proceeding Committee, in its discretion, 
may order that a matter be set down for oral argument, or may consider 
the matter on the basis of the record.
    (c) Notice Regarding Oral Argument
    If oral argument is held, a notice stating the date, time, and 
place of the argument shall be served on the Parties at least 21 days 
before the hearing. The Parties may agree in writing to waive the 
notice period or, in extraordinary circumstances, the Subcommittee or, 
if applicable, the Extended Proceeding Committee, may provide for a 
shorter notice period.
    (d) Attendance Required
    The Parties shall make oral arguments before the Subcommittee or, 
if applicable, the Extended Proceeding Committee. Unless otherwise 
agreed to by all of the Parties, all Panelists comprising the 
Subcommittee or, if

[[Page 25343]]

applicable, the Extended Proceeding Committee, shall be present for the 
oral argument.
    (e) Time Limits
    Unless the Subcommittee or, if applicable, the Extended Proceeding 
Committee, orders otherwise for good cause shown, each Party's oral 
argument before the Subcommittee or, if applicable, the Extended 
Proceeding Committee, shall be limited to a total of 30 minutes.
    (f) Recordation; Transcript Correction
    Oral arguments shall be recorded and a written transcript prepared 
by a court reporter. Parties may purchase copies of the transcript from 
the court reporter. Any corrections that a Party believes necessary to 
a transcript shall be submitted by motion to the Subcommittee or, if 
applicable, the Extended Proceeding Committee, within 21 days after the 
hearing date or within five days after receipt of the transcript, 
whichever date is later. 

9342. Failure to Appear at Oral Argument

    A Party who requests oral argument but fails to appear after being 
duly notified, shall be deemed to have waived any opportunity for oral 
argument provided under the Rule 9300 Series. The Subcommittee or, if 
applicable, the Extended Proceeding Committee, shall permit argument to 
go forward as to those Parties who appear. The Subcommittee or, if 
applicable, the Extended Proceeding Committee, in the exercise of its 
discretion, may consider the matter on the basis of the record without 
oral argument as to those Parties who failed to appear.

9343. Disposition Without Oral Argument

    If an oral argument is not held, the matter shall be considered by 
a Subcommittee or, if applicable, an Extended Proceeding Committee, on 
the basis of the record, as defined in Rule 9267, and supplemented by 
any written materials submitted to or issued by the Subcommittee or, if 
applicable, the Extended Proceeding Committee, or the National Business 
Conduct Committee in connection with the appeal, cross-appeal, or call 
for review.

9344. Failure to Participate Below; Abandonment of Appeal

    (a) Failure to Participate Below
    When an appealing Party did not participate in the disciplinary 
proceeding before a Hearing Officer, Hearing Panel or, if applicable, 
Extended Hearing Panel, but shows good cause for the failure to 
participate, the National Business Conduct Committee may dismiss the 
appeal and remand the matter for further proceedings, or may hear 
evidence and consider the matter. If the appealing Party did not 
participate in the disciplinary proceeding before a Hearing Officer, 
Hearing Panel or, if applicable, Extended Hearing Panel, and fails to 
show good cause for the failure to participate, the matter shall be 
considered by the Subcommittee or, if applicable, Extended Proceeding 
Committee, and the National Business Conduct Committee on the basis of 
the record and other documents, as provided in Rules 9346 and 9347. For 
purposes of this paragraph, failure to participate shall include 
failure to file an answer or otherwise respond to a complaint, or 
failure to appear at a scheduled hearing, but shall not include failure 
to request a hearing pursuant to Rule 9221.
    (b) Abandonment of Appeal
    If an appealing Party fails to advise the National Business Conduct 
Committee of the basis for seeking review, or otherwise fails to 
provide information or submit a written brief in response to a request 
pursuant to Rules 9346 and 9347, the National Business Conduct 
Committee may dismiss the appeal as abandoned, and the decision of the 
Hearing Officer, Hearing Panel or, if applicable, Extended Hearing 
Panel, shall become the final disciplinary action of the Association. 
If a cross-appealing Party fails to advise the National Business 
Conduct Committee of the basis for seeking review, or otherwise fails 
to provide information or submit a written brief in response to a 
request pursuant to Rules 9346 and 9347, the National Business Conduct 
Committee may dismiss the cross-appeal as abandoned. Upon a showing of 
good cause, the National Business Conduct Committee may withdraw any 
dismissal entered pursuant to this Rule.

9345. Subcommittee or Extended Proceeding Committee Recommendation to 
National Business Conduct Committee

    A Subcommittee or, if applicable, an Extended Proceeding Committee, 
shall present a recommended decision in writing to the National 
Business Conduct Committee and all other Directors not later than seven 
days before the meeting of the National Business Conduct Committee at 
which the disciplinary proceeding shall be considered.

9346. Evidence in National Business Conduct Committee Proceedings

    (a) Scope of Review
    Except as otherwise set forth in this paragraph, the National 
Business Conduct Committee's review shall be limited to consideration 
of: (i) the record, as defined in Rule 9267, supplemented by briefs and 
other papers submitted to the Subcommittee or, if applicable, the 
Extended Proceeding Committee, and the National Business Conduct 
Committee; and (ii) any oral argument permitted under this Code. A 
Party may introduce additional evidence only with prior approval of the 
Subcommittee or, if applicable, the Extended Proceeding Committee, or 
the National Business Conduct Committee, upon a showing that 
extraordinary circumstances exist under paragraph (b). If an appealing 
Party shows good cause for failure to participate in the disciplinary 
proceeding below, the National Business Conduct Committee may hear 
evidence and consider the disciplinary proceeding pursuant to Rule 
9344(a).
    (b) Leave to Introduce Additional Evidence
    A Party may apply to the Subcommittee or, if applicable, the 
Extended Proceeding Committee, or the National Business Conduct 
Committee for leave to introduce additional evidence by motion filed 
not later than 30 days after service of such Party's notice of appeal 
or cross-appeal, or not later than 35 days after service upon the Party 
by the National Business Conduct Committee of a notice of review. The 
motion shall describe each item of proposed new evidence, demonstrate 
that there was good cause for failing to introduce it below, and 
demonstrate why the evidence is material to the proceeding, and be 
filed and served. By a motion filed in accordance with Rule 9146, a 
Party may request an extension of the period during which a Party may 
file a motion for leave to introduce additional evidence. A Party shall 
demonstrate that there was good cause for failing to file the motion 
for leave to introduce additional evidence during the period 
prescribed.
    (c) Motion In Opposition; Motion to Introduce Rebuttal Evidence
    A Party may file an opposition to a motion, as provided in Rule 
9146(d), for leave to introduce new evidence, and may move for leave to 
introduce rebuttal evidence in response to the proposed new evidence. A 
Party who moves to introduce rebuttal evidence in response to the 
proposed new evidence of another Party shall describe each item of 
proposed rebuttal evidence and explain why the evidence is material to 
the proceeding, and shall file and serve such motion.
    (d) Discretion Regarding Review of Additional Evidence
    Upon consideration of any motion to introduce additional evidence 
and any opposition thereto, the Subcommittee

[[Page 25344]]

or, if applicable, the Extended Proceeding Committee, or the National 
Business Conduct Committee may permit the evidence to be introduced 
into the record on review, or the National Business Conduct Committee 
may remand the disciplinary proceeding for further proceedings 
consistent with its ruling or for further fact finding.
    (e) Requirements for Submitting Additional Documentary Evidence
    A Party that is permitted to introduce additional documentary 
evidence before the Subcommittee or, if applicable, the Extended 
Proceeding Committee, or the National Business Conduct Committee 
pursuant to paragraph (d) shall make copies of the evidence available 
to the Subcommittee or, if applicable, the Extended Proceeding 
Committee, or the National Business Conduct Committee, and to all 
Parties at such time as the Subcommittee or, if applicable, the 
Extended Proceeding Committee, or the National Business Conduct 
Committee may specify.
    (f) Subcommittee or Extended Proceeding Committee Order Requiring 
Additional Evidence
    On its own motion, the Subcommittee or, if applicable, the Extended 
Proceeding Committee, or the National Business Conduct Committee may 
order that the record be supplemented with such additional evidence as 
it may deem relevant. Among other things, the Subcommittee, or if 
applicable, the Extended Proceeding Committee, or the National Business 
Conduct Committee may order a Respondent who asserts his or her 
inability to pay a monetary sanction to file a sworn financial 
statement and to keep such statement current as ordered by the 
Subcommittee or, if applicable, the Extended Proceeding Committee, or 
the National Business Conduct Committee.
    (g) Rules of Evidence Not Applicable
    Formal rules of evidence shall not apply.
    (h) Testimony
    A person who is subject to the jurisdiction of the Association 
shall testify under oath or affirmation. The oath or affirmation shall 
be administered by a court reporter or a notary public.

