[Federal Register Volume 63, Number 213 (Wednesday, November 4, 1998)]
[Notices]
[Pages 59614-59615]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-29513]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40615; File No. SR-NASD-98-56]


Self-Regulatory Organizations; Order Granting Partial Approval to 
Proposed Rule Change by the National Association of Securities Dealers, 
Inc. Relating to the Small Firm Representative on NASD Board Portion of 
the Proposed Rule Change Relating to Amendment to Composition of NASD 
Board to Include Members of New Amex LLC and for Other Purposes

October 28, 1998.
    On August 10, 1998, the National Association of Securities Dealers, 
Inc. (``NASD'' or ``Association'') filed with the Securities and 
Exchange Commission (``SEC'' or ``Commission'') a proposed rule change 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder.\2\ In its proposal, among 
other matters, the NASD proposed revision of its by-laws to reserve one 
Industry Governor position on the NASD Board of Governors (``Board'') 
for a representative of smaller NASD member firms. Notice of the 
proposal was published in the Federal Register on August 26, 1998 
(``Notice'').\3\ The Commission received one comment letter on the 
filing.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 40399 (August 19, 
1998), 63 FR 22839 (File No. SR-NASD-98-56).
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I. Introduction and Description of the Proposal

    In 1997, the NASD reorganized its corporate governance structure in 
connection with a revision of its disciplinary process following 
issuance of the Commission's Report Pursuant to Section 21(a) of the 
Act and related order and undertakings.\4\ The changes streamlined the 
NASD's decisionmaking process, improved communication among members of 
the Board and Association staff and enabled the Association to act 
quickly and decisively when appropriate.\5\ After the reorganization, 
the NASD established the Small Firm Advisory Board \6\ to address 
concerns raised by a number of smaller member firms about their 
representation within the new NASD corporate structure.
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    \4\ Report and Appendix to Report Pursuant to Section 21(a) of 
the Securities Exchange Act of 1934 Regarding the NASD and The 
Nasdaq Stock Market (August 8, 1996) and Securities Exchange Act 
Release No. 37538 (August 8, 1996) (SEC 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), respectively. The 
undertakings were included in the SEC Order.
    \5\ See Securities Exchange Act Release No. 39326 (November 14, 
1997), 62 FR 62385 (November 21, 1997) (File Nos. NASD-97-71, 96-29 
and 96-20).
    \6\ Press Release, National Association of Securities Dealers, 
NASD Creates Small Firm Advisory Board (Feb. 17, 1998).
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    The Notice indicated that the NASD's experience under the new 
corporate structure suggested that further participation by the small 
member firm community in matters affecting their business and their 
customers would be desirable. To provide this, the NASD filed the 
proposed rule change, seeking amendment of its by-laws to include one 
representative of member firms with 150 or fewer registered 
representatives among the Industry positions on the Board of 
Governors.\7\
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    \7\ To qualify for this position, a proposed nominee must be 
associated with a member firm of 150 or fewer registered 
representatives. The definition of an Industry Governor is set forth 
in Article I of the NASD By-laws.
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II. Summary of Comments

    The Commission received one comment letter from the Independent 
Broker-Dealer Association (``IBDA'').\8\ The NASD responded to this 
letter.\9\
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    \8\ See Letter from Bill T. Singer, Singer Fumiento LLP to The 
Secretary, Securities and Exchange Commission, dated September 11, 
1998. The comment letter is composed of a cover letter from Mr. 
Singer, counsel to the IBDA and a report to Alan Davidson, President 
of the IBDA from Mr. Singer, addressing the small firm 
representative and other issues, dated September 10, 1998.
    \9\ See Letter from T. Grant Callery, General Counsel, NASD to 
Katherine England, Assistant Director, Division of Market 
Regulation, Commission, dated October 22, 1998.
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    The comment letter expresses numerous concerns about the 
representation of small firms within the NASD.\10\ Primarily, the 
comment letter questions whether the proposed ``small firm Board 
position,'' combined with the current Small Firm Advisory Board, 
adequately represent the IBDA members within the NASD. The letter 
stresses the need for enhanced representation of small firms and 
asserts that IBDA members have been hurt by the lack of adequate 
representation. The comment letter suggests that IBDA members would be 
better represented if they were able to elect the members of the Small 
Firm Advisory Board and the small firm Board representative directly. 
The comment letter also suggests that the maximum number of registered 
representatives allowed by the proposed definition of a small firm 
should be reduced, to more adequately represent the majority of smaller 
firms.
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    \10\ The comment letter also questioned: (a) certain aspects of 
the proposed NASD/Amex combination; (b) inclusion of the small firm 
representative vote in the same filing as the combination; and (c) 
the effects of the post 21(a) Report enhancement of the NASD 
disciplinary process on OBDA members. That portion of SR-NASD-98-56 
regarding the NASD/Amex combination, and any comment letters 
received thereto, will be separately addressed by the Commission at 
a later date, in connection with review of all filings addressing 
the combination. See, e.g., Securities Exchange Act Release No. 
40426 (September 10, 1998) (Notice of Filing of Proposed Rule Change 
and Amendment No. 1 Thereto by the American Stock Exchange, Inc. 
Relating to Changes to the Combination of the American Stock 
Exchange, Inc. and the National Association of Securities Dealers, 
Inc. File No. SR-AMEX-98-32) and Securities Exchange Act Release No. 
40443 (September 16, 1998.) (Notice of Filing of Proposed Rule 
Change and Amendment No. 1 Thereto by the National Association of 
Securities Dealers, Inc. Relating to Policies Regarding Authority 
Over American Stock Exchange LLC and Composition of Board of 
Governors of American Stock Exchange LLC, File No. SR-NASD-98-67).
    The Association has indicated to the Commission that the small 
firm representative Board member vote was included in the same 
ballot as the NASD/Amex combination issues as a cost-savings 
mechanism, to avoid incurring the expense of separate mailings to 
the NASD membership on each issue. Conversation between Philip 
Rosen, Associate General Counsel, Office of General Counsel, NASD 
and Mandy S. Cohen, Special Counsel, Division of Market Regulation, 
Commission, on October 26, 1998.
    The comments on the post 21(a) Report disciplinary process 
enhancements do not relate to the subject of SR-NASD-98-56, the 
proposal currently under consideration. The Commission notes, 
however, that enhancement of the disciplinary process is a favorable 
outcome of the 21(a) Report and SEC Order.
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    Responding to the IBDA's concerns, the NASD points out that the 
Commission approved its 1997 corporate structure and in doing so, found 
the restructuring to be consistent with the requirements of Section 15A 
of the Act, including the provisions requiring fair representation of 
members in the governance of the NASD.\11\ In particular, the 
Association responds that the Commission assessed the 1997 corporate 
structure changes in terms of the fair representation requirement 
before reservation of a small firm Board position. Additionally, the 
NASD asserts that the Small Firm Advisory Board was voluntarily 
established by the Board of Governors to provide a more effective voice 
for the small firm member community, notwithstanding the minimum 
requirements of the Act. Moreover, the NASD points out that, regardless 
of the proposed definition, the current nominee for the small firm 
Governor position is associated with a member firm of eight registered 
representatives,\12\ and that eight of the twelve members of the Small 
Firm

