[Federal Register Volume 70, Number 153 (Wednesday, August 10, 2005)]
[Notices]
[Pages 46554-46557]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-4313]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52176; File No. SR-NASD-2005-086]


Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Notice of Filing and Immediate Effectiveness of Proposed 
Rule Change To Amend Article VIII of the By-Laws of NASD Regulation, 
Inc. Relating to District Committees and District Nominating Committees

July 29, 2005.
    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 5, 2005, the National Association of Securities Dealers, Inc. 
(``NASD'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in items I and 
II below, which items have been prepared by NASD. NASD has filed the 
proposed rule change pursuant to section 19(b)(3)(A) of the Act \3\ and 
Rule 19b-4(f)(6) thereunder,\4\ which renders the proposal effective 
upon filing with the Commission.\5\ The Commission is publishing this 
notice to solicit comments on the proposed rule change from interested 
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 7 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4(f)(6)
    \5\ As required under Rule 19b-4(f)(6)(iii), NASD provided the 
Commission with written notice of its intent to file the proposed 
rule change at least five business days prior to the filing date.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    NASD proposes to amend Article VIII (District Committees and 
District Nominating Committees) of the By-Laws of NASD Regulation, Inc. 
(``By-Laws'') to clarify the qualification requirements for candidates 
to NASD District Committees and District Nominating Committees 
(collectively, ``Committees''), and to establish procedures for the 
nomination and election of an alternate candidate who will replace, in 
an uncontested election, a candidate nominated by the District 
Nominating Committee that withdraws from further consideration or is 
determined to be ineligible. Below is the text of the proposed rule 
change.\6\ Proposed new language is italicized; proposed deleted text 
is [bracketed].
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    \6\ The Commission made minor technical changes to the rule text 
on behalf of the NASD. See E-mail from Kosha Dalal, Associate 
General Counsel, NASD, to Ronesha A. Butler, Special Counsel, 
Division of Market Regulation, Commission, dated July 27, 2005.
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* * * * *

ARTICLE VIII

DISTRICT COMMITTEES AND DISTRICT NOMINATING COMMITTEES

    Sec. 8.1 No change.

Composition of District Committees

    Sec. 8.2 (a) A district created under Section 8.1 shall elect a 
District Committee pursuant to this Article. A District Committee shall 
consist of no fewer than five and no more than 20 members, unless 
otherwise provided by resolution of the Board. Subject to the 
limitation set forth in the immediately preceding sentence, the 
authorized number of members of a District Committee shall be 
determined from time to time by the Board; provided, however, that no 
decrease in the authorized number of members of a District Committee 
shall shorten the term of office of any member thereof. Each District 
Committee member shall: (1) Be [employed by] registered with an NASD 
member eligible to vote in the district for District Committee 
elections, and (2) work primarily from such NASD member's principal 
office or a branch office that is located within the district where the 
member serves on a District Committee. Members of the District 
Committees shall serve as panelists in disciplinary proceedings in 
accordance with the Rules of the Association. The District Committees 
shall consider and recommend policies and rule changes to the Board. 
The District Committees shall endeavor to educate NASD members and 
other brokers and dealers in their respective districts as to the 
objects, purposes, and work of the NASD and NASD Regulation in order to 
foster NASD members' interest and cooperation.
    Sec. 8.3 to Sec. 8.8. No change.

Composition of District Nominating Committees

    Sec. 8.9 (a) Each district created under Section 8.1 shall elect a 
District Nominating Committee pursuant to this Article. A District 
Nominating Committee shall consist of five

[[Page 46555]]

members, unless the Board by resolution increases a District Nominating 
Committee to a larger number. Each District Nominating Committee member 
shall: (1) be [employed by] registered with an NASD member eligible to 
vote in the district for District Committee elections, and (2) work 
primarily from such NASD member's principal office or a branch office 
that is located within the district where the member serves on a 
District Nominating Committee, but shall not be a member of the 
District Committee. A majority of the members of the District 
Nominating Committee shall include persons who previously have served 
on a District Committee or who are current or former Directors or 
current or former Governors of the NASD Board.
    Sec. 8.10 to Sec. 8.16. No change.

