[Federal Register Volume 66, Number 74 (Tuesday, April 17, 2001)]
[Notices]
[Pages 19822-19825]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-9506]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44174; File No. SR-NASD-00-78]


Self Regulatory Organizations; Order Approving Proposed Rule 
Change by the National Association of Securities Dealers, Inc. Amending 
the Nasdaq By-Laws

April 11, 2001.

I. Introduction

    On January 22, 2001, the National Association of Securities 
Dealers, Inc. (``NASD'') through its subsidiary, The Nasdaq Stock 
Market, Inc. (``Nasdaq'') filed with the Securities and Exchange 
Commission (``SEC'' or ``Commission'') pursuant to section 19(b)(1) of 
the Securities Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 
thereunder,\2\ a

[[Page 19823]]

proposed rule change amending the Nasdaq By-Laws. The proposed rule 
change was published for comment in the Federal Register on February 8, 
2001.\3\ On February 8, 2001, Nasdaq filed Amendment No. 1 with the 
Commission.\4\ The Commission received no comments on the proposal. 
This order approves the proposal, as amended.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 43914 (January 31, 
2001), 66 FR 9615 (February 8, 2001).
    \4\ Letter from Mary M. Dunbar, Vice President, Nasdaq, to 
Katherine England, Assistant Director, Division of Market Regulation 
(``Division''), Commission, dated February 8, 2001 (``Amendment No. 
1''). Amendment No. 1 redesignated the term ``Amex'' as ``Article 
I(u)'' rather than ``Article I(v).'' This is a technical amendment 
and is not subject to notice and comment.
---------------------------------------------------------------------------

II. Description of the Proposal

    Nasdaq proposes to amend its By-Laws regarding the Nasdaq Board of 
Directors (the ``Board'') by designating up to two officers of Nasdaq 
who will be treated as ``neutral'' Board members for classification and 
composition purposes. Nasdaq also proposes to create new Nasdaq 
Management Compensation, Audit, and Nominating Committees, and to amend 
its By-law provisions regarding the composition and operation of 
certain other Nasdaq committees. Finally, Nasdaq seeks to make certain 
changes to conform its By-Laws to Delaware law and to reflect the new 
corporate relationship between the NASD and Nasdaq.
    The proposed rule change further implements the Restructuring Plan 
approved by NASD members on April 14, 2000 (the ``Restructuring'').\5\ 
The Restructuring broadens the ownership in Nasdaq through a two-phase 
private placement of common stock and warrants to NASD members, Nasdaq 
issuers, and certain others. Prior to the private placement, the NASD 
owned 100 percent of Nasdaq. Now after the closing of the private 
placement, Nasdaq has numerous shareholders, but the NASD retains 
voting control over Nasdaq. Concurrent with the ongoing Restructuring, 
Nasdaq submitted an application to the Commission to register as a 
national securities exchange (``Form 1'') under section 6 of the 
Act.\6\ Prior to its registration as a national securities exchange, 
however, Nasdaq will continue to operate under the Plan of Allocation 
and Delegation of Functions by the NASD to its Subsidiaries (the 
``Delegation Plan''), as approved by the Commission.\7\ Nasdaq is also 
subject to the provisions and requirements of the NASD's August 8, 1996 
settlement order with the Commission (``1996 Order'').\8\
---------------------------------------------------------------------------

    \5\ On June 26, 2000, the Commission approved a number of 
changes to the Nasdaq By-Laws to implement the Restructuring. See 
Securities Exchange Act Release No. 42983 (June 26, 2000), 65 FR 
41116 (July 3, 2000).
    \6\ Nasdaq originally filed its Form 1 with the Commission on 
November 9, 2000. However, Nasdaq's initial Form 1 submission was 
incomplete, and therefore on March 15, 2001, Nasdaq submitted 
additional documents to address the deficiencies. Thus Nasdaq's Form 
1 was not officially filed with the Commission until March 15, 2001.
    \7\ After exchange registration, Nasdaq will no longer be 
governed pursuant to the Delegation Plan.
    \8\ See Order Instituting Public Proceedings Pursuant to section 
19(h)(1) of the Securities Exchange Act of 1934, Making Findings and 
Imposing Remedial Sanctions, Securities Exchange Act Release No. 
37538 (August 8, 1996) (``1996 Order'').
---------------------------------------------------------------------------

