[Federal Register Volume 69, Number 184 (Thursday, September 23, 2004)]
[Notices]
[Pages 57119-57126]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E4-2354]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50403; File No. SR-NASD-2004-110]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by National Association of Securities Dealers, Inc. Relating to 
Divestiture of American Stock Exchange

September 16, 2004.
    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 July 16, 2004, the National Association of Securities Dealers, Inc. 
(``NASD''), filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission'') the proposed rule change as described in items I, 
II, and III below, which items have been prepared by NASD. On August 
10, 2004, NASD amended the proposal.\3\ NASD further amended the 
proposal on August 25, 2004,\4\ and on September 3, 2004.\5\ The 
Commission is publishing this notice to solicit comments on the 
proposed rule change, as amended, from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letter from Barbara Z. Sweeney, Senior Vice President 
and Corporate Secretary, NASD, to Katherine A. England, Assistant 
Director, Division of Market Regulation (``Division''), Commission, 
dated August 10, 2004 (``Amendment No. 1''). Amendment No. 1 
replaced NASD's original filing in its entirety.
    \4\ See letter from Barbara Z. Sweeney, Senior Vice President 
and Corporate Secretary, NASD, to Katherine A. England, Assistant 
Director, Division, Commission, dated August 25, 2004 (``Amendment 
No. 2''). Amendment No. 2 replaced NASD's earlier amended filing in 
its entirety.
    \5\ See letter from Barbara Z. Sweeney, Senior Vice President 
and Corporate Secretary, NASD, to Katherine A. England, Assistant 
Director, Division, Commission, dated September 2, 2004 (``Amendment 
No. 3''). Amendment No. 3 modified Exhibit 1 and made certain 
technical corrections to the proposal. Amendment No. 3 replaced 
NASD's earlier amended filing in its entirety.

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[[Page 57120]]

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    NASD is proposing to amend provisions of its By-Laws to reflect 
NASD's pending divestiture of its ownership interest in the American 
Stock Exchange LLC (``Amex''). NASD is also proposing to make parallel 
changes to the definitional and conflict-of-interest provisions of the 
By-Laws of NASD Regulation, Inc. (``NASD Regulation'') and NASD Dispute 
Resolution, Inc. (``Dispute Resolution''), to terminate certain 
undertakings NASD assumed when it acquired Amex in 1998, and to make 
certain other clarifying amendments. Below is the text of the proposed 
rule change. Proposed new language is in italics; proposed deletions 
are in brackets.
* * * * *

Proposed Revisions to By-Laws of National Association of Securities 
Dealers, Inc.