9347. Filing of Papers in National Business Conduct Committee 
Proceedings

    (a) Briefs; Reply Briefs; Requirements
    Parties may file briefs in connection with proceedings governed by 
the Rule 9300 Series. Briefs shall be confined to the particular 
matters at issue. An exception to findings, conclusions, or sanctions 
shall be supported by citation to the relevant portions of the record, 
including references to specific pages relied upon, and by concise 
argument, including citation of such statutes, decisions, and other 
authorities as may be relevant. If an exception relates to the 
admission or exclusion of evidence, the substance of the evidence 
admitted or excluded shall be set forth in the brief, an appendix 
thereto, or by citation to the record. Parties may file reply briefs. 
If a Party files a reply brief, such brief shall be limited to matters 
in reply. All briefs shall conform to the requirements of the Rule 9130 
Series, and, except with advance leave of the Subcommittee or, if 
applicable, the Extended Proceeding Committee, or the National Business 
Conduct Committee, exclusive of pages containing tables of contents or 
tables of authorities, a brief other than a reply brief shall not 
exceed 25 double-spaced pages, and a reply brief shall not exceed 12 
double-spaced pages.
    (b) Timely Filing of Briefs
    Briefs shall be due upon dates established by the Subcommittee or, 
if applicable, the Extended Proceeding Committee, or the National 
Business Conduct Committee in a scheduling order. Unless the 
Subcommittee or, if applicable, the Extended Proceeding Committee, or 
the National Business Conduct Committee specifies otherwise, opening 
briefs shall be submitted not less than 21 days from the date of the 
scheduling order, and answering briefs shall be submitted 21 days 
thereafter. When reply briefs are submitted, such briefs shall be filed 
not later than ten days after service of the answering brief.

9348. Powers of the National Business Conduct Committee on Review

    In any appeal or review proceeding pursuant to the Rule 9300 
Series, the National Business Conduct Committee may affirm, dismiss, 
modify, or reverse with respect to each finding, or remand the 
disciplinary proceeding with instructions. The National Business 
Conduct Committee may affirm, modify, reverse, increase, or reduce any 
sanction, or impose any other fitting sanction.

9349. National Business Conduct Committee Formal Consideration; 
Decision

    (a) Decision of National Business Conduct Committee, Including 
Remand
    In an appeal or review of a disciplinary proceeding governed by the 
Rule 9300 Series that is not withdrawn or dismissed prior to a decision 
on the merits, the National Business Conduct Committee, after 
considering all matters presented in the appeal or review, and the 
written recommended decision of the Subcommittee or, if applicable, the 
Extended Proceeding Committee, may affirm, dismiss, modify or reverse 
the decision of the Hearing Panel or, if applicable, Extended Hearing 
Panel, with respect to each Respondent who has appealed or cross-
appealed or is subject to a call for review. The National Business 
Conduct Committee may affirm, modify, reverse, increase, or reduce any 
sanction, or impose any other fitting sanction. Alternatively, the 
National Business Conduct Committee may remand the disciplinary 
proceeding with instructions. The National Business Conduct Committee 
shall prepare a proposed written decision pursuant to paragraph (b).
    (b) Contents of Decision
    The decision shall include:
    (1) a statement describing the investigative or other origin of the 
disciplinary proceeding;
    (2) the specific statutory or rule provisions that were alleged to 
have been violated;
    (3) a statement setting forth the findings of fact with respect to 
any act or practice the Respondent was alleged to have committed or 
omitted;
    (4) the conclusions as to whether the Respondent violated any 
provision alleged in the complaint;
    (5) a statement in support of the disposition of the principal 
issues raised in the proceeding; and
    (6) a statement describing any sanction imposed, the reasons 
therefor, and, pursuant to Rule 9360, the date upon which such sanction 
shall become effective.
    (c) Issuance of Decision After Expiration of Call for Review Period
    The National Business Conduct Committee shall provide its proposed 
written decision to the NASD Regulation Board, and, if the disciplinary 
proceeding is not called for review by the NASD Regulation Board, to 
the NASD Board. The NASD Regulation Board may call the disciplinary 
proceeding for review pursuant to Rule 9351. The NASD Board may call 
the disciplinary proceeding for review pursuant to Rule 9352. If 
neither the NASD Regulation Board nor the NASD Board calls the 
disciplinary proceeding for review, the proposed written decision of 
the National Business Conduct Committee shall become final, and the 
National Business Conduct Committee shall serve its written decision on 
the Parties and provide a copy to each member of the Association with 
which a Respondent is associated. The decision shall constitute the 
final disciplinary action of the Association for purposes of SEC Rule 
19-1(c)(1), unless the National Business Conduct Committee remands the 
proceeding.

[[Page 25345]]

9350. Discretionary Review by Boards

9351. Discretionary Review by the NASD Regulation Board

    (a) Call for Review by Director
    A Director may call a disciplinary proceeding for review by the 
NASD Regulation Board, if the call for review is made within the period 
prescribed in paragraph (b).
    (b) Seven Day Period; Waiver
    After receiving the proposed written decision of the National 
Business Conduct Committee pursuant to Rule 9349, a Director shall have 
not less than seven days to determine if the disciplinary proceeding 
should be called for review. A Director shall call a disciplinary 
proceeding for review by notifying the General Counsel of NASD 
Regulation. By a unanimous vote of the NASD Regulation Board, the NASD 
Regulation Board may shorten the period to less than seven days. By an 
affirmative vote of the majority of the NASD Regulation Board then in 
office, the NASD Regulation Board may, during the seven day period, 
vote to extend the period to more than seven days.
    (c) Review at Next Meeting
    If a Director calls a disciplinary proceeding for review within the 
period prescribed in paragraph (b), the NASD Regulation Board shall 
review the disciplinary proceeding not later than the next meeting of 
the NASD Regulation Board. The NASD Regulation Board may order the 
Parties (excluding any Respondent who did not appeal or cross-appeal, 
or as to whom the issues appealed or called for review do not apply), 
to file briefs in connection with the NASD Regulation Board review 
proceedings pursuant to this Rule.
    (d) Decision of NASD Regulation Board, Including Remand
    After review, the NASD Regulation Board may affirm, modify, or 
reverse the proposed written decision of the National Business Conduct 
Committee. The NASD Regulation Board may affirm, modify, reverse, 
increase, or reduce any sanction, or impose any other fitting sanction. 
Alternatively, the NASD Regulation Board may remand the disciplinary 
proceeding with instructions. The NASD Regulation Board shall prepare a 
proposed written decision that includes all of the elements described 
in Rule 9349(b) (1)-(6).
    (e) Issuance of Decision After Expiration of Call for Review Period
    The NASD Regulation Board shall provide its proposed written 
decision to the NASD Board. The NASD Board may call the disciplinary 
proceeding for review pursuant to Rule 9352. If the NASD Board does not 
call the disciplinary proceeding for review, the proposed written 
decision of the NASD Regulation Board shall become final, and the NASD 
Regulation Board shall serve its written decision on the Parties and 
provide a copy to each member of the Association with which a 
Respondent is associated. The decision shall constitute the final 
disciplinary action of the Association for purposes of SEC Rule 19d-
1(c)(1), unless the NASD Regulation Board remands the proceeding.
    9352. Discretionary Review by the NASD Board
    (a) Call for Review by Governor
    A Governor may call a disciplinary proceeding for review by the 
NASD Board if the call for review is made within the period prescribed 
in paragraph (b).
    (b) Seven Day Period; Waiver
    (1) Disciplinary Proceeding Called for Review by NASD Regulation 
Board
    If the NASD Regulation Board reviewed the disciplinary proceeding 
under Rule 9351, a Governor shall make his or her call for review not 
later than the next meeting of the NASD Board that is at least seven 
days after the date on which the NASD Board receives the proposed 
written decision of the NASD Regulation Board.
    (2) Disciplinary Proceeding Not Called for Review by NASD 
Regulation Board
    If no Director of the NASD Regulation Board called the disciplinary 
proceeding for review under Rule 9351, a Governor shall make his or her 
call for review not later than the next meeting of the NASD Board that 
is at least seven days after the date on which the NASD Board receives 
the proposed written decision of the National Business Conduct 
Committee.
    (3) Waiver
    By a unanimous vote of the NASD Board, the NASD Board may shorten 
the period in subparagraph (1) or (2) to less than seven days. By an 
affirmative vote of the majority of the NASD Board then in office, the 
NASD Board may, during the seven day period in subparagraph (1) or (2), 
vote to extend the period in subparagraph (1) or (2) to more than seven 
days.
    (c) Review at Next Meeting
    If a Governor calls a disciplinary proceeding for review within the 
period prescribed in paragraph (b), the NASD Board shall review the 
disciplinary proceeding not later than the next meeting of the NASD 
Board. The NASD Board may order the Parties (excluding any Respondent 
who did not appeal, cross-appeal, or as to whom the issues appealed or 
called for review do not apply) to file briefs in connection with 
review proceedings pursuant to this Rule.
    (d) Decision of NASD Board, Including Remand
    After review, the NASD Board may affirm, modify, or reverse: (1) 
the proposed written decision of the NASD Regulation Board; or (2) if 
the NASD Regulation Board did not call a disciplinary proceeding for 
review under Rule 9351, the proposed written decision of the National 
Business Conduct Committee. The NASD Board may affirm, modify, reverse, 
increase, or reduce any sanction, or impose any other fitting sanction. 
Alternatively, the NASD Board may remand the disciplinary proceeding 
with instructions. The NASD Board shall prepare a written decision that 
includes all of the elements described in Rule 9349(b)(1)-(6).
    (e) Issuance of Decision
    The NASD Board shall issue and serve its written decision on the 
Parties and provide a copy to each member of the Association with which 
a Respondent is associated. The decision shall constitute the final 
disciplinary action of the Association for purposes of SEC Rule 19d-
1(c)(1), unless the NASD Board remands the proceeding.
    9360. Effectiveness of Sanctions
    A sanction (other than a bar or an expulsion) specified in a 
decision constituting final disciplinary action of the Association for 
purposes of SEC Rule 19d-1(c)(1) shall become effective on a date 
established by the Chief Hearing Officer, which shall not be earlier 
than 30 days after the date of service of the decision constituting 
final disciplinary action. A bar or an expulsion shall become effective 
upon service of the decision constituting final disciplinary action of 
the Association for purposes of SEC Rule 19d-1(c)(1), unless otherwise 
specified therein.