Summary of Amendments

Article I

    Article IV, Section 4.3 of the Nasdaq By-Laws requires that the 
number of Non-Industry Directors equal or exceed the number of Industry 
Directors. Currently, Nasdaq officers who serve on the Board are 
treated as Industry Directors for purposes of calculating the 
compositional balance of the Nasdaq Board. Nasdaq proposes that up to 
two officers of Nasdaq who may be elected to the Board be treated as 
``neutral'' for purposes of calculating the balance between Industry 
and Non-Industry Directors. To effectuate this change, Nasdaq proposes 
to exclude from the definitions of Industry Director and Non-Industry 
Director up to two Nasdaq officers who are elected to the Board (the 
``Staff Directors''). Thus, if the stockholders elect one or two Nasdaq 
officers to the Board, they would be deemed ``neutral'' Staff Directors 
and would not be included in calculating the balance between Industry 
and Non-Industry Directors on the Nasdaq Board. If the stockholders 
elect three or more officers to the Board, then the Board, in its 
discretion, would designate two of the officers as ``neutral'' Staff 
Directors and the others would be considered Industry Directors for 
compositional purposes.

Article IV

    Nasdaq proposes to modify its By-Law provision establishing the 
balancing requirements between Industry and Non-Industry Directors, by 
removing references to Nasdaq officers who may be elected to the Board. 
The effect of this amendment, in conjunction with the amendments to the 
definitions of Industry and Non-Industry Directors described above, 
would be to ensure that the two ``neutral'' Staff Directors are not 
counted when calculating the Industry/Non-Industry balance of the 
Board.
    In addition, certain Nasdaq By-Laws relating to committees 
currently require resolutions to be adopted by a majority vote of the 
whole Board (e.g., to appoint, fill vacancies, fix the term of office 
of a committee member, or remove a committee member). Nasdaq proposes 
to remove this high vote requirement because it is no longer required 
for Nasdaq under applicable Delaware law. Under the amended By-Laws, 
only a vote of the Board would be necessary to adopt such resolutions.
    Nasdaq also proposes several amendments to section 4.13 relating to 
committees. Nasdaq proposes to create a new Nominating Committee, 
Management Compensation Committee, and Audit Committee. Currently the 
NASD Nominating Committee nominates candidates for the Nasdaq Board and 
the Nasdaq Listing and Review Council.\9\ In light of the broadening of 
the ownership of Nasdaq, Nasdaq proposes that a committee of its Board, 
rather than a committee of the board of the NASD, would be the 
appropriate nomination body for Nasdaq.\10\ Nasdaq has also proposed to 
make conforming amendments throughout its By-Laws to replace references 
to the NASD's National Nominating Committee with references to Nasdaq's 
Nominating Committee.\11\ The new Audit and Management Compensation 
Committees each require that the majority of Committee members be Non-
Industry Directors, and the Nominating Committee requires that the 
number of Non-Industry members on the Committee equal or exceed the 
number of Industry members on the Committee. With respect to the 
existing Nasdaq Executive and Finance Committees, Nasdaq proposes to 
remove limitations on the size of these committees. As currently 
provided in the By-Laws, the Executive Committee would continue to have 
balancing requirements for industry, Non-Industry, and Public 
Directors, but no such requirements would apply to the Finance 
Committee.
---------------------------------------------------------------------------

    \9\ NASD By-Laws Article VII, section 9.
    \10\ The NASD has proposed changes to its By-Laws to reflect 
this new procedure for electing Nasdaq Board members. See Securities 
Exchange Act Release No. 44004 (February 26, 2001), 66 FR 13601 
(March 6, 2001) (SR-NASD-01-06) and Special NASD Notice to Members 
00-90.
    \11\ Nasdaq By-Laws Article I(p); Article III, sections 3.1, 
3.2; Article IV, section 4.8; and Article V, sections 5.3, 5.8.
---------------------------------------------------------------------------

    Under Delaware law, the Board of a stockholder-owned corporation 
must appoint the Directors who serve on Board committees. Moreover, 
Board committees must be comprised solely of Directors to be validly 
constituted as

[[Page 19824]]

such under Delaware law. Therefore, Nasdaq proposes to remove the By-
Law provision that requires the Nasdaq Chief Executive Officer to serve 
on the Executive and Finance Committees because it is inconsistent with 
the Board's exclusive authority in this respect and inconsistent with 
the requirement that such committees be comprised solely of Directors. 
In the future, any Nasdaq officer elected to the Board may be appointed 
to these Committees.

