[Federal Register Volume 64, Number 116 (Thursday, June 17, 1999)]
[Notices]
[Pages 32575-32586]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-15348]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34--41510; File No. SR-NASD-99-21]
Self-Regulatory Organizations Notice of Filing of Proposed Rule
Change by the Nation Association of Securities Dealers, Inc. Relating
to the Creation of a Dispute Resolution Subsidiary
June 10, 1999.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on April 26, 1999, the National Association of Securities Dealers, Inc.
(``NASD'' or ``Association''), through its wholly owned regulatory
subsidiary, NASD Regulation, Inc. (``NASD Regulation''), filed with the
Securities and Exchange Commission (``Commission'') the proposed rule
change as described in Items I, II, and III below, which Items have
been prepared by NASD Regulation. The Commission is publishing this
notice to solicit comments on the proposed rule change from interest
persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
The Association is proposing to create a dispute resolution
subsidiary, NASD Dispute Resolution, Inc. (``NASD Dispute
Resolution''), to handle dipsute resolution programs; to adopt by-laws
for such subsidiary; and to make conforming amendments to the
Delegation Plan, the NASD Regulation By-Laws, and the Rules of the
Association. Below is the text of the proposed rule change. Proposed
new language is in italics; proposed deletions are in brackets.
* * * * *
Plan of Allocation and Delegation of Functions by NASD to
Subsidiaries
I. NASD, Inc.
A. 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 ``NASD
Regulation''),2\2\ [and] The Nasdaq Stock Market, Inc.
(referenced individually as ``Nasdaq''), and NASD Dispute Resolution,
Inc. (referenced individually as `'NASD Dispute Resolution'')
(referenced collectively as the ``Subsidiaries''). The term
``Association'' shall refer to the NASD and the Subsidiaries
collectively.
* * * * *
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, and V.A., the NASD has delegated certain
authority and functions to its subsidiaries. Actions taken pursuant to
delegated authority, however, remain subject to review, ratification or
rejection by the NASD Board in accordance with procedures establish 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 Certificate of Incorporation or the by-laws is hereby
reserved, except as expressly delegated to the subsidiaries. In
addition, the NASD expressly retains the following authority and
functions:
* * * * *
4. To review the rulemaking and disciplinary decisions of the
subsidiaries (See Sections II.B., [and] III.B., and V.B.
below).
5. No change.
6. To resolve any disputes [between] among the Subsidiaries.
* * * * *
11. To take action ``ab inito'' in an area of responsibility
delegated to NASD Regulation in Section II, [or] to Nasdaq
in Section III, or to NASD Dispute Resolution in Section V.
* * * * *
D. 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, and V.A. below,
the staff, books, records, and premises of the NASD subject to
oversight pursuant to the Act, and all officers, directors, employees,
and agents of the Subsidiaries are officers, directors, employees and
agents of the NASD for purposes of the Act. The books and records of
NASDAQ shall be subject at all times to inspection and copying by NASD
Regulation.
II. NASD Regulation, Inc.
A. Delegation of Functions and Authority:
1. Subject to Section 1.B.11, the NASD hereby delegates to NASD
Regulation and NASD Regulation assumes the following responsibilities
and functions as a registered securities association:
a. To establish and interpret rules and regulations and provide
exemptions for NASD members including, but not limited to fees[,] and
membership requirements[, 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)] (ii) financial
responsibility, [(iv)] (iii) qualifications for NASD membership and
association with NASD members, [(v)](iv) clearance and settlement of
securities transactions and other financial responsibility and
operational matters affecting members in general and securities listed
on The Nasdaq Stock Market and on other markets operated by the Nasdaq
Stock Market, [(vi)] (v) NASD member advertising practices, [(vii)]
(vi) administration, interpretation and enforcement of Association
rules, [(viii)] (vii) administration and enforcement of Municipal
Securities Rulemaking Board (``MSRB'') rules, the federal securities
laws, and other laws, rules and regulations that the Association has
the authority to administer or enforce, and [(ix)] (viii) standards of
proof for violations and sanctions imposed on NASD members and
associated persons in connection with disciplinary actions.
* * * * *
h. [To conduct arbitrations, mediations and other dispute
resolution programs.
i.] To conduct qualification examinations and continuing education
programs.
j.-t. Remembered as i.-s.
* * * * *
B. NASD Regulation Board Procedures
1. Rule Filings--The NASD Board shall review and ratify a rule
change adopted by the NASD Regulation Board before the rule change
becomes the final action of the Association if the rule
[[Page 32576]]
change: (a) imposes fees or other charges on persons or entities other
than NASD members; (b) raises significant policy issues in the view of
the NASD Regulation Board, and the NASD Regulation Board refers the
rule change to the NASD Board; or (c) is materially inconsistent with a
recommendation of the National Adjudicatory Council. If the NASD
Regulation Board does not refer a rule change to the NASD Board for
review, the NASD Regulation Board action shall become the final action
of the Association unless called for review by any member of the NASD
Board not later than the NASD Board meeting next following the NASD
Regulation Board's action. During the process of developing rule
proposals, NASD Regulation staff shall consult with and seek the advice
of Nasdaq and NASD Dispute Resolution staff before presenting any rule
proposal to the NASD Regulation Board.
C. Supplemental Delegation Regarding Committees
* * * * *
[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 National Arbitration and
Mediation Committee shall consist of no fewer than ten and no more than
25 members. The members of the National Arbitration and Mediation
Committee shall be equally balanced between Industry and Non-Industry
committee members.
c. At all meetings of the National Arbitration and Mediation
Committee, a quorum for the transaction of business shall consist of a
majority of the National Arbitration and Mediation Committee, including
not less than 50 percent of the Non-Industry committee members. If at
least 50 percent of the Non-Industry Committee members are (i) present
at or (ii) have filed a waiver of attendance for a meeting after
receiving an agenda prior to such meeting, the requirement that not
less than 50 percent of the Non-Industry committee members be present
to constitute the quorum shall be waived.]