9370. Application to Commission for Review

    (a) Appeal to Commission; Effect
    A person aggrieved by final disciplinary action pursuant to the 
Rule 9300 Series may apply for review by the Commission pursuant to 
Section 19(d)(2) of the Act. The filing with the Commission of an 
application for review by the Commission shall stay the effectiveness 
of any sanction, other than a bar or an expulsion, imposed in a 
decision constituting final disciplinary action of the Association for 
purposes of SEC Rule 19d-1(c)(1).
    (b) Association Notification to Member
    The Association shall promptly notify any Association member with 
which a Respondent is associated if the

[[Page 25346]]

Respondent files an application for review to the Commission.
9400. Limitation and Approval Procedures Under Rules 3130, 3131 and 
3140
    9410. Procedures for Regulating Activities of Members Experiencing 
Financial or Operating Difficulties

    9411. Purpose
    9412. Notice of Limitations
    9413. Department Consideration
    9414. National Business Conduct Committee Review
    9415. Discretionary Review by NASD Regulation Board
    9416. Discretionary Review by NASD Board
    9417. Enforcement of Sanctions
    9418. Additional Limitations, Modification or Removal of 
Limitations
    9419. Application to Commission for Review, Other Action Not 
Foreclosed

    9420. Approval of Change in Business Operations that Will Result in 
a Change in Exemptive Status under SEC Rule 15c3-3

    9421. Purpose
    9422. Department of Member Regulation Consideration
    9423. National Business Conduct Committee Review
    9424. Discretionary Review by NASD Regulation Board
    9425. Discretionary Review by NASD Board
    9426. Enforcement of Sanctions
    9427. Application to Commission for Review

9500. Suspension, Cancellation, Bar, and Eligibility Procedures
    9510. Procedures for Summary Suspension by NASD

    9511. Purpose
    9512. Notice
    9513. Hearing and Decision
    9514. Discretionary Review by NASD Board
    9515. Application to Commission for Review
    9516. Other Action Not Foreclosed

    9520. Non-Summary Suspension, Cancellation, and Bar Procedures

    9521. Purpose
    9522. Initiation of Proceeding
    9523. Hearing Panel Consideration
    9524. Discretionary Review by NASD Board
    9525. Application to Commission for Review
    9526. Other Action not Foreclosed

    9530. Eligibility Proceedings

    9531. Purpose
    9532. Initiation of Eligibility Proceedings
    9533. National Business Conduct Committee Consideration
    9534. Discretionary Review by NASD Regulation Board
    9535. Discretionary Review by NASD Board
    9536. Application to Commission for Review

9400. Limitations and Approval Procedures Under Rules 3130, 3131, and 
3140

9410. Procedures for Regulating Activities of a Member Experiencing 
Financial or Operational Difficulties

9411. Purpose

    The Rule 9410 Series sets forth procedures for regulating the 
activities of a member that is experiencing the financial or 
operational difficulties specified in Rule 3130 or 3131.

9412. Notice of Limitations

    The Department of Member Regulation (hereinafter ``Department'' in 
the Rule 9410 Series) may issue a notice directing a member to limit 
its business activities if the Department has reason to believe that 
any condition specified in Rule 3130 or 3131 exists. The notice shall 
specify the grounds on which action is being taken, the nature of the 
limitations to be imposed, the effective date of the limitations, and a 
fitting sanction that will be imposed if the member fails to comply 
with the limitations set forth in the notice. The effective date of the 
limitations shall be at least seven days after the date of service of 
the notice. The notice also shall inform the member that it may request 
a hearing before the Department under Rule 9413. The Department shall 
serve the notice pursuant to Rules 9131 and 9134.

9413. Department Consideration

    (a) Request for Hearing
    A member aggrieved by a notice issued under Rule 9412 may file a 
written request for a hearing before the Department. The request shall 
state the specific grounds for withdrawing or modifying the limitations 
specified in the notice. The request shall be filed pursuant to Rules 
9135, 9136, and 9137 within five days after service of the notice under 
Rule 9412.
    (b) Hearing
    If a member requests a hearing under paragraph (a), the Department 
shall conduct a hearing within 14 days after service of the notice 
under Rule 9412. The member shall be entitled to be heard in person, to 
be represented by an attorney, and to submit any relevant evidence. The 
hearing shall be recorded and a transcript prepared by a court 
reporter. The member may purchase a copy of the transcript from the 
court reporter. Any corrections to the transcript shall be submitted 
within three days after the hearing or within three days after receipt 
of the transcript, whichever is later.
    (c) Decision
    Within seven days after the hearing, the Department shall issue a 
decision approving, modifying, or withdrawing the limitations specified 
in the notice. If the decision imposes limitations, the decision shall 
provide for a fitting sanction to be imposed under Rule 9417 if the 
member fails to comply with the limitations. The Department shall 
promptly serve the decision pursuant to Rules 9132 and 9134. The 
decision shall become effective upon service.
    (d) Failure to Request Hearing
    If a member does not request a hearing under paragraph (a), the 
limitations specified in the notice shall become effective on the date 
specified in the notice. Unless the National Business Conduct Committee 
calls the notice for review under Rule 9414, the limitations specified 
in the notice shall remain in effect until the Department removes or 
modifies the limitations pursuant to Rule 9418.

9414. National Business Conduct Committee Review

    (a) Initiation of a Review
    (1) Application by Member
    A member aggrieved by a decision issued under Rule 9413 may file a 
written application for review by the National Business Conduct 
Committee. The application shall state the specific grounds for the 
review and whether oral argument is requested. The application shall be 
filed pursuant to Rules 9135, 9136, and 9137 within seven days after 
service of the decision. The member may withdraw its application for 
review at any time by filing a written notice with the National 
Business Conduct Committee pursuant to Rules 9135, 9136, and 9137.
    (2) Motion of National Business Conduct Committee
    A decision issued under Rule 9413 shall be subject to a call for 
review by any member of the National Business Conduct Committee or the 
Review Subcommittee described in Rule 9312(a)(1) within 30 days after 
service of the decision. If a member that receives a notice under Rule 
9412 does not request a hearing under Rule 9413, the notice shall be 
subject to a call for review by any member of the National Business 
Conduct Committee or the Review Subcommittee, within 30 days after the 
effective date of the notice. If the National Business Conduct 
Committee or the Review Subcommittee calls a decision or notice for 
review, a

[[Page 25347]]