Article VII

    Section 7.1 currently provides that none of the principal officers 
of Nasdaq, except the Chair and Chief Executive Officer, need to be 
Directors. Nasdaq proposes to remove the reference to the Chief 
Executive Officer to provide the flexibility to have a Chief Executive 
Officer who is not a Director.

Other Changes To Conform the By-Laws to Nasdaq's New Corporate 
Relationship With the NASD; To Delete Unused Terms; and To Conform 
Nasdaq's By-Laws With Delaware Law

    Other changes to the By-Laws are made to reflect Nasdaq's new 
ownership structure and to institute procedures necessary for Nasdaq to 
operate as a corporation. For example, Nasdaq proposes to delete 
Section 4.3 of Article IV, which requires that certain Directors be 
drawn from candidates proposed to the National Nominating Committee by 
a majority of the Non-NASD stockholders of Nasdaq. This provision is no 
longer operative because Nasdaq has already solicited the 
recommendations of the non-NASD stockholders and has mailed a ballot to 
non-NASD stockholders asking them to vote on such candidates. Also, 
definitions for ``Amex Floor Governors,'' ``Nasdaq-Amex,'' and ``Amex 
Board'' are deleted because the terms are no longer used in the Nasdaq 
By-Laws. Finally, Nasdaq proposes certain amendments to the By-Laws to 
conform to applicable Delaware law. For example, under Article IV, 
Section 4.16, Nasdaq Directors would now be permitted to take action 
without a meeting.

III. Discussion

    The Commission has reviewed the NASD's proposed rule change and 
finds, for the reasons set forth below, that the proposal is consistent 
with the requirements of section 15A of the Act \12\ and the rules and 
regulations thereunder applicable to a national securities 
association.\13\ Specifically, the Commission believes the proposal is 
consistent with Sections 15A(b)(2), (b)(4) and (b)(6) of the Act.\14\ 
Section 15A(b)(2) \15\ requires that the association be so organized 
and have the capacity to be able to carry out the purpose of the Act 
and to comply, and to enforce compliance by its members and persons 
associated with its members, with the provisions of the Act.\16\ 
Section 15A(b)(4) \17\ requires that the rules of an association assure 
a fair representative of its members in the selection of its Directors 
and administration of its affairs and provide that one or more 
Directors shall be representative of issuers and investors and not be 
associated with a member of the association, broker, or dealer.\18\ 
Section 15A(b)(6) \19\ 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, 
to remove impediments to and perfect the mechanism of a free and open 
market and a national market system, and, in general, to protect 
investors and the public interest.\20\ The proposed rule change is also 
consistent with the Delegation Plan, and ensures that Nasdaq continues 
to meet its obligations under the 1996 Order.
---------------------------------------------------------------------------

    \12\ 15 U.S.C. 78o-3.
    \13\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
information. 15 U.S.C. 78c(f).
    \14\ 15 U.S.C. 78o-3(b)(2), (b)(4), and (b)(6).
    \15\ 15 U.S.C. 78o-3(b)(2).
    \16\ Through the operation of the Delegation Plan, NASD must be 
responsible for, and Nasdaq must implement, rules, policies, and 
procedures that are consistent with the Act.
    \17\ 15 U.S.C. 78o-3(b)(4).
    \18\ See supra note 16.
    \19\ 15 U.S.C. 78o-3(b)(6).
    \20\ See supra note 16.
---------------------------------------------------------------------------

    Section 15A(b)(4) \21\ of the Act requires fair representation of 
an association's members in the selection of its Directors and 
administration of its affairs, and provides that one or more Directors 
shall be representative issuers and investors and not be associated 
with a member of the association, broker, or dealer. The NASD, through 
the Delegation Plan, has the responsibility for ensuring that the 
Nasdaq Board fulfills the fair representation and public participation 
requirements. The fair representation requirement helps to ensure that 
no particular constituency is subject to the unfair, unfettered actions 
of another constituency, and helps to ensure that the NASD, including 
its Nasdaq subsidiary, is administered in a way that is equitable to 
all NASD members.
---------------------------------------------------------------------------

    \21\ 15 U.S.C. 78o-3(b)(4).
---------------------------------------------------------------------------