Article I

Definitions

* * * * *
    (n) ``Industry Director'' means a Director of the NASD Regulation 
Board or NASD Dispute Resolution Board (excluding the Presidents) 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 revenues 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 20 percent or more of the gross 
revenues received by the Director's firm or partnership; (5) provides 
professional services to a director, officer, or employee 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 20 percent or more of the gross revenues received by the Director's 
firm or partnership; or (6) has a consulting or employment relationship 
with or provides professional services to the NASD, NASD Regulation, 
NASD Dispute Resolution, [Nasdaq,] or [Amex (and any predecessor)] a 
market for which NASD provides regulation, or has had any such 
relationship or provided any such services at any time within the prior 
three years;
    (o) ``Industry Governor'' or ``Industry committee member'' means a 
Governor (excluding the Chief Executive Officer of the NASD and the 
President of NASD Regulation) or 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 revenues 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 Governor or committee member or 20 percent or more of the gross 
revenues received by the Governor's or committee member's firm or 
partnership; (5) provides professional services to a director, officer, 
or employee 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 Governor or committee member or 20 percent or more of 
the gross revenues received by the Governor's or committee member's 
firm or partnership; [(6) is a Floor Governor,] or ([7]6) has a 
consulting or employment relationship with or provides professional 
services to the NASD, NASD Regulation, NASD Dispute Resolution, [Nasdaq 
or Amex (and any predecessor)] or a market for which NASD provides 
regulation, or has had any such relationship or provided any such 
services at any time within the prior three years;
* * * * *
    (bb) ``Non-Industry Director'' means a Director of the NASD 
Regulation Board or NASD Dispute Resolution Board (excluding the 
Presidents of NASD Regulation and NASD Dispute Resolution) who is: (1) 
a Public Director; (2) an officer or employee of an issuer of 
securities listed on [Nasdaq or Amex, or] a market for which NASD 
provides regulation; (3) an officer or employee of an issuer of 
unlisted securities that are traded in the over-the-counter market; or 
([3]4) any other individual who would not be an Industry Director;
    (cc) ``Non-Industry Governor'' or ``Non-Industry committee member'' 
means a Governor (excluding the Chief Executive Officer and any other 
officer of the NASD, the President of NASD Regulation)[, any Floor 
Governor, and the Chief Executive Officer of Amex)] or committee member 
who is: (1) A Public Governor or committee member; (2) an officer or 
employee of an issuer of securities listed on [Nasdaq or Amex, or] a 
market regulated by NASD; (3) an officer or employee of an issuer of 
unlisted securities that are traded in the over-the-counter market; or 
([3]4) any other individual who would not be an Industry Governor or 
committee member;
* * * * *
    (ee) ``Public Director'' means a Director of the NASD Regulation 
Board or NASD Dispute Resolution Board who has no material business 
relationship with a broker or dealer or the NASD, NASD Regulation, NASD 
Dispute Resolution, or [Nasdaq] a market for which NASD provides 
regulation;
    (ff) ``Public Governor'' or ``Public committee member'' means a 
Governor or committee member who has no material business relationship 
with a broker or dealer or the NASD, NASD Regulation, NASD Dispute 
Resolution, or [Nasdaq] a market for which NASD provides regulation;
* * * * *
    [(ii) ``Floor Governor'' or ``Amex Floor Governor'' means a Floor 
Governor of Amex elected pursuant to Article II, Section .01(a) of the 
Amex By-Laws;
    (jj) ``Amex'' means American Stock Exchange LLC; and
    (kk) ``Amex Board'' means the Board of Governors of Amex.]
* * * * *

Article VII

Board of Governors

* * * * *

[[Page 57121]]

Composition and Qualifications of the Board
    Sec. 4. (a) The Board shall consist of no fewer than [17] 15 nor 
more than [27] 25 Governors, comprising (i) the Chief Executive Officer 
of the NASD, (ii) if the Board of Governors determines, from time to 
time, in its sole discretion, that the appointment of a second officer 
of the NASD to the Board of Governors is advisable, a second officer of 
the NASD, (iii) the President of NASD Regulation, (iv) the Chair of the 
National Adjudicatory Council, [(v) the Chief Executive Officer and one 
Floor Governor of Amex,] and [(vi)] (v) no fewer than 12 and no more 
than 22 Governors elected by the members of the NASD. The Governors 
elected by the members of the NASD shall include a representative of an 
issuer of investment company shares or an affiliate of such an issuer, 
a representative of an insurance company, a representative of a 
national retail firm, a representative of a regional retail or 
independent financial planning member firm, a representative of a firm 
that provides clearing services to other NASD members, and a 
representative of an NASD member having not more than 150 registered 
persons. The number of Non-Industry Governors shall exceed the number 
of Industry Governors. If the number of Industry and Non-Industry 
Governors is [15 to 17] 13 to 15, the Board shall include at least four 
Public Governors. If the number of Industry and Non-Industry Governors 
is [18 to 19] 16-17, the Board shall include at least five Public 
Governors. If the number of Industry and Non-Industry Governors is [20-
25] 18-23, the Board shall include at least six Public Governors.
* * * * *
Term of Office of Governors
    Sec. 5. (a) The Chief Executive Officer and, if appointed, the 
second officer of the NASD, and the President of NASD Regulation[, and 
the Chief Executive Officer of Amex] shall serve as Governors until a 
successor is elected, or until death, resignation, or removal (or, in 
addition, in the case of a second officer of the NASD, until the Board 
of Governors, in its sole discretion, determines that such appointment 
is no longer advisable).
    (b) The Chair of the National Adjudicatory Council shall serve as a 
Governor for a term of one year, or until a successor is duly elected 
and qualified, or until death, resignation, disqualification, or 
removal. A Chair of the National Adjudicatory Council may not serve 
more than two consecutive one-year terms as a Governor, unless a Chair 
of the National Adjudicatory Council is appointed to fill a term of 
less than one year for such office. In such case, the Chair of the 
National Adjudicatory Council may serve an initial term as a Governor 
and up to two consecutive one-year terms as a Governor following the 
expiration of such initial term. After serving as a Chair of the 
National Adjudicatory Council, an individual may serve as a Governor 
elected by the members of the NASD.
    [(c) The Amex Floor Governor shall serve as a Governor for a term 
of two years, or until a successor is duly elected and qualified, or 
until death, resignation, disqualification, or removal. An Amex Floor 
Governor may not serve more than three consecutive two-year terms as a 
Governor, unless such Amex Floor Governor is appointed to fill a term 
of less than one year for such office. In such case, the Amex Floor 
Governor may serve that initial term as a Governor and up to three 
consecutive two-year terms as a Governor following the expiration of 
the initial term.]
    (c [d]) The Governors elected by the members of the NASD shall be 
divided into three classes and hold office for a term of no more than 
three years, such term to be fixed by the Board at the time of the 
nomination or certification of each such Governor, or until a successor 
is duly elected and qualified, or until death, resignation, 
disqualification, or removal. A Governor elected by the members of the 
NASD may not serve more than two consecutive terms. If a Governor is 
elected by the Board to fill a term of less than one year, the Governor 
may serve up to two consecutive terms following the expiration of the 
Governor's initial term. The term of office of Governors of the first 
class shall expire at the January 1999 Board meeting, of the second 
class one year thereafter, and of the third class two years thereafter. 
At each annual election, commencing January 1999, Governors shall be 
elected for a term of three years to replace those whose terms expire.
* * * * *