[3]2. Operations Committee
* * * * *
V. NASD Dispute Resolution, Inc.
A. Delegation of Functions and Authority
1. Subject to Section I.B.11, the NASD hereby delegates to NASD
Dispute Resolution and NASD Dispute Resolution assumes the following
responsibilities and functions as a registered securities association:
a. To establish and interpret rules and regulations and provide
exemptions for NASD members pertaining to dispute resolution programs
including, but not limited to, dispute resolution fees and procedures.
b. To determine Association policy, including developing and
adopting necessary or appropriate rule changes, relating to the
arbitration, mediation, or other resolution of disputes among and
between NASD members, associated persons and customers.
c. To conduct arbitrations, mediations, and other dispute
resolution programs.
d. To establish the annual budget and business plan for NASD
Dispute Resolution.
e. To determine allocation of NASD Dispute Resolution resources.
f. To establish and assess fees and other charges on NASD members,
persons associated with NASD members, and others using the services or
facilities of NASD Dispute Resolution.
g. To manage external relations on matters related to dispute
resolution with Congress, the Commission, state regulators, other self-
regulatory organizations, business groups, and the public.
2. All action taken pursuant to authority delegated pursuant to
A.1. shall be subject to the review, ratification, or rejection by the
NASD Board in accordance with procedures established by the NASD Board.
B. NASD Dispute Resolution Board Procedures
Rule Filings--The NASD Board shall review and ratify a rule change
adopted by the NASD Dispute Resolution Board before the rule change
becomes the final action of the Association if the rule change: (a)
imposes fees or other charges on persons or entities other than NASD
members; or (b) raises significant policy issues in the view of the
NASD Dispute Resolution Board, and the NASD Dispute Resolution Board
refers the rule change to the NASD Board. If the NASD Dispute
Resolution Board does not refer a rule change to the NASD Board for
review, the NASD Dispute Resolution Board action shall become the final
action of the Association unless called for review by any member of the
NASD Board not later than the NASD Board meeting next following the
NASD Dispute Resolution Board's action. During the process of
developing rule proposals, NASD Dispute Resolution staff shall consult
with and seek the advice of Nasdaq and NASD Resolution staff before
presenting any rule proposal to the NASD Dispute Resolution Board.
C. Supplemental Delegation Regarding Committees
1. 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
NASD Dispute Resolution 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 Dispute Resolution Board shall appoint the National
Arbitration and Mediation Committee by resolution. The National
Arbitration and Mediation Committee shall consist of no fewer than ten
and no more than 25 members. The National Arbitration and Mediation
Committee shall have at least 50 percent Non-Industry members.
c. At all meetings of the National Arbitration and Mediation
Committee, a quorum for the transaction of business shall consist of a
majority of the National Arbitration and Mediation Committee, including
not less than 50 percent of the Non-Industry committee members. If at
least 50 percent of the Non-Industry committee members are either (i)
present at or (ii) have filed a waiver of attendance for a meeting
after receiving an agenda prior to such meeting, the requirement that
not less than 50 percent of the Non-Industry committee members be
present to constitute the quorum shall be waived.
* * * * *
By-Laws of NASD Regulation, Inc.
Article I--Definitions
* * * * *
[[Page 32577]]
(q) ``Industry Director'' or ``Industry Member'' means a
Director (excluding the President) or a National Adjudicatory
Council or committee member who
* * * * *
(6) has a consulting or employment relationship with or provide
professional services to the NASD, NASD Regulation, Nasdaq, NASD
Dispute Resolution, or Amex (and any predecessor), or has had any such
relationship or provided any such services at any time within the prior
three years;
* * * * *
(t) ``NASD Dispute Resolution'' means NASD Dispute Resolution,
Inc,;
(t)-(ff) Renumbered as (u) to (gg)
* * * * *
Rules of the Association
* * * * *
0120. Definitions
When used in these Rules, unless the context otherwise requires:
* * * * *
(b) ``Association''
The term ``Association'' means, collectively, the NASD, NASD
Regulation, [and] Nasdaq, and NASD Dispute Resolution.
* * * * *
Code of Arbitration Procedure
10102. National Arbitration and Mediation Committee
(a) The NASD Dispute Resolution Board of [Governors of the
Association] Directors, following the annual election of its members
[to] by the NASD Board of Governors shall appoint a National
Arbitration and Mediation Committee of such size and composition
including representation from the public at large, as it shall deem
appropriate and in the public interest. The Chairman of the Committee
shall be named by the Chairman of the NASD Dispute Resolution Board.
The said Committee shall establish and maintain [a pool] rosters of
[arbitrations] neutrals composed of persons from within and without the
securities industry.
(b) The Committee shall have the authority to [establish] recommend
to the NASD Dispute Resolution Board appropriate Rules, regulations,
and procedures to govern the conduct of all arbitration, mediation, and
other dispute resolution matters before the Association. All Rules,
regulations, and procedures and amendments thereto [promulgated]
presented by the Committee must be by a majority vote of all the
members of the said Committee. It also shall have such other power and
authority as is necessary to effectuate the purposes of this code.
* * * * *
10400. Mediation Rules
10401. Scope and Authority
* * * * *
(b) A Director of Mediation shall be designated by the
[Association] NASD Dispute Resolution Board to administer mediations
under these Procedures. The Director will consult the [Association's]
National Arbitration and Mediation Committee on the administration of
mediations and the Committee shall, as necessary, make recommendations
to the Director of Arbitration and recommend to the NASD Dispute
Resolution Board [of Governors] amendments to the Procedures. The
duties and functions of the Director may be delegated by the Director,
as appropriate. For purposes of this Rule 10400 Series, the term
``Director'' refers to the Director of Mediation.
* * * * *
10404. Mediator Selection
* * * * *
(c) No mediator shall be permitted to serve as an arbitrator of any
matter pending in [NASD] Association arbitration in which he served as
a mediator, nor shall the mediator be permitted to represent any party
or participant to the mediation in any subsequent [NASD] Association
arbitration proceeding relating to the subject matter of the mediation.