written notice of review shall be served promptly on the member 
pursuant to Rules 9132 and 9134. The notice of review shall state the 
specific grounds for the review and whether an oral argument is 
ordered. If a decision is called for review by a member of the National 
Business Conduct Committee or the Review Subcommittee, the decision 
shall be reviewed by the National Business Conduct Committee.
    (3) Stay
    Unless otherwise ordered by the National Business Conduct 
Committee, the initiation of a review under this paragraph shall stay 
the decision of the Department or an uncontested notice until a 
decision constituting final action of the Association is issued.
    (4) Ex Parte Communications
    The prohibitions against ex parte communications in Rule 9143 shall 
become effective under the Rule 9410 Series when Association staff has 
knowledge that a member intends to file a written application for 
review or that the National Business Conduct Committee intends to 
review a decision on its own motion under this Rule.
    (b) Subcommittee Consideration
    (1) Appointment of Subcommittee
    The National Business Conduct Committee shall appoint a 
Subcommittee to participate in the review. The Subcommittee shall be 
composed of two or more members. One member shall be a member of the 
National Business Conduct Committee, and the remaining member or 
members shall be current or former Directors of the NASD Regulation 
Board or former Governors of the NASD Board.
    (2) Oral Argument
    If oral argument is requested by the member, oral argument shall be 
held before the Subcommittee within 14 days after service of the 
decision under Rule 9413. If oral argument is ordered by the 
Subcommittee, oral argument shall be held before the Subcommittee 
within seven days after service of the order. The member shall be 
entitled to be represented by an attorney. The oral argument shall be 
recorded and a transcript prepared by a court reporter. The member may 
purchase a copy of the transcript from the court reporter. Any 
corrections to the transcript shall be submitted within three days 
after the oral argument or within three days after receipt of the 
transcript, whichever is later.
    (3) Review on Record
    If oral argument is not requested or ordered, the Subcommittee 
shall conduct its review on the basis of the record and any written 
submissions by the Parties.
    (4) Additional Evidence
    The Subcommittee may consider additional evidence if the member 
shows good cause for not previously submitting such evidence.
    (5) Recommendation
    The Subcommittee shall present a recommended decision in writing to 
the National Business Conduct Committee and all other Directors not 
later than seven days before the meeting of the National Business 
Conduct Committee at which the proceeding shall be considered.
    (c) Decision
    (1) Decision of National Business Conduct Committee, Including 
Remand
    After considering all matters presented in the review and the 
written recommended decision of the Subcommittee, the National Business 
Conduct Committee may affirm, modify, or reverse the Department's 
decision or remand the proceeding with instructions. The National 
Business Conduct Committee shall prepare a proposed written decision 
pursuant to subparagraph (2).
    (2) Contents of Decision
    The decision shall include:
    (A) a description of the Department's decision, including its 
rationale;
    (B) a description of the principal issues regarding the imposition 
of limitations raised in the review and a statement supporting the 
disposition of such issues;
    (C) a summary of the evidence on each issue;
    (D) a statement of whether the Department's decision is affirmed, 
modified, or reversed, and a rationale therefor; and
    (E) if any limitations are imposed, a description of the 
limitations and a statement describing a fitting sanction that will be 
imposed under Rule 9417 if the member fails to comply with any of the 
limitations.
    (3) Issuance of Decision After Expiration of Call for Review Period
    The National Business Conduct Committee shall provide its proposed 
written decision to the NASD Regulation Board, and, if the proceeding 
is not called for review by the NASD Regulation Board, to the NASD 
Board. The NASD Regulation Board may call the proceeding for review 
pursuant to Rule 9415. The NASD Board may call the proceeding for 
review pursuant to Rule 9416. If neither the NASD Regulation Board nor 
the NASD Board calls the proceeding for review, the proposed written 
decision of the National Business Conduct Committee shall become final, 
and the National Business Conduct Committee shall serve its written 
decision pursuant to Rules 9132 and 9134. The decision shall constitute 
the final action of the Association, unless the National Business 
Conduct Committee remands the proceeding.

9415. Discretionary Review by the NASD Regulation Board

    (a) Call for Review by Director
    A Director may call a proceeding for review by the NASD Regulation 
Board if the call for review is made within the period prescribed in 
paragraph (b).
    (b) Seven Day Period; Waiver
    After receiving the proposed written decision of the National 
Business Conduct Committee pursuant to Rule 9414, a Director shall have 
not less than seven days to determine if the proceeding should be 
called for review. A Director shall call a proceeding for review by 
notifying the General Counsel of NASD Regulation. By a unanimous vote 
of the NASD Regulation Board, the NASD Regulation Board may shorten the 
period to less than seven days. By an affirmative vote of the majority 
of the NASD Regulation Board then in office, the NASD Regulation Board 
may, during the seven day period, vote to extend the period to more 
than seven days.
    (c) Review at Next Meeting
    If a Director calls a proceeding for review within the period 
prescribed by paragraph (b), the NASD Regulation Board shall review the 
proceeding not later than the next meeting of the NASD Regulation 
Board. The NASD Regulation Board may order the filing of briefs in 
connection with its review proceedings pursuant to this Rule.
    (d) Decision of NASD Regulation Board, Including Remand
    After review, the NASD Regulation Board may affirm, modify, or 
reverse the proposed written decision of the National Business Conduct 
Committee or remand the proceeding with instructions. The NASD 
Regulation Board shall prepare a proposed written decision that 
includes all of the elements described in Rule 9414(c)(2).
    (e) Issuance of Decision After Expiration of Call for Review Period
    The NASD Regulation Board shall provide its proposed written 
decision to the NASD Board. The NASD Board may call the proceeding for 
review pursuant to Rule 9416. If the NASD Board does not call the 
proceeding for review, the proposed written decision of the NASD 
Regulation Board shall become final, and the NASD Regulation Board 
shall serve its written decision pursuant to Rules 9132 and 9134. The 
decision shall constitute the final action of the Association, unless 
the NASD Regulation Board remands the proceeding.

[[Page 25348]]

9416. Discretionary Review by the NASD Board

    (a) Call for Review by Governor
    A Governor may call a proceeding for review by the NASD Board if 
the call for review is made within the period prescribed in paragraph 
(b).
    (b) Seven Day Period; Waiver
    (1) Proceeding Called for Review by NASD Regulation Board
    If the NASD Regulation Board reviewed the proceeding under Rule 
9415, a Governor shall make his or her call for review not later than 
the next meeting of the NASD Board that is at least seven days after 
the date on which the NASD Board receives the proposed written decision 
of the NASD Regulation Board.
    (2) Proceeding Not Called for Review by NASD Regulation Board
    If no Director of the NASD Regulation Board called the proceeding 
for review under Rule 9415, a Governor shall make his or her call for 
review not later than the next meeting of the NASD Board that is at 
least seven days after the date on which the NASD Board receives the 
proposed written decision of the National Business Conduct Committee.
    (3) Waiver
    By a unanimous vote of the NASD Board, the NASD Board may shorten 
the period in subparagraph (1) or (2) to less than seven days. By an 
affirmative vote of the majority of the NASD Board then in office, the 
NASD Board may, during the seven day period in subparagraph (1) or (2), 
vote to extend the period in subparagraph (1) or (2) to more than seven 
days.
    (c) Review at Next Meeting
    If a Governor calls a proceeding for review within the period 
prescribed in paragraph (b), the NASD Board shall review the proceeding 
not later than the next meeting of the NASD Board. The NASD Board may 
order the filing of briefs in connection with its review proceedings 
pursuant to this Rule.
    (d) Decision of NASD Board, Including Remand
    After review, the NASD Board may affirm, modify, or reverse: (1) 
the proposed written decision of the NASD Regulation Board, or (2) if 
the NASD Regulation Board did not call a proceeding for review under 
Rule 9415, the proposed written decision of the National Business 
Conduct Committee. Alternatively, the NASD Board may remand the 
proceeding with instructions. The NASD Board shall prepare a written 
decision that includes all of the elements described in Rule 
9414(c)(2).
    (e) Issuance of Decision
    The NASD Board shall issue and serve its written decision pursuant 
to Rules 9132 and 9134. The decision shall constitute the final action 
of the Association, unless the NASD Board remands the proceeding.

9417. Enforcement of Sanctions

    (a) Order
    If the Department determines that a member has failed to comply 
with any limitations imposed by a decision under Rule 9413, 9414, 9415, 
or 9416, or an effective notice under Rule 9413(d), the Department 
shall issue an order to be served pursuant to Rules 9132 and 9134 
imposing the sanctions set forth in the decision or notice and 
specifying the effective date and time of such sanctions.
    (b) Hearing
    A member aggrieved by an order issued under paragraph (a) may file 
a written request for a hearing before the Department. The request 
shall be filed pursuant to Rules 9135, 9136, and 9137 within four days 
after service of the order. The member shall be entitled to be heard in 
person, to be represented by an attorney, and to submit any relevant 
evidence. The hearing shall be recorded and a transcript prepared by a 
court reporter. The member may purchase a copy of the transcript from 
the court reporter. Any corrections to the transcript shall be 
submitted within two days after the hearing or within two days after 
receipt of the transcript, whichever is later.
    (c) Decision
    Within four days after the hearing, the Department shall affirm, 
modify, or reverse the order issued under paragraph (a). The Department 
shall serve the decision on the member pursuant to Rules 9132 and 9134. 
The decision shall become effective upon service and shall constitute 
final action of the Association.

9418. Additional Limitations; Modification or Removal of Limitations

    (a) Additional Limitations
    If a member continues to experience financial or operational 
difficulty specified in Rule 3130 or 3131, notwithstanding an effective 
notice or decision under the Rule 9410 Series, the Department may 
impose additional limitations by issuing a notice under Rule 9412.
    (b) Modification of Limitations
    If the Department determines that any limitations previously 
imposed under the Rule 9410 Series should be modified or removed, the 
Department shall serve a written notice on the member pursuant to Rules 
9132 and 9134.

9419. Application to Commission for Review; Other Action Not Foreclosed

    (a) Any person aggrieved by final action pursuant to the Rule 9410 
Series may apply for review by the Commission under Section 19 of the 
Act. The filing of an application for review shall not stay the 
effectiveness of final action by the Association, unless the Commission 
otherwise orders.
    (b) Action by the Association under the Rule 9410 Series shall not 
foreclose action by the Association under any other Rule.

9420. Approval of Change in Business Operations That Will Result in a 
Change in Exemptive Status under SEC Rule 15c3-3

9421. Purpose

    The Rule 9420 Series sets forth procedures for Rule 3140, which 
requires the Association's approval of a change in a member's business 
activities that will result in a change in the member's exemptive 
status under SEC Rule 15c3-3.