Article IX

Committees

* * * * *
Executive Committee
    Sec. 4. (a) The Board may appoint an Executive Committee, which 
shall, to the fullest extent permitted by the General Corporation Law 
of the State of Delaware and other applicable law, have and be 
permitted to exercise all the powers and authority of the Board in the 
management of the business and affairs of the NASD between meetings of 
the Board, and which may authorize the seal of the NASD to be affixed 
to all papers that may require it.
    (b) The Executive Committee shall consist of no fewer than 
[six]five and no more than [nine]eight Governors. The Executive 
Committee shall include the Chief Executive Officer of the NASD, and at 
least one Director of NASD Regulation. [, at least one Governor of 
Amex, and at least two Governors who are not members of either the NASD 
Regulation Board, or the Amex Board.] The Executive Committee shall 
have a percentage of Non-Industry committee members at least as great 
as the percentage of Non-Industry Governors on the whole Board and a 
percentage of Public committee members at least as great as the 
percentage of Public Governors on the whole Board.
    (c) An Executive Committee member shall hold office for a term of 
one year.
    (d) 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.
* * * * *

Article XV

Limitation of Powers

* * * * *
Conflicts of Interest
    Sec. 4. (a) A Governor or a member of a committee shall not 
directly or indirectly participate in any adjudication of the interests 
of any party if such Governor or committee member has a conflict of 
interest or bias, or if circumstances otherwise exist where his or her 
fairness might reasonably be questioned. In any such case, the Governor 
or committee member shall recuse himself or herself or shall be 
disqualified in accordance with the Rules of the Association.
    (b) No contract or transaction between the NASD and one or more of 
its Governors or officers, or between the NASD and any other 
corporation, partnership, association, or other organization in which 
one or more of its Governors or officers are directors or officers, or 
have a financial interest, shall be void or voidable solely for this 
reason if: (i) The material facts pertaining to such Governor's or 
officer's relationship or interest and the contract or transaction are 
disclosed or

[[Page 57122]]

are known to the Board or the committee, and the Board or committee in 
good faith authorizes the contract or transaction by the affirmative 
vote of a majority of the disinterested Governors, even though the 
disinterested governors be less than a quorum; or (ii) the material 
facts are disclosed or become known to the Board or committee after the 
contract or transaction is entered into, and the Board or committee in 
good faith ratifies the contract or transaction by the affirmative vote 
of a majority of the disinterested Governors even though the 
disinterested governors be less than a quorum. Only disinterested 
Governors may be counted in determining the presence of a quorum at the 
portion of a meeting of the Board or of a committee that authorizes the 
contract or transaction. This subsection shall not apply to any 
contract or transaction between the NASD and NASD Regulation, Nasdaq, 
or NASD Dispute Resolution[, or Amex].
* * * * *

Proposed Revisions to By-Laws of NASD Regulation, Inc.