* * * * *
By-Laws of NASD Dispute Resolution, 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) ``Amex'' means American Stock Exchange LLC;
(c) ``Board'' means the Board of Directors of NASD Dispute
Resolution;
(d) ``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;
(e) ``Commission'' means the Securities and Exchange Commission;
(f) ``day'' means calendar day;
(g) ``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;
(h) ``Delaware law'' means the General Corporation Law of the State
of Delaware;
(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) ``Director'' means a member of the Board, excluding the Chief
Executive Officer of the NASD;
(k) ``Executive Representative'' means the executive representative
of an NASD member appointed pursuant to Article IV, Section 3 of the
NASD By-Laws;
(l) ``Industry Director'' or ``Industry member'' means a Director
(excluding the President) or a committee member who (1) is or has
served in the prior three years as an officer, director, or employee of
a broker or dealer, excluding an outside director or a director not
engaged in the day-to-day management of a broker or dealer; (2) is an
officer, director (excluding an outside director), or employee of an
entity that owns more than ten percent of the equity of a broker or
dealer, and the broker or dealer accounts for more than five percent of
the gross revenue received by the consolidated entity; (3) owns more
than five percent of the equity securities of any broker or dealer,
whose investments in brokers or dealers exceed ten percent of his or
her net worth, or whose ownership interest otherwise permits him or her
to be engaged in the day-to-day management of a broker or dealer; (4)
provides professional services to brokers or dealers, and such services
constitute 20 percent or more of the professional revenues received by
the Director or member or 20 percent or more of the gross revenues
received by the Director's or member's firm or partnership; (5)
provides professional services to a director, officer, or employee of a
broker of a broker, dealer, or corporation that owns 50 percent or more
of the voting stock of a broker or dealer, and such services relate to
the director's officer's, or employee's professional capacity and
constitute 20 percent or more of the professional revenues received by
the Director or member or 20 percent or more of the gross revenues
received by the Director's or member's firm or
[[Page 32578]]
partnership; or (6) has a consulting or employment relationship with or
provides professional services to the NASD, NASD Regulation, Nasdaq,
NASD Dispute Resolution, or Amex (and any predecessor), or has had any
such relationship or provided any such services at any time within the
prior three years;
(m) ``NASD'' means the National Association of Securities Dealer,
Inc.;
(n) ``NASD Board'' means the NASD Board of Governors;
(o) ``NASD Dispute Resolution'' means NASD Dispute Resolution,
Inc.;
(p) ``NASD member'' means any broker or dealer admitted to
membership in the NASD;
(q) ``NASD Regulation'' means NASD Regulation, Inc.;
(r) ``Nasdaq'' means The Nasdaq Stock Market, Inc.;
(s) ``Nasdaq-Amex'' means Nasdaq-Amex Market Group, Inc.;
(t) ``National Nominating Committee'' means the National Nominating
Committee appointed pursuant to Article VII, Section 9 of the NASD By-
Laws;
(u) ``Non-Industry Director'' or ``Non-Industry member'' means a
Director (excluding the President) or committee member who is (1) a
Public Director or Public member; (2) an officer or employee of an
issuer of securities listed on Nasdaq or Amex, or traded in the over-
the-counter market; or (3) any other individual who would not be an
Industry Director or Industry member;
(v) ``person associated with a member'' or ``associated person of a
member'' means: (1) a natural person registered under the Rules of the
Association; or (2) a sole proprietor, partner, officer, director, or
branch manager of a member, or a natural person occupying a similar
status or performing similar functions, or a natural person engaged in
the investment banking or securities business who is directly or
indirectly controlling or controlled by a member, whether or not any
such person is registered or exempt from registration with the NASD
under these By-Laws or the Rules of the Association;
(w) ``Public Director'' or ``Public member'' means a Director or
committee member who has no material business relationship with a
broker or dealer or the NASD, NASD Regulation, Nasdaq, or NASD Dispute
Resolution;
(x) ``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 II
Offices
Location
Sec. 2.1 The address of the registered office of NASD Dispute
Resolution 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. NASD Dispute Resolution 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 NASD Dispute Resolution may require.
Change of Location
Sec. 2.2 In the manner permitted by law, the Board or the
registered agent may change the address of NASD Dispute Resolution's
registered office in the State of Delaware and the Board may make,
revoke, or change the designation of the registered agent.
Article III
Meetings of the Stockholder
Action by Consent of Stockholder
Sec. 3.1 Any action required or permitted by law to be taken at
any meeting of the stockholder of NASD Dispute Resolution 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 of the outstanding stock.
Article IV
Board of Directors
General Powers
Sec. 4.1 The property, business, and affairs of NASD Dispute
Resolution shall be managed by or under the direction of the Board. The
Board may exercise all such powers of NASD Dispute Resolution and have
the authority to perform all such lawful acts as are permitted by law,
the Certificate of Incorporation, these By-Laws, or the Delegation Plan
to assist the NASD in fulfilling its self-regulatory responsibilities
as set forth in Section 15A of the Act, and to support such other
initiatives as the Board may deem appropriate. To the fullest extent
permitted by applicable law, the Certificate of Incorporation, and
these By-Laws, the Board may delegate any of its powers to a committee
appointed pursuant to Section 4.13 or to NASD Dispute Resolution staff
in a manner not inconsistent with the Delegation Plan.
Number of Directors
Sec. 4.2 The Board shall consist of no fewer than five and no more
than eight Directors, the exact number to be determined by resolution
adopted by the stockholder of NASD Dispute Resolution from time to
time. Any new Director position created as a result of an increase in
the size of the Board shall be filled pursuant to Section 4.4.
Qualifications
Sec. 4.3 (a) Directors need not be stockholders of NASD Dispute
Resolution. The number of Non-Industry Directors shall equal or exceed
the number of Industry Directors plus the President. The Board shall
include the President, at least two Non-Industry Directors who are also
Governors of the NASD Board, and at least one Industry Director who is
also a Governor of the NASD Board. The Board shall include at least one
Public Director, unless the Board consists of eight Directors. In such
case, at least two Directors shall be Public Directors. 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 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 qualified. 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.
Election
Sec. 4.4 Except as otherwise provided by law, these By-Laws, or
the Delegation Plan, after the first meeting of NASD Dispute Resolution
at which Directors are elected, Directors of NASD Dispute Resolution
shall be elected each year at the annual of the stockholder, or at a
special meeting called for such purpose in lieu of the annual meeting.
