[Federal Register Volume 72, Number 57 (Monday, March 26, 2007)]
[Notices]
[Pages 14149-14161]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-5422]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-55495; File No. SR-NASD-2007-023]


Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Notice of Filing of Proposed Rule Change To Amend the 
By-Laws of NASD To Implement Governance and Related Changes To 
Accommodate the Consolidation of the Member Firm Regulatory Functions 
of NASD and NYSE Regulation, Inc.

March 20, 2007.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'' or ``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ notice 
is hereby given that on March 19, 2007, 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. 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\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    NASD is proposing to amend the By-Laws of NASD (``NASD By-Laws'') 
to implement governance and related changes to accommodate the 
consolidation of the member firm regulatory functions of NASD and NYSE 
Regulation, Inc. (``NYSE Regulation''). The proposed rule change also 
would make limited conforming changes to the By-Laws of NASD 
Regulation, Inc. (``NASD Regulation By-Laws'').
    The text of the proposed rule change is available on the NASD's Web 
site (http://www.nasd.com), at the principal office of NASD, and at the 
Commission's Public Reference Room. The text of Exhibit 5 of the 
proposed rule change is also available on the Commission's Web site 
(http://www.sec.gov).

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
Background and Reasons for the Transaction
    The securities industry--both domestically and internationally--is 
in the midst of dramatic change. As the industry changes, it has become 
clear that the self-regulatory organization (``SRO'') model must be 
adapted to ensure efficient and effective regulation. At the moment, 
both NASD and NYSE Regulation oversee the activities of U.S.-based 
broker-dealers doing business with the public, approximately 170 of 
which are regulated by both organizations. The result is a duplicative, 
sometimes conflicting system that makes inefficient use of resources 
and, as such, can be detrimental to the ultimate goal of investor 
protection.
    NASD has long supported the idea of one SRO having responsibility 
for all member firm regulation.\3\ At the same time, the SEC, Congress, 
securities firms, and independent observers have long encouraged 
greater efficiencies, clarity and cost savings in the regulation of 
America's financial markets. For these reasons, NASD and NYSE 
Regulation joined together proactively to design a system that would 
better meet the needs of today's investors and securities firms.
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    \3\ See NASD's comment letter dated March 15, 2005 in response 
to the SEC's Concept Release Concerning Self-Regulation, Securities 
Exchange Act Release No. 50700 (November 18, 2004), 69 FR 71256 
(December 8, 2004) (File No. S7-40-04).
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    With the support and encouragement of the SEC, NASD and NYSE Group, 
Inc. (``NYSE Group'') representatives began meeting in June 2006 to 
discuss options for changes to the self-regulatory system. A 
determination was made that the scope of the discussions should be 
limited to eliminating redundant member regulation and not to combine 
the market regulatory responsibilities of NASD and NYSE Regulation.
    On November 28, 2006, NASD and the NYSE Group announced the plan to 
consolidate their member regulation operations into a combined 
organization that will be the sole U.S. private-sector provider of 
member firm regulation for securities firms that do business with the 
public (the ``Transaction'').\4\ This consolidation will streamline the 
broker-dealer regulatory system, combine technologies, permit the 
establishment of a single set of rules and group examiners with 
complementary areas of expertise in a single organization--all of which 
will serve to enhance oversight of U.S. securities firms and help 
ensure investor protection. Moreover, the new organization will be 
committed to reducing regulatory costs and burdens for firms of all 
sizes through greater regulatory efficiency.
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    \4\ At the closing of the Transaction, NASD will adopt a new 
corporate name. The proposed rule change refers to the newly named 
entity as the ``New SRO.''
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    The goals of the consolidation plan are to:
     Establish a new organization that will be the single SRO 
for all securities firms doing business with the public in the U.S.;
     Build and sustain the confidence critical to the operation 
of vibrant capital markets;
     Increase efficient, effective, and consistent regulation 
of securities firms;
     Provide cost savings to securities firms of all sizes; and
     Strengthen investor protection and market integrity.