9422. Department of Member Regulation Consideration

    (a) Application
    A member shall apply for approval of a change in its business 
operation that will result in a change in its exemptive status under 
SEC Rule 15c3-3 by filing a written application with the Department of 
Member Regulation (hereinafter ``Department'' in the 9420 Rule Series) 
at the district office in the district in which it has its principal 
place of business. The application shall address the criteria set forth 
in Rule 3140 and shall be filed pursuant to Rules 9135, 9136, and 9137.
    (b) Decision
    Within 21 days after receipt of the application, the Department 
shall issue a decision approving or denying the application in whole or 
in part. If the decision denies the application in whole or in part, 
the decision shall set forth the specific grounds for such action. The 
decision shall provide a fitting sanction to be imposed in accordance 
with Rule 9426 if the member fails to comply with any limitations 
imposed. The Department shall serve the decision pursuant to Rules 9132 
and 9134.

9423. National Business Conduct Committee Review

    (a) Initiation of Review
    (1) Application by Member
    A member aggrieved by a decision issued under Rule 9422 may file a 
written application for review by the National Business Conduct 
Committee. The application shall state the specific grounds for the 
review and whether oral

[[Page 25349]]

argument is requested. The application shall be filed pursuant to Rules 
9135, 9136, and 9137 within seven days after service of the decision. 
The member may withdraw its application at any time by filing a written 
notice with the National Business Conduct Committee pursuant to Rules 
9135, 9136, and 9137.
    (2) Motion of National Business Conduct Committee
    A decision issued under Rule 9422 shall be subject to a call for 
review by any member of the National Business Conduct Committee or the 
Review Subcommittee described in Rule 9312(a)(1) within 30 days after 
service of the decision. If the National Business Conduct Committee or 
the Review Subcommittee calls a decision for review, a written notice 
of review shall be served promptly on the member pursuant to Rules 9132 
and 9134. The written notice of review shall state the specific grounds 
for the review and whether oral argument is ordered. If a decision is 
called for review by any member of the National Business Conduct 
Committee or the Review Subcommittee, the decision shall be reviewed by 
the National Business Conduct Committee.
    (3) No Stay of Action
    Unless otherwise ordered by the National Business Conduct 
Committee, the initiation of a review under this paragraph shall not 
stay the decision of the Department.
    (4) Ex Parte Communications
    The prohibitions against ex parte communications in Rule 9143 shall 
become effective under the Rule 9420 Series when Association staff has 
knowledge that a member intends to file a written application for 
review or that the National Business Conduct Committee intends to 
review a decision on its own motion under this Rule.
    (b) Subcommittee Consideration
    (1) Appointment of Subcommittee
    The National Business Conduct Committee shall appoint a 
Subcommittee to participate in the review. The Subcommittee shall be 
composed of two or more members. One member shall be a member of the 
National Business Conduct Committee, and the remaining member or 
members shall be current or former Directors of the NASD Regulation 
Board or former Governors of the NASD Board.
    (2) Oral Argument
    If oral argument is requested by the member, oral argument shall be 
held before the Subcommittee within 14 days after service of the 
decision under Rule 9422. If oral argument is ordered by the 
Subcommittee, oral argument shall be held before the Subcommittee 
within seven days after service of the order. The oral argument shall 
be recorded and a transcript prepared by a court reporter. The member 
may purchase a copy of the transcript from the court reporter. Any 
corrections to the transcript shall be submitted within three days 
after the oral argument or within three days after receipt of the 
transcript, whichever is later.
    (3) Review on Record
    If oral argument is not requested or ordered, the Subcommittee 
shall conduct its review on the basis of the record and any written 
submissions by the Parties.
    (4) Additional Evidence
    The Subcommittee may consider additional evidence if the member 
shows good cause for not previously submitting such evidence.
    (5) Recommendation
    The Subcommittee shall present a recommended decision in writing to 
the National Business Conduct Committee and all other Directors not 
later than seven days before the meeting of the National Business 
Conduct Committee at which the proceeding shall be considered.
    (c) Decision
    (1) Decision of National Business Conduct Committee, Including 
Remand
    After considering all matters presented in the review and the 
written recommended decision of the Subcommittee, the National Business 
Conduct Committee may affirm, modify, or reverse the Department's 
decision or remand the proceeding with instructions. The National 
Business Conduct Committee shall prepare a proposed written decision 
pursuant to subparagraph (2).
    (2) Contents of Decision
    The decision shall include:
    (A) a description of the Department's decision, including its 
rationale;
    (B) a description of the principal issues regarding the change in 
the member's exemptive status raised in the review and a statement 
supporting the disposition of such issues;
    (C) a summary of the evidence on each issue;
    (D) a statement of whether the Department's decision is affirmed, 
modified, or reversed, and a rationale therefore; and
    (E) if any limitations are imposed, a description of the 
limitations and a statement describing a fitting sanction that will be 
imposed under Rule 9426 if the member fails to comply with any of the 
limitations.
    (3) Issuance of Decision After Expiration of Call for Review Period
    The National Business Conduct Committee shall provide its proposed 
written decision to the NASD Regulation Board, and, if the proceeding 
is not called for review by the NASD Regulation Board, to the NASD 
Board. The NASD Regulation Board may call the proceeding for review 
pursuant to Rule 9424. The NASD Board may call the proceeding for 
review pursuant to Rule 9425. If neither the NASD Regulation Board nor 
the NASD Board calls the proceeding for review, the proposed written 
decision of the National Business Conduct Committee shall become final, 
and the National Business Conduct Committee shall serve its written 
decision pursuant to Rules 9132 and 9134. The decision shall constitute 
the final action of the Association, unless the National Business 
Conduct Committee remands the proceeding.

9424. Discretionary Review by the NASD Regulation Board

    (a) Call for Review by Director
    A Director may call a proceeding for review by the NASD Regulation 
Board if the call for review is made within the period prescribed in 
paragraph (b).
    (b) Seven Day Period; Waiver
    After receiving the proposed written decision of the National 
Business Conduct Committee pursuant to Rule 9423, a Director shall have 
not less than seven days to determine if the proceeding should be 
called for review. A Director shall call a proceeding for review by 
notifying the General Counsel of NASD Regulation. By a unanimous vote 
of the NASD Regulation Board, the NASD Regulation Board may shorten the 
period to less than seven days. By an affirmative vote of the majority 
of the NASD Regulation Board then in office, the NASD Regulation Board 
may, during the seven day period, vote to extend the period to more 
than seven days.
    (c) Review at Next Meeting
    If a Director calls a proceeding for review within the period 
prescribed by paragraph (b), the NASD Regulation Board shall review the 
proceeding not later than the next meeting of the NASD Regulation 
Board. The NASD Regulation Board may order the filing of briefs in 
connection with its review proceedings pursuant to this Rule.
    (d) Decision of NASD Regulation Board, Including Remand
    After review, the NASD Regulation Board may affirm, modify, or 
reverse the proposed written decision of the National Business Conduct 
Committee or remand the proceeding with instructions. The NASD 
Regulation Board shall prepare a proposed written decision that 
includes all of the elements described in Rule 9423(c)(2).

[[Page 25350]]

    (e) Issuance of Decision After Expiration of Call for Review Period
    The NASD Regulation Board shall provide its proposed written 
decision to the NASD Board. The NASD Board may call the proceeding for 
review pursuant to Rule 9425. If the NASD Board does not call the 
proceeding for review, the proposed written decision of the NASD 
Regulation Board shall become final, and the NASD Regulation Board 
shall serve its written decision pursuant to Rules 9132 and 9134. The 
decision shall constitute the final action of the Association, unless 
the NASD Regulation Board remands the proceeding.

9425. Discretionary Review by NASD Board

    (a) Call for Review by Governor
    A Governor may call a proceeding for review by the NASD Board if 
the call for review is made within the period prescribed in paragraph 
(b).
    (b) Seven Day Period; Waiver
    (1) Proceeding Called for Review by NASD Regulation Board
    If the NASD Regulation Board reviewed the proceeding under Rule 
9424, a Governor shall make his or her call for review not later than 
the next meeting of the NASD Board that is at least seven days after 
the date on which the NASD Board receives the proposed written decision 
of the NASD Regulation Board.
    (2) Proceeding Not Called for Review by NASD Regulation Board
    If no Director of the NASD Regulation Board called the proceeding 
for review under Rule 9424, a Governor shall make his or her call for 
review not later than the next meeting of the NASD Board that is at 
least seven days after the date on which the NASD Board receives the 
proposed written decision of the National Business Conduct Committee.
    (3) Waiver
    By a unanimous vote of the NASD Board, the NASD Board may shorten 
the period in subparagraph (1) or (2) to less than seven days. By an 
affirmative vote of the majority of the NASD Board then in office, the 
NASD Board may, during the seven day period in subparagraph (1) or (2), 
vote to extend the period in subparagraph (1) or (2) to more than seven 
days.
    (c) Review at Next Meeting
    If a Governor calls a proceeding for review within the period 
prescribed in paragraph (b), the NASD Board shall review the proceeding 
not later than the next meeting of the NASD Board. The NASD Board may 
order the filing of briefs in connection with its review proceedings 
pursuant to this Rule.
    (d) Decision of NASD Board, Including Remand
    After review, the NASD Board may affirm, modify, or reverse: (1) 
the proposed written decision of the NASD Regulation Board, or (2) if 
the NASD Regulation Board did not call a proceeding for review under 
Rule 9424, the proposed written decision of the National Business 
Conduct Committee. Alternatively, the NASD Board may remand the 
proceeding with instructions. The NASD Board shall prepare a written 
decision that includes all of the elements described in Rule 
9423(c)(2).
    (e) Issuance of Decision
    The NASD Board shall issue and serve its written decision pursuant 
to Rules 9132 and 9134. The decision shall constitute the final action 
of the Association, unless the NASD Board remands the proceeding.