If the annual election of Directors is not held on the date designated
therefor, the Directors shall cause such election to be held as soon
thereafter as convenient.
Resignation
Sec. 4.5 Any 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 is not specified, upon receipt thereof, and the
acceptance of such resignation,
[[Page 32579]]
unless required by the terms thereof, shall not be necessary to make
such resignation effective.
Removal
Sec. 4.6 Any or all of the Directors may be removed from office at
any time, with or without cause, only by a majority vote of the NASD
Board.
Disqualification
Sec. 4.7 The term of office of a Director shall terminate
immediately upon a determination by the Board, by a majority vote of
the remaining Directors, that: (a) the Director no longer satisfies the
classification for which the Director was elected; and (b) the
Director's continued service as such would violate the compositional
requirements of the Board set forth in Section 4.3. If the term of
office of a Director terminates under this Section, and the remaining
term of office of such Director at the time of termination is not more
than six months, during the period of vacancy the Board shall not be
deemed to be in violation of Section 4.3 by virtue of such vacancy.
Filling of Vacancies
Sec. 4.8 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 or Non-Industry 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. 4.9 (a) At all meetings of the Board, 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 present may adjourn the meeting
until a quorum is present.
(b) Except as provided in Section 4.14(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.
Regulation
Sec. 4.10 The Board may adopt such rules, regulations, and
requirements for the conduct of the business and management of NASD
Dispute Resolution not inconsistent with the law, the Certificate of
Incorporation, these By-Laws, the Delegation Plan, 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 such Director's duties, be
fully protected in relying in good faith upon the books of account or
reports made to NASD Dispute Resolution by any of its officers, by an
independent certified public accountant, by an appraiser selected with
reasonable care by the Board or any committee of the Board or by any
agent of NASD Dispute Resolution, or in relying in good faith upon
other records of NASD Dispute Resolution.
Meetings
Sec. 4.11 (a) An annual meeting of the Board 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 the stockholder, no notice of the
annual meeting of the Board 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 4.12.
(b) Regular meetings of the Board may be held at such time and
place, within or without the State of Delaware, as determined from time
to time by the Board. After such determination has been made, notice
shall be given in accordance with Section 4.12.
(c) Special meetings of the Board may be called by the Chair of the
Board, by the President, or by at least one-third of the Directors then
in office. Notice of any special meeting of the Board shall be given to
each Director in accordance with Section 4.12.
(d) A Director or member of any committee appointed by the Board
may participate in a meeting of the Board 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. 4.12 (a) Notice of any meeting of the Board shall be deemed
to be duly given to a Director if: (i) mailed to the address last made
known in writing to NASD Dispute Resolution by such Director as the
address to which such notices are to be sent, at least seven days
before the day on which such meeting is to be held; (ii) sent to the
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) delivered to the Director personally or orally,
by telephone or otherwise, not later than the day before the day on
which such 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 need not be given to any
Director if waived by that 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 is present at such meeting, subject to Article IX,
Section 9.3(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
Sec. 4.13 (a) The Board may, by resolution or resolutions adopted
by a majority of the whole Board, appoint one or more committees.
Except as herein provided, vacancies in membership of any committee
shall be filled by the vote of a majority of the whole Board. The Board
may designate one or more 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 such member or
members constitute a quorum, may unanimously appoint another 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. Any
member of a committee may be removed from such committee only after a
majority vote of the whole Board, after appropriate notice, for
refusal, failure, neglect, or inability to discharge such member's
duties.
(b) The Board may, by resolution or resolutions 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 Dispute Resolution by the
NASD under the Delegation Plan. Such delegations shall be in
conformance with applicable law, the 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
[[Page 32580]]
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 NASD Dispute Resolution 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 NASD Dispute Resolution to be affixed to all papers that may
require it.
(c) Except as otherwise permitted by applicable law, no committee
shall have the power or authority of the Board with regard to: amending
the Certificate of Incorporation or the By-Laws of NASD Dispute
Resolution; adopting an agreement of merger or consolidation;
recommending to the stockholder the sale, lease, or exchange of all or
substantially all NASD Dispute Resolution's property and assets; or
recommending to the stockholder a dissolution of NASD Dispute
Resolution or a revocation of a dissolution. Unless the resolution of
the Board expressly so provides, no committee shall have the power or
authority to authorize the issuance of stock.
(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 when required.
(e) Unless otherwise provided by these By-Laws, a majority of a
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 Dispute
Resolution between meetings of the Board, and which may authorize the
seal of NASD Dispute Resolution to be affixed to all papers that may
require it. The Executive Committee shall consist of three or four
Directors, including at least one Public Director. The President of
NASD Dispute Resolution shall be a member of the Executive Committee.
The number of Non-Industry committee members shall equal or exceed the
number of Industry committee members plus the President. An Executive
Committee member shall hold office for a term of one year. At all
meetings of the Executive Committee, a quorum for the transaction of
business shall consist of a majority of the Executive Committee,
including not less than 50 percent of the Non-Industry committee
members. In the absence of a quorum, a majority of the committee
members present may adjourn the meeting until a quorum is present.
(g) The Board may appoint a Finance Committee. The Finance
Committee shall advise the Board with respect to the oversight of the
financial operations and conditions of NASD Dispute Resolution,
including recommendations for NASD Dispute Resolution's annual
operating and capital budgets and proposed changes to the rates and
fees charged by NASD Dispute Resolution. The Finance Committee shall
consist of two or three Directors. The President of NASD Dispute
Resolution shall serve as a member of the Committee. A Finance
Committee member shall hold office for a term of one year.
(h) If the Board appoints a non-Director to a committee, upon
request of the Secretary of NASD Dispute Resolution, each such
prospective committee member shall provide to the Secretary such
information as is reasonably necessary to serve as the basis for a
determination of the prospective committee member's classification as
an Industry or Non-Industry committee member. The Secretary of NASD
Dispute Resolution 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 NASD Dispute Resolution, and shall report
immediately to the Secretary any change in such classification.