    The Commission finds that the proposed composition of the Board 
meets the fair presentation and public participation criteria as set 
forth in Section 15A(b)(4) of the Act. \22\ The proposed rule change 
does not change the requirement that the number of Non-Industry 
Directors equal or exceed the number of Industry Directors. Thus, the 
instant proposal continues to ensure that all interests, Industry, Non-
Industry and Public will be adequately represented on the Board; that 
the decisions by the Board are not unfairly discriminatory between 
customers, issuers, brokers, or dealers; and that the protection of 
investors and the public interest is considered consistent with the 
requirements of the Act. Moreover, as staff representatives of Nasdaq, 
the two ``neutral'' Staff Directors should represent the interest of 
all members, including Industry, Non-Industry, and Public market 
participants.
---------------------------------------------------------------------------

    \22\ Id.
---------------------------------------------------------------------------

    The Commission also finds that Nasdaq's proposal to designate up to 
two officers of Nasdaq who may be elected to the Board as ``neutral'' 
for purposes of calculating the composition of Industry and Non-
Industry Directors on the Board is consistent with Section 15A(b)(4) of 
the Act and with the 1996 Order. In particular, the Commission notes 
that the remainder of the Board will continue to maintain a majority of 
Non-Industry/Public representation. Moreover, the Staff Directors 
should represent the interest of the entire Nasdaq organization, which 
includes Industry, Non-Industry, and Public market participants. The 
Commission further notes that this portion of Nasdaq's proposal permits 
the Nasdaq board to be reduced in size and thus operate more 
efficiently.
    The Commission also finds that Nasdaq's amendments to Section 4.13 
of the Nasdaq By-Laws relating to committees are consistent with the 
requirements of Section 15A(b)(2) and Section 15A(b)(4) of the Act. The 
Commission notes that the establishment of these committees should 
result in the more efficient operation and administration of Nasdaq, 
particularly as Nasdaq moves forward in its efforts to complete its 
exchange registration and become a self-regulatory organization 
separate from the NASD.\23\

[[Page 19825]]

The composition provisions of the Executive Committee and the new 
Nasdaq Committees ensure public participation in the Committees' 
decision-making process and provide for the fair representation of NASD 
members. Like the proposed changes to the structure and composition of 
the Board, the requirement that the number of Non-Industry Directors 
equal or exceed the number of Industry Directors, and the requirement 
that Public Directors be present helps to ensure that the decisions by 
the Executive Committee and the new Nasdaq committees take into account 
the public interest.
---------------------------------------------------------------------------

    \23\ For example, Nasdaq's proposal to remove limitations on the 
size of the Executive and Finance Committees will permit the Board 
to determine the appropriate number of members on these committees 
as appropriate to the needs of Nasdaq and NASD members. As currently 
provided in the By-Laws, the Executive Committee would continue to 
have balancing requirements for Industry, Non-Industry, and Public 
Directors, but no such requirements would apply to the Finance 
Committee.
---------------------------------------------------------------------------

    The Commission notes that the composition of the new Management 
Compensation, Audit, and Nominating Committees, are consistent with the 
specific compositional requirements for the mirror NASD committees, as 
set forth either in the Delegation Plan or the 1996 Order, and as 
implemented by the NASD By-Laws. For example, the composition of the 
proposed Management Compensation Committee fulfills the compositional 
requirements set forth in the 1996 Order that a majority of the 
committee members shall be Non-Industry Directors. The Management 
Compensation Committee also reflects other compositional requirements 
as set forth in the Delegation Plan, which designates that Nasdaq's CEO 
will be an ex-officio, non-voting member of the committee and that each 
committee member will hold office for one year.
    The composition of the proposed Audit Committee fulfills the 
compositional requirements set forth in the 1996 Order that a majority 
of the committee members shall be Non-Industry Directors. In addition, 
the provisions of the Audit Committee mirror those of the NASD By-Laws, 
which also requires that a majority of the Audit Committee members 
shall be Non-Industry Directors; that the Audit Committee shall include 
two Public Directors; and that a Public Director shall serve as chair 
of the Committee.\24\
---------------------------------------------------------------------------

    \24\ See NASD By-Laws, Article IX, Section 5.
---------------------------------------------------------------------------