Article I

Definitions

* * * * *
    (q) ``Industry Director'' or ``Industry member'' means a Director 
(excluding the President of NASD Regulation and the Chief Executive 
Officer of NASD) or a National Adjudicatory Council or 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 revenues 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, 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 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),] a 
market for which NASD provides regulation, or has had any such 
relationship or provided any such services at any time within the prior 
three years;
* * * * *
    (y) ``Non-Industry Director'' or ``Non-Industry member'' means a 
Director (excluding the President of NASD Regulation and the Chief 
Executive Officer of NASD) or a National Adjudicatory Council 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,] a market for which NASD provides regulation; (3) an officer or 
employee of an issuer of unlisted securities that are traded in the 
over-the-counter market; or [(3)](4) any other individual who would not 
be an Industry Director or Industry member;
* * * * *
    (aa) ``Public Director'' or ``Public member'' means a Director or 
National Adjudicatory Council or committee member who has no material 
business relationship with a broker or dealer or the NASD, NASD 
Regulation, or [Nasdaq;] a market for which NASD provides regulation;
* * * * *
    [(dd) ``Floor Governor'' or ``Amex Floor Governor'' means a Floor 
Governor of Amex elected pursuant to Article I, Section 01(a) of the 
Amex By-Laws;
    (ee) ``Nasdaq-Amex'' means Nasdaq-Amex Market Group, Inc.;
    (ff) ``Amex'' means American Stock Exchange LLC;
    (gg) ``Amex Board'' means the Board of Governors of Amex;]
* * * * *

Article IV

Board of Directors

* * * * *
Sec. 4.14 (a) Conflicts of Interest; Contracts and Transactions 
Involving Directors
    Sec. 4.14 (a) A Director or a National Adjudicatory Council or 
committee member shall not directly or indirectly participate in any 
adjudication of the interests of any party if that Director or National 
Adjudicatory Council 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 
National Adjudicatory Council 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 Regulation and one or 
more of its Directors or officers, or between NASD Regulation 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 Regulation and[:] the NASD, NASD Dispute Resolution, or Nasdaq[, 
Nasdaq-Amex, or Amex].
* * * * *

[[Page 57123]]

Proposed Amendments to 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;]
    (b) [(c)] ``Board'' means the Board of Directors of NASD Dispute 
Resolution;
    (c) [(d)] ``broker'' shall have the same meaning as in Section 
3(a)(4) of the Act;
    (d) [(e)] ``Commission'' means the Securities and Exchange 
Commission;
    (e) [(f)] ``day'' means calendar day;
    (f) [(g)] ``dealer'' shall have the same meaning as in Section 
3(a)(5) of the Act;
    (g) [(h)] ``Delaware law'' means the General Corporation Law of the 
State of Delaware;
    (h) [(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;
    (i) [(j)] ``Director'' means a member of the Board, excluding the 
Chief Executive Officer of the NASD;
    (j) [(k)] ``Executive Representative'' means the executive 
representative of an NASD member appointed pursuant to Article IV, 
Section 3 of the NASD By-Laws;
    (k) [(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 revenues 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, 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 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),] a market for which 
NASD provides regulation, or has had any such relationship or provided 
any such services at any time within the prior three years;
    (l) [(m)] ``NASD'' means the National Association of Securities 
Dealers, Inc.;
    (m) [(n)] ``NASD Board'' means the NASD Board of Governors;
    (n) [(o)] ``NASD Dispute Resolution'' means NASD Dispute 
Resolution, Inc.;
    (o) [(p)] ``NASD member'' means any broker or dealer admitted to 
membership in the NASD;
    (p) [(q)] ``NASD Regulation'' means NASD Regulation, Inc.;
    (q) [(r)] ``Nasdaq'' means The Nasdaq Stock Market, Inc.;
    [(s) ``Nasdaq-Amex'' means Nasdaq-Amex Market Group, Inc.;]
    (r) [(t)] ``National Nominating Committee'' means the National 
Nominating Committee appointed pursuant to Article VII, Section 9 of 
the NASD By-Laws;
    (s) [(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] a market for 
which NASD provides regulation; (3) an officer or employee of an issuer 
of unlisted securities that are traded in the over-the-counter market; 
or [(3)](4) any other individual who would not be an Industry Director 
or Industry member;
    (t) [(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;
    (u) [(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,] a market for 
which NASD provides regulation, or NASD Dispute Resolution;
    (v) [(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 IV