9426. Enforcement of Sanctions

    (a) Order
    If the Department determines that a member has failed to comply 
with limitations imposed by a decision under Rule 9422, 9423, 9424, or 
9425, the Department shall issue an order to be served pursuant to 
Rules 9132 and 9134 imposing the sanctions set forth in the decision 
and specifying the effective date and time of such sanctions.
    (b) Hearing
    A member aggrieved by an order issued under paragraph (a) may file 
a written request for a hearing before the Department. The request 
shall be filed pursuant to Rule 9135, 9136, and 9137 within four days 
after service of the order. The member shall be entitled to be heard in 
person, to be represented by an attorney, and to submit any relevant 
evidence. The hearing shall be recorded and a transcript prepared by a 
court reporter. The member may purchase a copy of the transcript from 
the court reporter. Any corrections to the transcript shall be 
submitted within two days after the hearing or within two days after 
receipt of the transcript, whichever is later.
    (c) Decision
    Within four days after the hearing, the Department shall affirm, 
modify, or reverse the order issued under paragraph (a). The Department 
shall serve the decision on the member pursuant to Rule 9132 and 9134. 
The decision shall become effective upon service and shall constitute 
final action of the Association.

9427. Application to Commission for Review

    Any person aggrieved by final action pursuant to the Rule 9420 
Series may apply for review by the Commission under Section 19 of the 
Act. The filing of an application for review shall not stay the 
effectiveness of final action by the Association, unless the Commission 
otherwise orders.

9500. Suspension, Cancellation, Bar, and Eligibility Procedures

9510. Procedures for Summary Suspension by NASD

9511. Purpose

    Section 15A(h)(3) of the Act authorizes a registered securities 
association to summarily (1) suspend a member or person associated with 
a member who has been and is expelled or suspended from any self-
regulatory organization or barred or suspended from being associated 
with a member of any self-regulatory organization, (2) suspend a member 
who is in such financial or operating difficulty that the association 
determines and so notifies the Commission that the member cannot be 
permitted to continue to do business as a member with safety to 
investors, creditors, other members, or the association, or (3) limit 
or prohibit any person with respect to access to services offered by 
the association if (1) or (2) applies to such person or, in the case of 
a person who is not a member, if the association determines that such 
person does not meet the qualification requirements or other 
prerequisites for such access and such person cannot be permitted to 
continue to have such access with safety to investors, creditors, 
members, or the association.
    Summary suspension procedures for the grounds listed in Section 
15A(h)(3) of the Act are set forth in the Rule 9510 Series. Other 
procedures for suspending the membership of a member, suspending the 
registration of an associated person, or suspending a person from 
association with any member are found in Rules 8220, 8320, and 9520.

9512. Notice

    (a) Authorization
    The NASD Board may authorize the President of NASD Regulation or 
Nasdaq to issue a written notice that:
    (1) summarily suspends a member or person associated with a member 
who has been and is expelled or suspended from any self-regulatory 
organization or barred or suspended from being associated with a member 
of any self-regulatory organization;
    (2) summarily suspends a member who is in such financial or 
operating difficulty that the Association determines and so notifies 
the Commission that the member cannot be permitted to continue to do 
business as a member with safety to investors,

[[Page 25351]]

creditors, other members, or the Association; or
    (3) limits or prohibits any person with respect to access to 
services offered by the Association if subparagraph (1) or (2) applies 
to such person or, in the case of a person who is not a member, if the 
NASD Board determines that such person does not meet the qualification 
requirements or other prerequisites for such access and such person 
cannot be permitted to continue to have such access with safety to 
investors, creditors, members, or the Association.
    (b) Contents and Service of Notice
    A notice issued under this Rule shall state the specific grounds 
for the summary suspension and state that the member or associated 
person may file a written request for a hearing under Rule 9513. The 
notice shall be served by facsimile or pursuant to Rules 9131 and 9134. 
A copy of a notice served on a person who is associated with a member 
shall be served on such member pursuant to Rule 9134. 
    (c) Effective Date
    A summary suspension shall be effective on the date and time 
specified in the notice.

9513. Hearing and Decision

    (a) Request
    (1) Request by Member or Associated Person
    A member or associated person subject to a summary suspension may 
file a written request for a hearing with the NASD Board. The request 
shall state the specific grounds for reversing the summary suspension. 
The request shall be filed pursuant to Rules 9135, 9136, and 9137 
within ten days after service of the notice under Rule 9512. The member 
or associated person may withdraw its request for a hearing by filing a 
written notice with the NASD Board pursuant to Rules 9135, 9136, and 
9137.
    (2) Failure to File Request
    If the member or associated person subject to a summary suspension 
does not file a written request for a hearing under subparagraph (1), 
the notice of summary suspension shall constitute final action by the 
Association.
    (3) No Stay of Summary Suspension
    A request for a hearing shall not stay the effectiveness of a 
summary suspension under Rule 9512.
    (b) Hearing Panel Consideration
    (1) Appointment of Hearing Panel 
    If a member or associated person subject to a summary suspension 
files a written request for a hearing, a hearing shall be held before a 
Hearing Panel within 15 days after service of the notice under Rule 
9512. The Hearing Panel shall be composed of two or more members. One 
member shall be a Governor of the NASD Board, and the remaining member 
or members shall be current or former members of the NASD Regulation 
Board, the Nasdaq Board, or the NASD Board.
    (2) Rights of Member or Associated Person
    A member or associated person subject to a summary suspension shall 
be entitled to be heard in person, to be represented by an attorney, 
and to submit any relevant evidence.
    (3) Witnesses
    A person who is subject to the jurisdiction of the Association 
shall testify under oath or affirmation. The oath or affirmation shall 
be administered by a court reporter.
    (4) Recordation of Hearing
    The hearing shall be recorded and a transcript prepared by a court 
reporter. The member or associated person may purchase a copy of the 
transcript from the court reporter. Any corrections to the transcript 
shall be submitted within three days after the hearing or within three 
days after receipt of the transcript, whichever is later.
    (c) Decision 
    (1) Decision of the Hearing Panel
    The Hearing Panel shall affirm, modify, or reverse the summary 
suspension. The Hearing Panel shall prepare a proposed written decision 
pursuant to subparagraph (2).
    (2) Contents of Decision
    The decision shall include a statement describing the investigative 
or other origin of the proceeding, the grounds for issuing the notice 
under Rule 9512, and a rationale for the disposition of the proceeding, 
and, if a suspension continues to be imposed, the specific grounds for 
imposing such sanction and the terms of the suspension.
    (3) Issuance of Decision After Expiration of Call for Review Period
    The Hearing Panel shall provide its proposed written decision to 
the NASD Board. The NASD Board may call the proceeding for review 
pursuant to Rule 9514. If the NASD Board does not call the proceeding 
for review, the proposed written decision of the Hearing Panel shall 
become final, and the Hearing Panel shall serve its written decision 
pursuant to Rules 9132 and 9134. The decision shall constitute final 
action of the Association.
    9514. Discretionary Review by the NASD Board
    (a) Call for Review by Governor
    A Governor may call a proceeding for review by the NASD Board if 
the call for review is made within the period prescribed by paragraph 
(b).
    (b) Seven Day Period; Waiver
    After receiving the proposed written decision of the Hearing Panel 
pursuant to Rule 9513, a Governor shall have not less than seven days 
to determine if the decision should be called for review. A Governor 
shall call the proceeding for review by notifying the General Counsel 
of the NASD. By a unanimous vote of the NASD Board, the NASD Board may 
shorten the period to less than seven days. By an affirmative vote of 
the majority of the NASD Board then in office, the NASD Board may, 
during the seven day period, vote to extend the period in to more than 
seven days.
    (c) Review at Next Meeting
    If a Governor calls a proceeding for review within the period 
prescribed by paragraph (b), the NASD Board shall review the decision 
not later than the next meeting of the NASD Board. The NASD Board may 
order the filing of briefs in connection with its review proceedings 
pursuant to this Rule.
    (d) Decision of the NASD Board, Including Remand
    After review, the NASD Board may affirm, modify, or reverse the 
proposed written decision of the Hearing Panel. Alternatively, the NASD 
Board may remand the proceeding with instructions. The NASD Board shall 
prepare a written decision that includes all of the elements of Rule 
9513(c)(2).
    (e) Issuance of Decision
    The NASD Board shall issue and serve its decision pursuant to Rules 
9132 and 9134. The decision shall constitute the final action of the 
Association, unless the NASD Board remands the proceeding.