Conflicts of Interest; Contracts and Transactions Involving Directors
Sec. 4.14 (a) A Director or a committee member shall not directly
or indirectly participate in any determinations regarding the interests
of any party 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 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 NASD Dispute Resolution and
one or more of its Directors or officers, or between NASD Dispute
Resolution and any other corporation, partnership, association, or
other organization in which one or more of its Directors 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 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. This subsection shall not apply
to a contract or transaction between NASD Dispute Resolution and the
NASD, NASD Regulation, Nasdaq, Nasdaq-Amex, or Amex.
Action Without Meeting
Sec. 4.15 Any action required or permitted to be taken at a
meeting of the Board or of a committee may be taken without a meeting
if all Directors or all members of 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 or the committee.
Communication of Views Regarding Contested Election or Nomination
Sec. 4.16 NASD Dispute Resolution, the Board, any committee, and
NASD Dispute Resolution 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 individual acts solely in his or her
individual capacity and disclaims any intention to
[[Page 32581]]
communicate in any official capacity on behalf of NASD Dispute
Resolution, the Board, or any committee. NASD Dispute Resolution, the
Board, any committee, and the NASD Dispute Resolution 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.
Article V
Officers, Agents, and Employees
Officers
Sec. 5.1 The Board shall elect the officers of NASD Dispute
Resolution, which shall include a President, a Secretary, and 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, General Counsel, and Treasurer
of NASD Dispute Resolution. 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. The terms of office
of such officers shall be at the pleasure of the Board, which by
affirmative vote of a majority of the 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 NASD
Dispute Resolution.
Absence of the President
Sec. 5.2 In the case of the absence or inability to act of the
President of NASD Dispute Resolution, 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. 5.3 In addition to the officers, NASD Dispute Resolution may
employ such agents and employees as the Board 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, the President, or
any officer designated by the Board may from time to time determine.
Agents and employees of NASD Dispute Resolution shall be under the
supervision and control of the officers of the NASD Dispute Resolution,
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. 5.4 The Board may delegate the duties and powers of any
officer of NASD Dispute Resolution to any other officer or to any
Director for a specified period of time and for any reason that the
Board may deem sufficient.
Resignation and Removal of Officers
Sec. 5.5 (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
shall not be necessary to make the resignation effective.
(b) Any officer of NASD Dispute Resolution may be removed, with or
without cause, by resolution adopted by a majority of the Directors
then in office at any regular or special meeting of the Board or by a
written consent signed by all of the Directors then in office. Such
removal shall be without prejudice to the contractual rights of the
affected officer, if any, with NASD Dispute Resolution.
Bond
Sec. 5.6 NASD Dispute Resolution may secure the fidelity of any or
all of its officers, agents, or employees by bond or otherwise.
Article VI
Compensation
Compensation of Board, Council, and Committee Members
Sec. 6.1 The Board may provide for reasonable compensation of the
Chair of the Board, the Directors, and the members of any committee of
the Board. The Board may also provide for reimbursement of reasonable
expenses incurred by such persons in connection with the business of
NASD Dispute Resolution.
Article VII
Indemnification
Indemnification of Directors, Officers, Employees, Agents, and
Committee Members
Sec. 7.1 (a) NASD Dispute Resolution 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 Dispute Resolution or a committee member, or is or was a Director,
officer, or employee of NASD Dispute Resolution who is or was serving
at the request of NASD Dispute Resolution 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 Dispute Resolution)
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 Dispute Resolution 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 Dispute Resolution 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 Dispute Resolution 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 Dispute Resolution
or is or was an agent of NASD Dispute Resolution who is or was serving
at the request of NASD Dispute Resolution 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 Dispute Resolution may, in its discretion, pay the
expenses
[[Page 32582]]
(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 Dispute Resolution 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 expense (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 Dispute Resolution;
(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
Dispute Resolution.
(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, or committee member, 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 Dispute Resolution 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 Dispute Resolution'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 Dispute
Resolution, 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 Dispute Resolution 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. 7.2 NASD Dispute Resolution shall have power to purchase and
maintain insurance on behalf of any person who is or was a Director,
officer, committee member, employee, or agent of NASD Dispute
Resolution, or is or was serving at the request of NASD Dispute
Resolution as a director, officer, employee, or agent of another
corporation, partnership, joint venture, trust, enterprise, or non-
profit entity against any liablity 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 Dispute Resolution would
have the power to indemnify such person against such liability
hereunder.
Article VIII
Capital Stock
Sole Stockholder
Sec. 8.1 The NASD shall be the sole stockholder of the capital
stock of NASD Dispute Resolution.
Certificates
Sec. 8.2 The stockholder 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 NASD Dispute Resolution owned
by the stockholder.
Signatures
Sec. 8.3 (a) Certificates for shares of capital stock of NASD
Dispute Resolution shall be signed in the name of NASD Dispute
Resolution 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.
Such certificates may be sealed with the corporate seal of NASD Dispute
Resolution or a facsimile thereof.
(b) If any such certificates are countersigned by a transfer agent
other than NASD Dispute Resolution or its employee, or by a registrar
other than NASD Dispute Resolution or its employee, any other signature
on the certificate may be a facsimile. In the event that any officer,
transfer agent, or registrar who has signed or whose facsimile
signature has been placed upon a certificate shall cease to be such
officer, transfer agent, or registrar before such certificate is
issued, such certificate may be issued by NASD Dispute Resolution with
the same effect as if such person were such officer, transfer agent, or
registrar at the date of issue.
Stock Ledger
Sec. 8.4 (a) A record of all certificates for capital stock issued
by NASD Dispute Resolution shall be kept by the Secretary or any other
officer, employee, or agent designated by the Board. 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) NASD Dispute Resolution 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, NASD Dispute Resolution 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 NASD Dispute Resolution shall have express or other notice thereof.
Transfers of Stock
Sec. 8.5 (a) The Board may make such rules and regulations as it
may deem expedient, not inconsistent with law, the Certificate of
Incorporation, or
[[Page 32583]]
these By-Laws, concerning the issuance, transfer, and registration of
certificates for shares of capital stock of NASD Dispute Resolution.