    Finally, the Nasdaq Nominating Committee's compostional 
requirements would mirror the compositional requirements for the NASD 
Nominating Committee and comply with the requirements of the 1996 
Order. The composition of the proposed Nominating Committee would 
continue to fulfill the compositional requirements set forth in the 
1996 Order that a majority of the committee members shall be Non-
Industry Directors. In addition the Nasdaq Nominating Committee 
reflects the mirror NASD Committee, where the number of Non-Industry 
members on the Nominating Committee equals or exceeds the number of 
Industry members on the Nominating Committee.\25\
---------------------------------------------------------------------------

    \25\ See NASD By-Laws, Article VII, Section 9.
---------------------------------------------------------------------------

    The Commission therefore finds that the composition and operation 
of these Nasdaq committees are consistent with section 15A(b)(2) and 
15A(b)(4) of the Act, which require that the Association, and through 
the Delegation Plan, Nasdq, be so organized and have the capacity to 
carry out the purposes of the Act, and that Nasdaq's key committees 
provide for the fair representation of all members. The Commission 
notes further that the Nasdaq Committees mirror the equivalent NASD 
committee requirements as set forth in the Delegation Plan and 1996 
Order and as reflected in the applicable NASD By-Laws, and are 
consistent with Section 15A(b)(2) and 15A(b)(4) of the Act. The 
Commission emphasizes that all actions undertaken by these Nasdaq 
committees remain subject to the review, ratification, or rejection by 
the NASD Board in accordance with procedures set forth and implemented 
pursuant to the Delegation Plan.\26\
---------------------------------------------------------------------------

    \26\ The NASD must retain the authority to oversee and control 
Nasdaq until Nasdaq registers as a national securities exchange.
---------------------------------------------------------------------------

    The Commission also finds that the proposed amendments, reflecting 
the new corporate relationship between the NASD and Nasdaq, deleting 
unused terms, and conforming the Nasdaq By-Laws to recent amendments to 
Delaware law, are consistent with Section 15A(b)(2) and (4) of the 
Act.\27\ The changes to the By-Laws reflect Nasdaq's new ownership 
structure and institute procedures necessary for Nasdaq to operate as a 
corporation. For example, Nasdaq proposes to delete section 4.3 of 
Article IV, which requires that certain Directors be drawn from 
candidates proposed to the National Nominating Committee by a majority 
of the non-NASD stockholders of Nasdaq. This provision is no longer 
operative because Nasdaq has already solicited the recommendations of 
the non-NASD stockholders and has mailed a ballot to non-NASD 
stockholders asking them to vote on such candidates. In addition, 
definitions for ``Amex Floor Governors,'' ``Nasdaq-Amex,'' and ``Amex 
Board'' are deleted because the terms are no longer used in the Nasdaq 
By-Laws. Other amendments, such as permitting Directors to take action 
without a meeting (Article IV, Section 4.16 of the Nasdaq By-Laws); 
permitting resignations in a form other than writing (Article IV, 
section 4.5 and Article VII, section 7.5 of the Nasdaq By-Laws);'' no 
longer requiring a waiver of certain notices to be in writing (Article 
X, section 10.3 of the Nasdaq By-Laws); and no longer requiring that 
resolutions be adopted by a majority vote of the whole Board (e.g., to 
appoint a committee, fill vacancies on the committee, fix the term of 
office of a committee member, or remove a committee member), conform 
the Nasdaq By-Laws to applicable Delaware law.\28\ The Commission finds 
that these proposed changes are generally consistent with the purposes 
of the Act.
---------------------------------------------------------------------------

    \27\ 15 U.S.C. 78o-3(b)(2) and (4).
    \28\ The Commission notes that the Nasdaq Board's power to 
delegate authority to a committee will still require a vote of the 
majority of the whole Board. Article IV, section 4.13(b) of the 
Nasdaq By-Laws.
---------------------------------------------------------------------------

IV. Conclusion

    It is Therefore Ordered, pursuant to section 19(b)(2) of the 
Act,\29\ that the proposed rule change (SR-NASD-00-78) is approved, as 
amended.

For the Commission, by the Division of Market Regulation, pursuant 
to delegated authority.\30\
---------------------------------------------------------------------------

    \29\ 15 U.S.C. 78s(b)(2).
    \30\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Jonathan G. Katz,
Secretary.
[FR Doc. 01-9506 Filed 4-16-01; 8:45 am]
BILLING CODE 8010-01-M