Board of Directors

* * * * *
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

[[Page 57124]]

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, or Nasdaq[, Nasdaq-Amex, or Amex].
* * * * *

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 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 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 will reverse a number of changes that NASD 
made to the By-Laws of NASD, NASD Regulation, and Dispute Resolution in 
1998, when NASD acquired Amex. In addition, NASD proposes to withdraw 
certain representations it made in 1998 regarding its relationship with 
Amex following the Amex acquisition. Finally, NASD proposes to make 
certain other clarifying changes.
Proposed NASD By-Law Revisions
    The proposed NASD By-Law changes are discussed briefly below. Where 
noted, parallel changes will be made to the By-Laws of NASD Regulation 
and Dispute Resolution.

Article I (Definitions)

    The amendments will eliminate references to both Amex and Nasdaq 
from the definitions of ``Industry Director'' and ``Industry 
Governor,'' ``Non-Industry Director'' and ``Non-Industry Governor,'' 
``Public Director'' and ``Public Governor.'' The current references to 
Nasdaq and Amex will be replaced with references to ``a market for 
which NASD provides regulation.'' For example, the definition of 
``Industry Governor'' currently includes persons with a consulting or 
employment relationship with NASD, NASD Regulation, NASD Dispute 
Resolution, Nasdaq, or Amex. Under the proposed amendments, the 
``Industry Governor'' definition will include persons with a consulting 
or employment relationship with ``a market regulated by NASD,'' a term 
that embraces markets with which NASD has entered a contract to provide 
regulatory services, but in which NASD does not necessarily have an 
ownership interest. Because NASD has entered into a regulatory services 
agreement with Amex, and continues to provide regulatory services to 
Nasdaq, for example, the amended definition of ``Industry Governor'' 
will continue to encompass individuals who have a consulting or 
employment relationship with Amex or Nasdaq. NASD believes that, given 
the difficulty and expense involved in amending the NASD By-Laws when 
regulatory clients are added or deleted, substituting ``a market 
regulated by NASD'' is preferable to identifying such clients by name 
in the By-Laws.
    In addition, clarifying amendments are proposed for the definitions 
of ``Non-Industry Director'' and ``Non-Industry Governor,'' which 
currently include an officer or employee of an issuer of securities 
``traded in the over-the-counter market.'' Historically, NASD has 
interpreted this provision as applying only to officers and employees 
of unlisted securities traded in the over-the-counter market; NASD has 
never applied the provision to include officers and employees of listed 
securities that were traded off-exchange. However, since both listed 
and unlisted securities may be traded in the over-the-counter market, 
Article I, Sections (bb) and (cc) have been amended to reflect NASD's 
historical interpretation of the definitions. The proposed amendments 
make no substantive change to the definitions; rather, the amendments 
simply seek to clarify that (renumbered) Subsections 3 of the ``Non-
Industry Director'' and ``Non-Industry Governor'' definitions include 
an officer or employee of only an issuer of unlisted securities that 
are traded exclusively in the over-the-counter market.
    Finally, the definitions of and references to ``Floor Governor,'' 
``Amex,'' and ``Amex Board'' have been eliminated.
    Parallel changes are proposed for the definitional provisions of 
the NASD Regulation and Dispute Resolution By-Laws.