The Board 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 NASD
Dispute Resolution only upon delivery to NASD Dispute Resolution 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. 8.6 Each certificate for capital stock surrendered to NASD
Dispute Resolution 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 Section 8.7 until such
existing certificate shall have been canceled.
Lost, Stolen, Destroyed, and Mutilated Certificates
Sec. 8.7 In the event that any certificate for shares of capital
stock of NASD Dispute Resolution shall be mutilated, NASD Dispute
Resolution shall issue a new certificate in place of such mutilated
certificate. In the event that any such certificate shall be lost,
stolen, or destroyed NASD Dispute Resolution may, in the discretion of
the Board or a committee 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 or such committee
may, in its discretion, require the owner of a lost or destroyed
certificate, or such owner's representatives, to furnish to NASD
Dispute Resolution a bond with an acceptable surety or sureties and in
such sum as shall be sufficient to indemnify NASD Dispute Resolution
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, it is proper to do so.
Fixing of Record Date
Sec. 8.8 The Board may fix a record date in accordance with
Delaware law.
Article IX
Miscellaneous Provisions
Corporate Seal
Sec. 9.1 The seal of NASD Dispute Resolution shall be circular in
form and shall bear, in addition to any other emblem or device approved
by the Board, the name of NASD Dispute Resolution, 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 may determine.
Fiscal Year
Sec. 9.2 The fiscal year of NASD Dispute Resolution shall begin on
the first day of January in each year, or such other month as the Board
may determine by resolution.
Waiver of Notice
Sec. 9.3 (a) Whenever notice is required to be given by law, the
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 stockholder,
Directors, of members of a committee of 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 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 NASD Dispute Resolution by such officer or officers or person
or persons as the Board, or a duly authorized committee thereof, may
from time to time designate. Except as otherwise provided by law, the
Board, any committee given specific authority in the premises by the
Board, or any committee given authority to exercise generally the
powers of the Board during intervals between meetings of the Board, may
authorize any officer, employee, or agent, in the name of and on behalf
of NASD Dispute Resolution, 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 NASD Dispute Resolution by any principal officer or subordinate
officer of NASD Dispute Resolution, or, to the extent designated for
such purpose from time to time by the Board, by an employee or agent of
NASD Dispute Resolution. Such designation may contain the power to
substitute, in the discretion of the person named, one or more other
persons.
Form of Records
Sec. 9.5 Any records maintained by NASD Dispute Resolution 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 X
Amendments; Emergency by-Laws
By Stockholder
Sec 10.1 These By-Laws may be altered, amended, or repealed, or
new By-Laws may be adopted, at any meeting of 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 10.2 To the extent permitted by the 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.
Emergency By-Laws
Sec 10.3 The Board may adopt emergency By-Laws subject to repeal
or change by action of the stockholder that shall, notwithstanding any
different provision of law, the Certificate of
[[Page 32584]]
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 NASD Dispute Resolution conducts its
business or customarily holds meetings of the Board or stockholder, any
catastrophe, or other emergency condition, as a result of which a
quorum of the Board or a committee thereof cannot readily be convened
for action. Such emergency By-Laws may make any provision that may be
practicable and necessary under the circumstances of the emergency.
* * * * *
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, NASD Regulation 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. NASD Regulation 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
The proposed rule change is intended to create a new subsidiary to
handle dispute resolution programs and to make certain related changes.
a. Background
The Association's arbitration and mediation programs were operated
by the NASD Arbitration Department until 1996, when those functions
were moved to NASD Regulation following a corporate reorganization.
This reorganization in part grew out of recommendations of a Select
Committee formed by the NASD and made up of individuals with
significant experience in the securities industry and NASD governance
(``the Rudman Committee''). This review took place from December 1994
through August 1995, and the Rudman Report was issued in September
1995.
Meanwhile, in September 1994, the NASD established the Arbitration
Policy Task Force, headed by David S. Ruder, former Chairman of the SEC
(``the Ruder Task Force''), to study NASD arbitration and recommend
improvements. The Ruder Task Force, composed of eight persons with
various backgrounds in the area of securities arbitration, met from the
fall of 1994 to January 1996, when its Report was issued.
Both the Rudman Committee and the Ruder Task Force made
recommendations that affected the arbitration program. The Rudman
Committee recommended that the NASD reorganize as a parent corporation
with two relatively autonomous and strong operating subsidiaries,
independent of one another. The resulting enterprise would consist of
NASD Inc., as parent, The Nasdaq Stock Market, Inc. (``Nasdaq'') as one
subsidiary to operate the Nasdaq market, and a new subsidiary, NASD
Regulation, Inc. to regulate the broker/dealer profession.\3\ The Ruder
Task Force Report, Securities Arbitration Reform, issued in January
1996, recommended that the dispute resolution program be housed either
in the parent or in NASD Regulation (Report at 151-52). The Arbitration
Department was placed in NASD Regulation in early 1996 based on the
recommendation of the Rudman Committee,\4\ and the name of the
department was changed to the Office of Dispute Resolution (ODR)
shortly thereafter, to reflect the broader range of dispute resolution
mechanisms.
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\3\ Report of the NASD Select Committee on Structure and
Governance to the NASD Board of Governors (``Rudman Report'') at R-
8. As described in the Rudman Report, ``The new NASDR subsidiary
would thus be responsible for the NASD's regulation of the broker-
dealer profession, and not for regulating or operating any OTC
market, including Nasdaq. NASDR would promulgate and administer
Rules of Fair Practice, membership rules, and operational
requirements for NASD member firms; oversee the examination and
investigation of member firms and registered representatives;
administer the district offices; bring enforcement actions for rule
violations (including violations of OTC trading rules, whether
referred by Nasdaq, another authority or uncovered by the NASDR
itself), and administer the adjudicative machinery for all NASD
disciplinary actions. NASDR would also assume NASD's other
membership regulatory functions, such as advertising reviews,
corporate finance reviews, arbitration, and administration of the
CRD.'' Rudman Report at R-8.