9515. Application to Commission for Review

    Any person aggrieved by final action pursuant to the Rule 9510 
Series may apply for review by the Commission under Section 19 of the 
Act. The filing of an application for review by the Commission shall 
not stay the effectiveness of final action by the Association, unless 
the Commission otherwise orders.

9516. Other Action Not Foreclosed

    Action by the Association under the Rule 9510 Series shall not 
foreclose action by the Association under any other Rule.

9520. Non-Summary Suspension, Cancellation, and Bar Procedures

9521. Purpose

    (a) The Rule 9520 Series sets forth procedures for the Association 
to:
    (1) cancel the membership of a member that becomes ineligible for 
continuance in membership, or that continues to be associated with an 
ineligible person, or suspend or bar a

[[Page 25352]]

person from continuing to be associated with a member because such 
person is or becomes ineligible for association under Article III, 
Section 3 of the NASD By-Laws;
    (2) suspend or cancel the membership of a member or the 
registration of a person for failure to pay fees, dues, assessments, or 
other charges; failure to submit a required report or information 
related to such payment; or failure to comply with an arbitration award 
or a settlement agreement related to an arbitration or mediation under 
Article VI, Section 3 of the NASD By-Laws; and
    (3) cancel the membership of a member for failure to file or submit 
on request any report, document, or other information required to be 
filed with or requested by the Association under Article VII, Section 2 
of the NASD By-Laws.
    (b) Procedures for summarily suspending a member or associated 
person on grounds set forth in Section 15A(h)(2) of the Act are found 
in the Rule 9510 Series. Other procedures for suspending a member or 
associated person for failure to submit required information or failure 
to pay fines, monetary sanctions, or costs are found in Rules 8220 and 
8320, respectively.

9522. Initiation of Proceeding

    (a) Notice
    Association staff shall initiate a proceeding authorized under 
Section 3 of Article III, Section 3 of Article VI, or Section 2 of 
Article VII of the NASD By-Laws by sending a written notice to the 
member or associated person. The notice shall specify the grounds for 
and effective date of the cancellation, suspension, or bar and shall 
state that the member or associated person may file a written request 
for a hearing. The notice shall be served by facsimile or pursuant to 
Rule 9131 and 9134.
    (b) Copy of Notice to Member
    A copy of a notice served on a person associated with a member 
shall be served on such member pursuant to Rule 9134.
    (c) Effective Date
    For any cancellation, suspension, or bar under Section 3 of Article 
III of the NASD By-Laws, the effective date shall be at least seven 
days after service of the notice on the member or associated person. 
For any cancellation or suspension under Section 3 of Article VI or 
Section 2 of Article VII of the NASD By-Laws, the effective date shall 
be at least 15 days after service of the notice on the member or 
associated person.

9523. Hearing Panel Consideration

    (a) Request for Hearing
    A member or associated person who receives a notice under Rule 
9522(a) may file a written request for a hearing with the NASD 
Regulation Board. The request shall be filed pursuant to Rules 9135, 
9136, and 9137 before the effective date set forth in the notice. The 
request shall state the grounds for opposing the cancellation, 
suspension, or bar. The member or associated person may withdraw its 
request at any time by filing a written notice with the NASD Regulation 
Board pursuant to Rules 9135, 9136, and 9137.
    (b) Stay of Action
    Unless otherwise ordered by the NASD Regulation Board, a request 
for a hearing under paragraph (a) shall stay the notice issued under 
Rule 9522.
    (c) Appointment of Hearing Panel
    If a member or associated person files a request for a hearing, the 
NASD Regulation Board shall appoint a Hearing Panel to conduct a 
hearing. The Hearing Panel shall be composed of two or more current or 
former Directors of the NASD Regulation Board.
    (d) Rights of Member
    The member or associated person shall be entitled to be heard in 
person, to be represented by an attorney, and to submit any relevant 
evidence.
    (e) Witnesses
    A person who is subject to the jurisdiction of the Association 
shall testify under oath or affirmation. The oath or affirmation shall 
be administered by a court reporter.
    (f) Recordation of Hearing
    The hearing shall be recorded and a transcript prepared by a court 
reporter. The member or associated person may purchase a copy of the 
transcript from the court reporter. Any corrections to the transcript 
shall be submitted within three days after the hearing or within three 
days after receipt of the transcript, whichever is later.
    (g) Decision
    (1) Decision of Hearing Panel
    The Hearing Panel shall decide whether a cancellation, suspension, 
or bar shall be imposed. The Hearing Panel shall prepare a proposed 
written decision pursuant to subparagraph (2).
    (2) Contents of Decision
    The decision shall include:
    (A) an identification of the article of the NASD By-Laws that 
authorizes the proceeding;
    (B) a statement describing the origin of the proceeding;
    (C) a statement of the nature of the ineligibility or the failure 
to take action that is at issue;
    (D) a statement of findings of fact and conclusions as to any 
violations of the By-Laws;
    (E) a rationale for the disposition of the proceeding; and, F) if a 
suspension, cancellation, or bar is imposed, the effective date and 
time and the terms of the sanction.
    (3) Issuance of Decision After Expiration of Call for Review Period
    The Hearing Panel shall provide its proposed written decision to 
the NASD Board. The NASD Board may call the proceeding for review 
pursuant to Rule 9524. If the NASD Board does not call the proceeding 
for review, the proposed written decision of the Hearing Panel shall 
become final, and the Hearing Panel shall serve its written decision 
pursuant to Rules 9132 and 9134. The decision shall constitute final 
action of the Association.

9524. Discretionary Review by NASD Board

    (a) Call for Review by Governor
    A Governor may call a proceeding for review by the NASD Board if 
the call for review is made within the period prescribed by paragraph 
(b).
    (b) Seven Day Period; Waiver
    After receiving the proposed written decision of the Hearing Panel 
pursuant to Rule 9523, a Governor shall have not less than seven days 
to determine if the decision should be called for review. A Governor 
shall call a proceeding for review by notifying the General Counsel of 
the NASD. By a unanimous vote of the NASD Board, the NASD Board may 
shorten the period to less than seven days. By an affirmative vote of 
the majority of the NASD Board then in office, the NASD Board may, 
during the seven day period, vote to extend the period to more than 
seven days.
    (c) Review at Next Meeting
    If a Governor calls a proceeding for review within the period 
prescribed by paragraph (b), the NASD Board shall review the proceeding 
not later than the next meeting of the NASD Board. The NASD Board may 
order the filing of briefs in connection with its review proceedings 
pursuant to this Rule.
    (d) Decision and Final Action of the Association
    After review, the NASD Board may affirm, modify, or reverse the 
decision of the Hearing Panel or remand the proceeding with 
instructions. The NASD Board shall prepare a written decision that 
includes all of the elements of Rule 9523(g)(2).
    (e) Issuance of Decision After Expiration of Call for Review Period
    The NASD Board shall issue and serve its decision pursuant to Rules 
9132 and 9134. The decision shall constitute final action of the 
Association, unless the NASD Board remands the proceeding.

9525. Application to Commission for Review

    Any person aggrieved by final action pursuant to the Rule 9520 
Series may

[[Page 25353]]

apply for review by the Commission under Section 19 of the Act. The 
filing of an application for review shall not stay the effectiveness of 
final action by the Association, unless the Commission otherwise 
orders.

9526. Other Action Not Foreclosed

    Action by the Association under the Rule 9520 Series shall not 
foreclose action by the Association under any other Rule.

9530. Eligibility Proceedings

9531. Purpose

    The Rule 9530 Series sets forth procedures for a person to become 
associated with a member, notwithstanding the existence of a statutory 
disqualification as defined in Section 3(a)(39) of the Act and for a 
current member or person associated with any member to obtain relief 
from the eligibility or qualification requirements of the NASD By-Laws 
and the Rules of the Association. Such actions hereinafter are referred 
to as ``eligibility proceedings.''

9532. Initiation of Eligibility Proceedings

    (a) Notice of Disqualification or Ineligibility
    (1) Issuance
    If the Department of Member Regulation (hereinafter ``Department'' 
in the Rule 9530 Series) has reason to believe that a statutory 
disqualification exists or that a member or person associated with a 
member otherwise fails to meet the eligibility requirements of the 
Association, the Department shall issue a written notice to the member 
or associated person. The notice shall specify the grounds for such 
disqualification or ineligibility.
    (2) Notice to Member
    A notice issued to a member that is subject to a statutory 
disqualification or is otherwise ineligible for membership shall state 
that the member may apply for relief by filing a written application 
for relief with the Department within seven days after service of the 
notice.
    (3) Notice to Associated Person
    A notice issued to an associated person who is subject to a 
statutory disqualification or is otherwise ineligible for association 
shall state that the member with which the person is or may become 
associated may apply for relief on behalf of itself and such person by 
filing a written application for relief with the Department within 
seven days after service of the notice.
    (4) Service
    A notice issued under this section shall be served by facsimile or 
pursuant to Rules 9131 and 9134.
    (b) Application by Member
    A member shall file a written application for relief from the 
eligibility requirements of the Association with the Department if the 
member:
    (1) determines that it is subject to a statutory disqualification 
or otherwise is no longer eligible for membership;
    (2) determines that a person associated with it is subject to a 
statutory disqualification or otherwise is no longer eligible for 
association with the member; or
    (3) wishes to sponsor the association of a person who is subject to 
a statutory disqualification or otherwise is ineligible for association 
with a member.
    (c) Form of Application for Relief
    A written application for relief shall be submitted on Form MC400 
and shall include a detailed statement demonstrating why the requested 
relief should be granted.
    (d) Withdrawal of Application
    A member may withdraw its application for relief at any time by 
filing a written notice with the Department pursuant to Rules 9135, 
9136, and 9137.
    (e) Ex Parte Communications
    The prohibitions against ex parte communications set forth in Rule 
9143 shall become effective under the Rule 9530 Series when the 
Department of Member Regulation has initiated the eligibility 
proceeding and Association staff has knowledge that a member intends to 
file written application for relief with the Department.