Article VII (Board of Governors)

    The proposed amendments will eliminate two seats on the NASD Board 
that have been reserved for the Chief Executive of Amex and an Amex 
Floor Governor. The elimination of these seats will permit NASD to 
reduce the overall size of the Board. The current authorized size of 
the Board is between 17 and 27 members. With the elimination of the 
Amex seats, the authorized size of the Board will be reduced to between 
15 and 25.
    The proposed amendments will leave unchanged the existing 
requirement that the NASD Board include a minimum of four to six Public 
Governors. However, the numeric thresholds for these minimums will be 
adjusted downward to reflect the smaller overall Board size. For 
example, the By-Laws currently require a minimum of four Public 
Governors when the combined number of Industry and Non-Industry 
Governors is 15 to 17; under the proposed amendments, a minimum of four 
Public Governors will be required when the combined number of Industry 
and Non-Industry Governors is 13 to 15.
    No change is proposed to the existing requirement that the number 
of Non-Industry Governors exceed the number of Industry Governors.
    Under Delaware law, the NASD Board determines how many of the 
authorized seats should be filled. Because smaller boards tend to 
function more efficiently than larger boards, NASD has repeatedly 
stated a preference to avoid filling all authorized seats if the 
compositional requirements set forth in the By-Laws can be met without 
the maximum permissible number of Governors.
    In addition, the proposed amendments will eliminate from Section 5 
of Article VII the provision that sets the maximum permissible term of 
the Amex Floor Governor.

Article IX (Committees)

    Article IX establishes the NASD Executive Committee, which is 
authorized to act on behalf of the NASD Board between meetings of the 
NASD Board. Currently, the committee must include six to nine members, 
at least one of whom must be an Amex representative, but at least two 
of whom may not be members of the boards of either NASD Regulation or 
the Amex.
    The proposed amendments will reduce the authorized size range of 
the committee by one, and eliminate the requirement that an Amex 
representative be included on the committee. The proposed amendments 
also will eliminate the current requirement that at least two members

[[Page 57125]]

of the committee be members of neither the Amex nor NASD Regulation 
boards. NASD notes that requiring at least two NASD-only members of the 
Executive Committee appears to have responded to concerns that arose 
when there were multiple subsidiaries (at various times Nasdaq, Amex, 
and/or NASD Regulation) that were entitled to representation on both 
the NASD Board and the Executive Committee.\6\
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    \6\ In 1997, NASD made extensive modifications to its corporate 
documents in response to the Report of the Select Committee on 
Structure and Governance to the NASD Board of Governors (``Select 
Committee Report'') and the Commission's 1996 Report Pursuant to 
Section 21(a) of the Act (``Section 21(a) Report''). Among other 
things, Article IX, Section 4 was amended to authorize the 
appointment of the Executive Committee. The 1997 amendments included 
requirements that: (i) Nasdaq and NASD Regulation be represented on 
the committee; and (ii) at least two of the committee members not be 
affiliated with those subsidiaries. See Exchange Act Release No. 
39326 (November 14, 1997), 62 FR 62385 (November 21, 1997). 
Following the acquisition of Amex in 1998, Amex was added to the 
entities entitled to representation on the Committee. See Exchange 
Act Release No. 40622 (October 30, 1998), 63 FR 59819 (November 5, 
1998). Nasdaq's right to representation on the committee was 
terminated in 2001. See Exchange Act Release No. 44280 (May 8, 
2001), 66 FR 26892 (May 15, 2001).
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    NASD notes that avoiding possible domination of NASD affairs by 
market interests, and a corresponding diminution of NASD's performance 
of its regulatory responsibilities, has represented a primary 
consideration in NASD corporate governance since the Select Committee 
Report was issued in 1995.\7\ With the elimination of ``status'' seats 
reserved for Nasdaq and Amex representatives, however, NASD believes 
concerns that these markets could dominate NASD decision-making also 
are eliminated.
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    \7\ Telephone conversation between Anne H. Wright, Associate 
Vice President and Associate General Counsel, NASD and Rebekah C. 
Liu, Special Counsel, Division, Commission, on September 13, 2004.
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    The elimination of mandatory market representation on the Executive 
Committee will leave NASD Regulation as the sole remaining subsidiary 
entitled to be represented on the committee. Under the proposed rule 
change, NASD Regulation will continue to be entitled to at least one 
representative on the Executive Committee. However, because NASD 
believes the possibility that regulatory interests could improperly 
dominate NASD decision making would not raise the same concerns as the 
possibility of market-interest domination, the proposed amendments do 
not specify any minimum number of NASD-only Governors who must be 
included on the Executive Committee. NASD believes that the proposed 
changes to the Executive Committee composition are consistent with the 
Select Committee Report and the Section 21(a) Report.