\4\ Rudman Report at R-8. That Report noted, ``Unlike Nasdaq,
NASDR would not be responsible for operating any securities market
or associated market systems. Rather, NASDR would be the NASD's
strong, independent regulatory arm, responsible for oversight of the
broker-dealer profession, and the programs (such as licensing,
advertising and corporate finance review, and arbitration) that the
NASD performs for the industry as a whole. The NASDR Board should
thus be constituted to perform effective, independent regulatory
oversight, with 50% public representation.'' Rudman Report at R-12.
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The NASD believes that ODR has established credibility as a neutral
forum that is fair to all parties and has gained acceptance by investor
groups. Because there are significant differences between the
disciplinary role of NASD Regulation and the sponsorship of a neutral
forum for the resolution of disputes between members, associated
persons, and customers, however, the NASD believes that creation of a
separate dispute resolution entity will further strengthen the
independence and credibility of the arbitration and mediation
functions. A new dispute resolution subsidiary will benefit from the
perception that it is separate and distinct from other NASD entities.
The new subsidiary will be subject to the same SEC oversight as other
parts of the NASD enterprise, which includes regular inspections by the
SEC and the need to file all by-laws and rule changes with the SEC.\5\
In addition, the new subsidiary will remain subject to inspections by
the General Accounting Office (GAO), which performs audits at the
request of Congress.
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\5\ In a release approving an NASD rule change, the SEC noted:
``The Commission oversees the arbitration programs of the SROs, like
the NASD, through inspections of the SRO facilities and the review
of SRO arbitration rules. Inspections are conducted to identify
areas where procedures should be strengthened, and to encourage
remedial steps either through changes in administration or through
the development of rule changes.'' Exchange Act Release No. 40109,
n. 53 (June 22, 1998), 63 FR 35299 (June 29, 1998).
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The NASD proposes to call the new subsidiary NASD Dispute
Resolution, Inc. (``NASD Dispute Resolution''), and proposes to
incorporate and organize it in much the same way as NASD Regulation.
Like ODR, the subsidiary would be part of the NASD Regulatory and
Dispute Resolution Group.
Staffing for NASD Dispute Resolution will be the same as at
present, except for the creation of a President position and the
possible creation of certain other executive positions. Certain
functions, such as human resources, legal, finance, communications,
administrative services, and technology will be shared with the NASD
and other subsidiaries to avoid duplication; the new subsidiary will be
transfer-priced (charged) for the cost of those functions as it
presently is.
Funding for the new subsidiary will be handled in much the same way
as at present. Currently, ODR is not self supporting. Fees received
from parties who use the arbitration and mediation programs are not
sufficient to fund the Office's regular activities. Rather, as a part
of NASD Regulation, ODR shares in the revenue stream of the overall
NASD enterprise, which includes revenue derived from member
assessments, various fees and charges, disciplinary fines, and other
sources of income. In return, ODR is charged for services that it
receives from the other corporations in the enterprise as described
above.
[[Page 32585]]
Apart from accounting changes to reflect the new subsidiary's status,
the current funding process for ODR will be the same for the new
subsidiary. ODR employees will continue in the same positions in the
new subsidiary, and the physical offices will not move.
The NASD proposes a five-person Board for NASD Dispute Resolution,
consisting of three non-industry and two industry directors, as those
terms and defined in Article I of the proposed By-Laws. The Chief
Executive Officer of the NASD will be an ex-officio non-voting member
of the Board. The non-industry directors would include at least two
persons who also are members of the NASD Board, and an additional
person knowledgeable in the dispute resolution field. At least one of
the non-industry directors also will qualify as a public director, as
defined in the By-Laws. One industry director would be a member of the
NASD Board; the other would be the President of the new subsidiary. The
NASD Board would elect the directors, as is done for the members of the
other subsidiary boards.
The procedures currently in place for disciplining members and
associated persons for noncompliance with arbitration awards will
continue much as they are at present. The Code of Arbitration
Procedure, in IM-10100, provides that the failure of a member or
associated person to comply with an arbitration award obtained in
connection with an arbitration submitted for disposition pursuant to
the procedures specified by the NASD, other self-regulatory
organizations, or the American Arbitration Association \6\ may be
deemed conduct inconsistent with just and equitable principles of trade
and a violation of Rule 2110. This language presently applies to awards
obtained in the NASD Regulation forum, since that forum applies rules
and procedures that are ultimately approved by the NASD. This will also
be the case for NASD Dispute Resolution. Enforcement of the Code will
continue to be handled by NASD Regulation.
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\6\ The NASD Regulation Board of Directors recently approved an
amendment to this Interpretive Material that would add, ``or other
dispute resolution forum selected by the parties.'' See Exchange Act
Release No. 41339 (April 28, 1999), 64 FR 23887 (May 4, 1999). This
proposal was filed as a non-controversial filing. The NASD
designated May 17, 1999 as the effective date of the proposal.
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As is the case with actions by NASD Regulation, actions by the NASD
Dispute Resolution Board may be referred by that Board to the NASD
Board, or reviewed by the NASD Board, as provided in the proposed
amendments to the Delegation Plan.\7\ Thus, the rules utilized by NASD
Dispute Resolution will be the rules of the Association, just as rules
approved currently by the other subsidiaries and subject to NASD Board
review are deemed to be NASD rules.
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\7\ The Delegation Plan was amended in 1997, together with
related By-Laws changes designed to allow the NASD Board to take
action on its own initiative rather than waiting for a subsidiary to
act on the matter. See Exchange Act Release No. 39326 (Nov. 14,
1997), 62 FR 62385 (Nov. 21, 1997).
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NASD Regulation has formed a working group with representatives
from various departments to ensure a smooth transition.
The necessary amendments to create the new subsidiary, and certain
technical changes, are described in detail below.
Description of Proposed Amendments
The Plan of Allocation and Delegation of Functions by NASD to
Subsidiaries (``Delegation Plan'') is proposed to be amended to add
references to the new subsidiary and to move the arbitration and
mediation functions from NASD Regulation to NASD Dispute Resolution.
Therefore, references to the delegations of authority to the
subsidiaries and the rulemaking decisions of the subsidiaries have been
amended to include references to NASD Dispute Resolution. As is the
case for NASD Regulation and Nasdaq, actions of the new subsidiary
Board will be subject to review by the NASD Board, and rule filings
will be made by the new subsidiary on behalf of the NASD.