9533. National Business Conduct Committee Consideration

    (a) Hearing Panel Consideration
    (1) Appointment of Hearing Panel
    If a member files an application for relief, the National Business 
Conduct Committee shall appoint a Hearing Panel composed of two or more 
members, who shall be current or former Directors of the NASD 
Regulation Board or former Governors of the NASD Board. The Hearing 
Panel shall conduct a hearing and recommend a decision on the request 
for relief.
    (2) Rights of Member
    The member and its current or prospective associated person, as 
applicable, shall be entitled to be heard in person, to be represented 
by an attorney, and to submit any relevant evidence.
    (3) Recordation of Hearing
    The hearing shall be recorded and a transcript prepared by a court 
reporter. The member may purchase a copy of the transcript from the 
court reporter. Any corrections to the transcript shall be submitted 
within three days after the hearing or within three days after receipt 
of the transcript, whichever is later.
    (4) Recommendation
    The Hearing Panel shall present a recommended decision in writing 
on the request for relief to the Statutory Disqualification Committee. 
After considering the recommendation of the Hearing Panel, the 
Statutory Disqualification Committee shall present its recommended 
decision in writing to the National Business Conduct Committee and all 
other Directors not later than seven days before the meeting of the 
National Business Conduct Committee at which the eligibility proceeding 
shall be considered.
    (b) Decision
    (1) Decision of the National Business Conduct Committee.
    After considering all matters presented in the request for relief, 
the Statutory Disqualification Committee's recommended decision, the 
public interest, and the protection of investors, the National Business 
Conduct Committee may grant or deny the request for relief, and, if 
relief is granted, impose conditions on the matter and its current or 
prospective associated person. Alternatively, the National Business 
Conduct Committee may remand the eligibility proceeding. The National 
Business Conduct Committee shall prepare a proposed written decision 
pursuant to subparagraph (2).
    (2) Contents of Decision
    The decision shall include:
    (A) a decription of the origin of the eligibility proceeding and 
the nature of disqualification;
    (B) a description of the prospective business or employment 
requested to be engaged in; and
    (C) a statement in support of the disposition of the request for 
relief, which, if granted, includes any of the applicable elements 
under SEC Rule 19h-1(e) and a description of any conditions that are 
imposed on the member and current or prospective associated person.
    (3) Issuance of Decision After Expiration of Call for Review Period
    The National Business Conduct Committee shall provide its proposed 
written decision to the NASD Regulation Board, and, if the eligibility 
proceeding is not called for review by the NASD Regulation Board, to 
the NASD Board. The NASD Regulation Board may call the eligibility 
proceeding for review pursuant to Rule 9534. The NASD Board may call 
the eligibility proceeding for review pursuant to Rule 9535. If neither 
the NASD Regulation Board nor the NASD Board calls the eligibility 
proceeding for review, the proposed written decision of the National

[[Page 25354]]

Business Conduct Committee shall become final, and the National 
Business Conduct Committee shall serve its written decision pursuant to 
Rules 9132 and 9134. The decision shall constitute final action of the 
Association, unless the National Business Conduct Committee remands the 
eligibility proceeding.

9534. Discretionary Review by the NASD Regulation Board

    (a) Call for Review by Director
    A Director may call an eligibility proceeding for review by the 
NASD Regulation Board, if the call for review is made within the period 
prescribed in paragraph (b).
    (b) Seven Day Period; Waiver
    After receiving the proposed written decision of the National 
Business Conduct Committee pursuant to Rule 9533, a Director shall have 
not less than seven days to determine if the eligibility proceeding 
should be called for review. A Director shall call an eligibility 
proceeding for review by notifying the General Counsel of NASD 
Regulation. By a unanimous vote of the NASD Regulation Board, the NASD 
Regulation Board may shorten the period to less than seven days. By an 
affirmative vote of the majority of the NASD Regulation Board then in 
office, the NASD Regulation Board may, during the seven day period, 
vote to extend the period to more than seven days.
    (c) Review at Next Meeting
    If a Director calls the eligibility proceeding for review within 
the period prescribed by paragraph (b), the NASD Regulation Board shall 
review the eligibility proceeding not later than the next meeting of 
the NASD Regulation Board. The NASD Regulation Board may order the 
filing of briefs in connection with its review proceedings pursuant to 
this Rule.
    (d) Decision of NASD Regulation Board, Including Remand
    After review, the NASD Regulation Board may affirm, modify, or 
reverse the proposed written decision of the National Business Conduct 
Committee. Alternatively, the NASD Regulation Board may remand the 
eligibility proceeding with instructions. The NASD Regulation Board 
shall prepare a proposed written decision that includes all of the 
elements described in Rule 9533(b)(2).
    (e) Issuance of Decision After Expiration of Call for Review Period
    The NASD Regulation Board shall provide its proposed written 
decision to the NASD Board. The NASD Board may call the eligibility 
proceeding for review pursuant to Rule 9535. If the NASD Board does not 
call the eligibility proceeding for review, the proposed written 
decision of the NASD Regulation Board shall become final, and the NASD 
Regulation Board shall serve its written decision pursuant to Rules 
9132 and 9134. The decision shall constitute the final action of the 
Association, unless the NASD Regulation Board remands the eligibility 
proceeding.

9535. Discretionary Review by the NASD Board

    (a) Call for Review by Governor
    A Governor may call an eligibility proceeding for review by the 
NASD Board if the call for review is made within the period prescribed 
in paragraph (b).
    (b) Seven Day Period; Waiver
    (1) Eligibility Proceeding Called for Review by NASD Regulation 
Board
    If the NASD Regulation Board reviewed the eligibility proceeding 
under Rule 9534, a Governor shall make his or her call for review not 
later than the next meeting of the NASD Board that is at least seven 
days after the date on which the NASD Board receives the proposed 
written decision of the NASD Regulation Board.
    (2) Eligibility Proceeding Not Called for Review by NASD Regulation 
Board
    If no Director of the NASD Regulation Board called the eligibility 
proceeding for review under Rule 9534, a Governor shall make his or her 
call for review not later than the next meeting of the NASD Board that 
is at least seven days after the date on which the NASD Board receives 
the proposed written decision of the National Business Conduct 
Committee.
    (3) Waiver
    By a unanimous vote of the NASD Board, the NASD Board may shorten 
the period in subparagraph (1) or (2) to less than seven days. By an 
affirmative vote of the majority of the NASD Board then in office, the 
NASD Board may, during the seven day period in subparagraph (1) or (2), 
vote to extend the period in subparagraph (1) or (2) to more than seven 
days.
    (c) Review at Next Meeting
    If a Governor calls a eligibility proceeding for review within the 
period prescribed in paragraph (b), the NASD Board shall review the 
eligibility proceeding not later than the next meeting of the NASD 
Board. The NASD Board may order the filing of briefs in connection with 
its review proceedings pursuant to this Rule.
    (d) Decision of NASD Board, Including Remand
    After review, the NASD Board may affirm, modify, or reverse: (1) 
the proposed written decision of the NASD Regulation Board, or (2) if 
the NASD Regulation Board did not call an eligibility proceeding for 
review under Rule 9534, the proposed written decision of the National 
Business Conduct Committee. Alternatively, the NASD Board may remand 
the eligibility proceeding with instructions. The NASD Board shall 
prepare a written decision that includes all of the elements described 
in Rule 9533(b)(2).
    (e) Issuance of Decision
    The NASD Board shall issue and serve its written decision pursuant 
to Rules 9132 and 9134. The decision shall constitute the final action 
of the Association, unless the NASD Board remands the proceeding.

9536. Application to Commission for Review

    Any person aggrieved by final action pursuant to the Rule 9530 
Series may apply for review by the Commission under Section 19 of the 
Act. The filing of an application for review shall not stay the 
effectiveness of final action by the Association, unless the Commission 
otherwise orders.

9600. [Reserved]

9700. PROCEDURES ON GRIEVANCES CONCERNING THE AUTOMATED SYSTEMS

    [No change.]

9800. CORPORATE FINANCING AND DIRECT PARTICIPATION PROGRAM MATTERS

    [No change.]
[FR Doc. 97-11600 Filed 5-7-97; 8:45 am]
BILLING CODE 8010-01-P