[[Page 59615]]

Advisory Board are from member firms with fewer than twenty registered 
representatives. Finally, the NASD notes that its by-laws allow for the 
nomination of dissident candidates for specific positions, such as the 
small firm representative, through the by-laws' contested election 
procedures.\13\
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    \11\ See 15 U.S.C. 78o(b)(4).
    \12\ See, e.g., Notice To Members 98-80 (Sept. 29, 1998); supra 
note 9.
    \13\ See Article VII, Section 10 to the NASD by-laws. In this 
context, dissident candidates are those not nominated by the NASD 
Nominating Committee.
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III. Discussion

    As discussed below, the Commission has determined to approve the 
Association's proposal incorporating a small firm Board representative. 
The standard by which the Commission must evaluate a proposed rule 
change is set forth in Section 19(b) of the Act. The Commission must 
approve a proposed NASD rule change if it finds that the proposal is 
consistent with the requirements of Section 15A of the Act \14\ and the 
rules and regulations thereunder that govern the NASD.\15\ In 
evaluating a given proposal, the Commission examines the record before 
it and all relevant factors and necessary information. In addition, 
Section 15A of the Act establishes specific standards for NASD rules 
against which the Commission must measure the proposal.\16\
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    \14\ 15 U.S.C. 78o-3.
    \15\ 15 U.S.C. 78s(b).
    \16\ 15 U.S.C. 78o-3.
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    The Commission believes the creation of a small firm representative 
is consistent with that portion of Section 15A requiring fair member 
representation in the governance of the NASD.\17\ As discussed above, 
the Association made substantial changes to its corporate governance 
structure in 1997, many of which responded to the Commission's 21(a) 
Report and related documents. After these changes, the NASD created the 
Small Firm Advisory Board to address concerns raised by small firms 
about their ability to participate in the new NASD corporate structure. 
Today, the Commission approves the reservation of a Governor position 
to represent member firms with 150 or fewer registered representatives. 
The Commission agrees with the NASD that the changes, as proposed, will 
enhance the representation of small firms within the NASD corporate 
governance structure by inserting a small firm representative into the 
center of the decisionmaking process, the NASD Board of Governors. As a 
member of the Board of Governors, the small firm representative, unlike 
a member of the Small Firm Advisory Board, will have an opportunity to 
actively participate in the governance of the NASD and keep abreast of 
the Association's new initiatives.
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    \17\ 15 U.S.C. 78o(b)(4).
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    Additionally, the Commission believes that the NASD acted within 
its discretion by defining a small member firm as one having 150 or 
fewer registered representatives. Approval of the exercise of this 
discretion is supported by the fact that the NASD by-laws include 
contested election provisions approved in connection with the 1997 
restructuring. These provision will allow organizations such as the 
IBDA to present candidates for the NASD Board of Governors to the NASD 
membership during the regular election process, if they do not like 
those nominated by the NASD Nominating Committee. The existence of 
these contested election procedures further supports the finding that 
the amendments approved today satisfy the fair representation 
requirements of the Act discussed above, since these provisions permit 
presentation of an alternative nominee for the small firm 
representative Board position.

IV. Conclusion

    The Commission believes that the proposed rule change is consistent 
with the Act, and, particularly, with Section 15A thereof.\18\ In 
approving the proposal, the Commission has considered its impact on 
efficiency, competition, and capital formation.\19\
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    \18\ 15 U.S.C. 78o-3.
    \19\ 15 U.S.C. 78(c)f.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\20\ that the portion of the proposed rule change (SR-NASD-98-56) 
relating to reservation of a small firm representative on the NASD 
Board of Governors, is approved.
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    \20\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, pursuant 
to delegated authority.\21\
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    \21\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-29513 Filed 11-3-98; 8:45 am]
BILLING CODE 8010-01-M