Article XV (Limitation of Powers)

    Subsection 4(b) of Article XV governs participation in transactions 
in which Governors have a conflict of interest. The subsection 
currently does not apply to contracts or transactions between NASD and 
NASD Regulation, Nasdaq, NASD Dispute Resolution, or Amex. The proposed 
amendments will eliminate Amex from this exemptive provision. As a 
result of this change, an Amex-affiliated Governor could no longer be 
counted as disinterested for purposes of determining the presence of a 
quorum at the portion of a meeting of the Board that authorizes a 
contract or transaction with Amex.
    Parallel changes are proposed for the conflict-of-interest 
provisions of the NASD Regulation and Dispute Resolution By-Laws.

1998 Undertakings Regarding NASD-Amex Relationship

    In 1998, NASD articulated certain principles that would guide the 
organization in fulfilling its responsibilities as parent company of 
Amex with ultimate responsibility for Amex's compliance with its 
statutory responsibilities as a self-regulatory organization 
(``SRO'').\8\ Upon completion of NASD's divestiture of its ownership 
interest in Amex, these principles will no longer be applicable. 
Instead, the NASD-Amex relationship will be governed by the regulatory 
services agreement into which the organizations have entered. Because 
the Commission approved the 1998 undertakings as NASD rules,\9\ NASD 
now seeks the Commission's approval of the withdrawal of the 
undertakings.
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    \8\ Among other things, NASD represented that it would exercise 
its powers and its managerial influence to ensure that Amex 
fulfilled its self-regulatory obligations by directing Amex to take 
action necessary to effectuate its purposes and functions as a 
national securities exchange operating pursuant to the Act, and 
ensuring that Amex had and appropriately allocated such financial, 
technological, technical, and personnel resources as may be 
necessary or appropriate to meet its obligations under the Act. NASD 
also committed to refraining from taking any action with respect to 
Amex that would impede efforts by Amex to carry out its SRO 
obligations. See Exchange Act Release No. 40443 (September 16, 
1998), 63 FR 51108 (September 24, 1998) (File No. SR-NASD-98-67--
Policies Regarding Authority Over American Stock Exchange LLC and 
Composition of Board of Governors of American Stock Exchange LLC).
    \9\ See Exchange Act Release No. 40622 (October 30, 1998), 63 FR 
59819 (November 5, 1998) (describing NASD's undertakings regarding 
Amex).
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2. Statutory Basis
    NASD believes that the proposed rule change is consistent with the 
provisions of section 15A(b)(4) of the Act \10\ which requires, among 
other things, that NASD's rules assure a fair representation 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 NASD, 
broker or dealer. NASD also believes the proposed rule change is 
consistent with section 15A(b)(6) of the Act,\11\ which requires that 
NASD's rules be designed to prevent fraudulent and manipulative acts 
and practices, to promote just and equitable principles of trade, and 
protect investors and the public interest.
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    \10\ 15 U.S.C. 78o-3(b)(4).
    \11\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    NASD does not believe that the proposed rule change, as amended, 
will result in any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Written comments were neither solicited nor received.

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. Comments may be submitted by any of 
the following methods:

[[Page 57126]]

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to [email protected]. Please include 
File Number SR-NASD-2004-110 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., 
Washington, DC 20549-0609.
    All submissions should refer to File Number SR-NASD-2004-110. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). 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 Section, 450 Fifth 
Street, NW., Washington, DC 20549. Copies of such filing also will be 
available for inspection and copying at the principal office of the 
NASD. All comments received will be posted without change; the 
Commission does not edit personal identifying information from 
submissions. You should submit only information that you wish to make 
available publicly. All submissions should refer to File Number SR-
NASD-2004-110 and should be submitted on or before October 14, 2004.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E4-2354 Filed 9-22-04; 8:45 am]
BILLING CODE 8010-01-P