District Nominating Committee Slate

    Sec. 8.17 (a) The District Nominating Committee shall review the 
background of proposed candidates and the description of the NASD 
membership provided by NASD Regulation staff and shall nominate a slate 
of candidates for the election. The slate shall include one candidate 
for each open position on the District Committee and the District 
Nominating Committee subject to election at the next annual election. 
The District Nominating Committee may also nominate one alternate 
candidate for the District Committee and one alternate candidate for 
the District Nominating Committee. In the event of an uncontested 
election pursuant to Section 8.19, the alternate candidate would 
replace any member of the nominated slate of candidates who withdrew or 
was determined to be ineligible. In nominating candidates for the 
office of member of the District Committee and the office of member of 
the District Nominating Committee, the District Nominating Committee 
shall endeavor to secure appropriate and fair representation on the 
District Committee and on the District Nominating Committee of the 
various sections of the district and various classes and types of NASD 
members engaged in the investment banking or securities business within 
the district. In nominating candidates for the office of member of the 
District Nominating Committee, a District Nominating Committee shall 
assure that the composition of the District Nominating Committee meets 
the standards in Section 8.9(a).

Notification of Nomination

    Sec. 8.18 The District Director, acting on behalf of the District 
Nominating Committee, shall give a Notice to the Secretary of NASD 
Regulation of each candidate nominated by the District Nominating 
Committee and the office to which the candidate is nominated. If the 
District Nominating Committee chooses, in its discretion, to nominate 
an alternate candidate for either the District Committee or the 
District Nominating Committee, or an alternate candidate for each such 
Committee, the District Director shall give Notice to the Secretary of 
NASD Regulation of each alternate candidate nominated by the District 
Nominating Committee and the office to which each alternate candidate 
is nominated. On or before October 1 of each year, the Secretary of 
NASD Regulation shall give a Notice of the nominated candidates and any 
alternate candidate(s) to the Executive Representatives of NASD members 
and the District Committee.
    Sec. 8.19. No change.

Designation of Additional Candidates

    Sec. 8.20 If an officer[,] or director[,] of, or [employee of] 
individual who is registered with, an NASD member who meets the 
qualifications of Section 8.2 or 8.9, as applicable, is not nominated 
by the District Nominating Committee as a candidate or an alternate and 
wants to be considered for election to the District Committee or the 
District Nominating Committee, he or she shall deliver a written notice 
to the District Director within 14 calendar days after the Secretary of 
NASD Regulation gives the Notice of nominated candidates pursuant to 
Section 8.18. The District Director shall make a written record of the 
time and date of the receipt of the officer's, director's, or 
[employee's] registered person's notice. The officer, director, or 
[employee] registered person shall be designated as an ``additional 
candidate.''
    Sec. 8.21 to Sec. 8.33 No change.
* * * * *

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 By-Laws set forth provisions relating to the operation of the 
Committees, including specifically, provisions regarding Committee 
meetings, vacancies and elections. Under Article VIII, the role of the 
District Committee members includes serving as panelists in 
disciplinary proceedings in accordance with NASD Rules, recommending 
policy and rule changes to the Board, educating members in their 
district, and selecting members of the regional Committees in a manner 
consistent with the By-Laws. The role of the District Nominating 
Committee includes nominating candidates to serve on the Committees for 
that region. Currently, there are 11 District Committees, divided by 
geographic region. The By-Laws set forth provisions governing the 
annual elections of the Committees.
    In the 2004 District Committee election, potential candidates 
sought clarification of the qualification requirements set forth in 
Article VIII, Sections 8.2 and 8.9 of the By-Laws. Specifically, 
questions arose as to the meaning of the language in such Sections 
requiring that potential candidates for election to, respectively, a 
District Committee or District Nominating Committee, be ``employed by'' 
a member eligible to vote in that district. To clarify the term, NASD 
is proposing to replace these references in Sections 8.2 and 8.9, and 
the reference to ``employee'' in Section 8.20, with the term 
``registered with'' and ``registered person,'' respectively, thereby 
making it clear that any person associated and registered with the 
member is eligible for election to the District Committee or District 
Nominating Committee irrespective of whether such person is, as a legal 
matter, employed by such member.\7\
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    \7\ Any person who engages in the investment banking or 
securities business of a member must be registered with NASD and be 
an associated person of that member. There is no requirement that 
associated persons be employees. They may, in fact, operate for 
employment law purposes as independent contractors. The Commission 
reiterates its longstanding position that the designation of 
independent contractor has no relevance for purposes of the 
securities laws. See letter to Gordon S. Macklin, President, NASD 
from Douglas Scarff, Director, Division of Market Regulation, dated 
June 18, 1982. NASD believes the requirement of being ``registered 
with'' as opposed to ``employed by'' the member more accurately 
aligns the candidacy requirements with the qualification of persons 
who may represent a member.