The description of the National Arbitration and Mediation Committee
(``NAMC'') in the Delegation Plan has been moved from the section
concerning NASD Regulation to a new section concerning NASD Dispute
Resolution. A change has been made in the NAMC member balancing
requirement to provide more flexibility while maintaining at least 50%
non-industry membership. The Delegation Plan currently provides that
NAMC membership shall be equally between industry and non-industry
members. It may be desirable, however, to have an odd number of members
of the NAMC to avoid tie votes. Therefore, the provision has been
amended to state that the NAMC shall have at least 50% non-industry
members. This provides additional flexibility while maintaining a
minimum of half non-industry members, in accordance with the spirit of
the Delegation Plan.
The NASD Regulation By-Laws are proposed to be amended to add
references to NASD Dispute Resolution in the definitions sections.\8\
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\8\ The NASD also intends to review the NASD and Nasdaq By-Laws
and consider appropriate amendments to recognize of NASD Dispute
Resolution.
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Rule 0120(b) is proposed to be amended to clarify that the term
``Association'' collectively means the NASD and its subsidiaries that
are considered part of the self-regulatory organization; that is, the
NASD, NASD Regulation, Nasdaq, and NASD Dispute Resolution.
Rule 101029a) of the Code of Arbitration Procedure is proposed to
be amended to clarify that the new NASD Dispute Resolution Board will
appoint members of the NAMC and name its chair. In addition, Rule
10102(a) is proposed to be amended to replace the phrase ``a pool of
arbitrators'' with the more accurate phrase ``rosters of neutrals,''
since the current rosters include both arbitrators and mediators
(collectively referred to as ``neutrals'').
Rule 10102(b) is proposed to be amended to conform to current
practice, in which the NAMC recommends to the Board certain rules and
procedures to govern the conduct of arbitration and mediation matters,
and does not unilaterally make such changes. In addition, the phrase
``NASD Dispute Resolution'' has been added before ``Board'' to clarify
that recommendations will be made to that Board. As noted above,
actions of the new subsidiary Board will be subject to review by the
NASD Board.
Rule 10401 is proposed to be amended to replace the phrase ``by the
Association'' with regard to designation of the Director of Mediation
and replace it with ``by the NASD Dispute Resolution Board,'' and to
delete ``Association's'' as a modifier of ``National Arbitration and
Mediation Committee.'' Although the NASD and its subsidiaries are
collectively referred to as the Association for self-regulatory
purposes, the use of ``Association'' in this Rule may cause confusion
in light of the new corporate structure and serves no useful purpose in
the Rule. The term ``of Arbitration'' is proposed to be added after one
instance of the word ``Director'' to distinguish it from the Director
of Mediation. In addition, the reference to the ``Board of Governors''
has been changed to ``NASD Dispute Resolution Board'' to reflect the
new structure.
Rule 10404 is proposed to be amended to change the term ``NASD'' to
``Association'' to be more inclusive in this instance because, as
described above, the term ``Association'' refers to the entire self-
regulatory organization.
[[Page 32586]]
The proposed NASD Dispute Resolution By-Laws are modeled on those
of NASD Regulation, with modifications, described below, appropriate to
the particular functions of NASD Dispute Resolution. For example, NASD
Dispute Resolution will not require that a committee other than the
NAMC review all rulemaking proposals. Similarly, there is no need for
provisions on nominations and elections, as all NASD Dispute Resolution
Board members will be selected by the NASD Board of Governors. Standard
provisions allowing for the appointment of an Executive Committee and a
Finance Committee have been included for flexibility, although it is
not immediately expected that such committees will be needed.
Proposed Article IV, Section 4.2 sets the number of Board members
at five to eight although, as stated above, the intention initially is
to have only five Board members. In addition, the Chief Executive
Officer of the NASD will be an ex-officio non-voting member of the
Board. Proposed Section 4.3(a) provides that the number of non-industry
directors shall equal or exceed the number of industry directors plus
the President. This means that the President is treated as an industry
director for this purpose. The other industry director and at least two
of the non-industry directors also will be sitting members of the NASD
Board. This overlapping membership provides stability and uniformity
among the corporations. At least one of the non-industry directors also
will qualify as a public director. The proposed By-Laws define ``Public
Director'' as a director who has no material business relationship with
a broker or dealer or the NASD, NASD Regulation, Nasdaq, or NASD
Dispute Resolution. The By-Laws define ``Non-Industry Director'' as a
director (excluding the President) who is (1) a public director or
public member; (2) an officer or employee of an issuer of securities
listed on Nasdaq or Amex, or traded in the over-the-counter market; or
(3) any other individual who would not be an industry director or
industry member.
A minor modification was made to the standard terminology in
Section 4.13(h) to clarify that the Board may appoint a non-director to
a committee, since this power is implied but not specifically stated in
the preceding paragraphs of Section 4.13.
2. Statutory Basis
NASD Regulation believes that the proposed rule change is
consistent with the provisions of Section 15A(b)(6) of the Act,\9\
which requires, among other things, that the Association's rules be
designed to prevent fraudulent and manipulative acts and practices, to
promote just and equitable principles of trade, and, in general, to
protect investors and the public interest. NASD Regulation believes
that the proposed rule change will protect the public interest by
providing a sharper focus on the dispute resolution process and
maintaining Commission oversight of that process.
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\9\ 15 U.S.C. 78o-3(b)(6).
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Self-Regulatory Organization's Statement on Burden on Competition
NASD Regulation does not believe that the proposed rule change will
result in any burden on competition that is not necessary or
appropriate in furtherance of the purposes of the Act.
Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Written comments were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing
for Commission Action
Within 35 days of the date of 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 such 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, including whether the proposed rule
change is consistent with the Act. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549-
0609. Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for inspection and copying in the
Commission's Public Reference Room. Copies of such filing will also be
available for inspection and copying at the principal office of the
NASD. All submissions should refer to File No. SR-NASD-99-21 and should
be submitted by July 8, 1999.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\10\
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\10\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-15348 Filed 6-16-99; 8:45 am]
BILLING CODE 8010-01-M