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[[Page 46556]]

    In addition, in the 2004 District Committee election, a candidate 
nominated by the District Nominating Committee for District 10 withdrew 
from further consideration following the September 2004 Special Notice 
to Members announcing the nominees for District 10 and prior to the 
distribution of the contested election ballot. As a result, procedures 
were implemented to allow the District Nominating Committee for 
District 10 to amend the slate of nominees to include an alternate 
nominee to replace the withdrawing nominee.
    To add flexibility to the nomination process and avoid potential 
delays, NASD is proposing to amend Section 8.17(a) to permit the 
District Nominating Committee, at the time it nominates its slate of 
candidates for the District Committee and the District Nominating 
Committee, to identify one alternate candidate for each such Committee. 
The alternate candidate would, in the context of an uncontested 
election, replace a nominated candidate who withdraws or is otherwise 
determined to be ineligible. In addition, NASD is proposing to amend 
Section 8.17(a) to provide that in an uncontested election, if any of 
the nominees for the District Committee or the District Nominating 
Committee withdraws or is determined to be ineligible before being 
declared duly elected, the withdrawing/ineligible nominee would be 
replaced by the alternate candidate. In an uncontested election, 
candidates are deemed duly elected 14 days after the Secretary of NASD 
Regulation provides notice of the nominated candidates to the Executive 
Representatives of NASD members and the District Committee and, so long 
as no additional candidate has come forward pursuant to Section 8.20 of 
the By-Laws. If a Committee member withdraws after the Committee 
members are duly elected, the vacancy provisions of the By-Laws, 
Sections 8.4 and 8.11, would apply. The proposed amendments to the By-
Laws contemplate that an alternate candidate will replace a candidate 
on the slate only when an election is uncontested.
2. Statutory Basis
    NASD believes that the proposed rule change is consistent with the 
provisions of section 15A of the Act,\8\ in general, and with section 
15A(b)(6) of the Act,\9\ in particular, which require, among other 
things, that NASD 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.
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    \8\ 15 U.S.C. 78o-3.
    \9\ 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 will result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act, as amended.

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

    Written comments were neither solicited nor received.

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

    Because the foregoing proposed rule change: (1) Does not 
significantly affect the protection of investors or the public 
interest; (2) does not impose any significant burden on competition; 
and (3) does not become operative for thirty days from the date on 
which it was filed, or such shorter time as the Commission may 
designate if consistent with the protection of investors and the public 
interest, it has become effective pursuant to section 19(b)(3)(A) of 
the Act \10\ and Rule 19b-4(f)(6) \11\ thereunder.
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    \10\ 15 U.S.C. 78s(b)(3)(A).
    \11\ 17 CFR 240.19b-4(f)(6).
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    A proposed rule change filed under Rule 19b-4(f)(6) \12\ normally 
does not become operative prior to thirty days after the date of 
filing. NASD requests that the Commission waive the 30-day operative 
delay, as specified in Rule 19b-4(f)(6)(iii), and designate the 
proposed rule change to become operative immediately to allow the 
proposed rule change to be operative before the start of the 2006 
Committees' election cycle. The Commission hereby grants the request. 
The Commission believes that waiving the 30-day operative delay is 
consistent with the protection of investors and the public interest 
because the waiver will allow the NASD to clarify and streamline the 
election processes governing the Committees and clarify the 
qualification requirements of candidates to serve on a District 
Committee or District Nominating Committee for the 2006 election 
cycle.\13\ For these reasons, the Commission designates the proposed 
rule change as effective and operative immediately.
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    \12\ Id.
    \13\ For purposes only of waiving the operative delay for this 
proposal, the Commission has considered the proposed rule's impact 
on efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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    At any time within 60 days of the filing of the proposed rule 
change the Commission may summarily abrogate such proposed rule change 
if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act.

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:

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 
SR-NASD-2005-086 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-9303.
    All submissions should refer to SR-NASD-2005-086. 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 Room. Copies of the 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 SR-NASD-

[[Page 46557]]

2005-086 and should be submitted on or before August 31, 2005.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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J. Lynn Taylor,
Assistant Secretary.
[FR Doc. E5-4313 Filed 8-9-05; 8:45 am]
BILLING CODE 8010-01-P