None of NASD's current functions and activities will be eliminated as a 
result of the Transaction. The new organization will be responsible 
for:
     Regulatory oversight of all securities firms that do 
business with the public;
     Professional training, testing and licensing of registered 
persons;
     Arbitration and mediation;
     Market regulation by contract for The Nasdaq Stock Market, 
Inc. (``Nasdaq''), the American Stock Exchange LLC, and the 
International Securities Exchange, LLC; and
     Industry utilities, such as Trade Reporting Facilities and 
other over-the-counter operations.
    The consolidation plan addresses key issues raised in the SEC's 
2004 Concept

[[Page 14150]]

Release Concerning Self-Regulation: (1) The inherent conflicts of 
interest between SRO regulatory operations and members, market 
operations, issuers and stockholders; (2) the costs and inefficiencies 
of multiple SROs, arising from multiple SRO rulebooks, inspection 
regimes and staff; and (3) the funding SROs have available for 
regulatory operations and the manner in which SROs allocate revenue to 
regulatory operations.\5\
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    \5\ See supra note 3.
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    The closing of the Transaction and the consolidation of the member 
firm regulatory functions of the two organizations is subject to the 
SEC's approval of this proposed rule change, the execution of 
definitive agreements between NASD and NYSE Group and obtaining certain 
additional regulatory approvals.\6\
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    \6\ On March 7, 2007, NASD and NYSE Group filed notification 
reports with the Department of Justice and the Federal Trade 
Commission under the Hart-Scott-Rodino Antitrust Improvements Act of 
1976. The waiting period for such a filing will terminate 30 
calendar days after the filing, unless the waiting period is 
extended. NASD believes that the completion of the Transaction will 
not violate the antitrust laws. NASD also has received a favorable 
ruling by the Internal Revenue Service that the Transaction will not 
affect the tax-exempt status of NASD or NASD Regulation. NASD and 
NYSE Group will seek to satisfy all regulatory filing obligations 
and observe any required waiting periods prior to the completion of 
the Transaction.
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Composition of the New SRO Board of Governors During the Transitional 
Period
    The proposed rule change will implement the governance changes at 
the combined organization, including a Board structure that balances 
public and industry representation, and designates certain governor 
seats to represent member firms of various sizes. As further described 
below, the new governance structure guarantees industry participation 
that provides for fair and balanced member representation on the Board.
    For a transitional period commencing on the date of closing of the 
Transaction and ending on the third anniversary of the date of closing 
(the ``Transitional Period''), the New SRO Board of Governors (``New 
SRO Board'') will consist of 23 governors as follows: (1) Eleven of the 
governors will be ``Public Governors''; (2) ten of the governors will 
be ``Industry Governors''; and (3) two of the governors will initially 
be Richard G. Ketchum, Chief Executive Officer (``CEO'') of NYSE 
Regulation and Mary L. Schapiro, CEO of NASD. Mr. Ketchum will serve as 
Non-Executive Chairman of the New SRO for a term of three years. Ms. 
Schapiro will serve as CEO of the New SRO.
    The eleven Public Governors will have no material business 
relationship with a broker or dealer or an SRO registered under the 
Exchange Act.
    Of the ten Industry Governors, (1) Three will be registered with a 
member that employs 500 or more registered persons (the ``Large Firm 
Governors''); (2) one will be registered with a member that employs at 
least 151 and no more than 499 registered persons (the ``Mid-Size Firm 
Governor''); (3) three will be registered with a member that employs at 
least one and no more than 150 registered persons (the ``Small Firm 
Governors''); (4) one will be associated with a floor member of the New 
York Stock Exchange (the ``Floor Member Governor''); (5) one will be 
associated with an independent dealer or insurance affiliate (the 
``Independent Dealer/Insurance Affiliate Governor''); and (6) one will 
be associated with an investment company affiliate (the ``Investment 
Company Affiliate Governor'').
    The Industry Governors and Public Governors will be appointed or 
nominated during the Transitional Period as follows:
     The three Small Firm Governors will be nominated by the 
NASD Board and elected by members that have at least one and no more 
than 150 registered persons; provided that members of that size also 
can nominate such candidates.
     The one Mid-Size Firm Governor will be nominated jointly 
by the Board of Directors of NYSE Group (``NYSE Group Board'') and the 
NASD Board and elected by members that have at least 151 and no more 
than 499 registered persons; provided that members of that size also 
can nominate such candidates.
     The three Large Firm Governors will be nominated by the 
NYSE Group Board and elected by members that have 500 or more 
registered persons; provided that members of that size also can 
nominate such candidates.
     Five Public Governors will be appointed by the NYSE Group 
Board.
     Five Public Governors will be appointed by the NASD Board.
     One Public Governor will be appointed jointly by the NYSE 
Group Board and the NASD Board.
     The one Floor Member Governor will be appointed by the 
NYSE Group Board.
     The one Independent Dealer/Insurance Affiliate Governor 
will be appointed by the NASD Board.
     The one Investment Company Affiliate Governor will be 
appointed jointly by the NYSE Group Board and the NASD Board.
    Effective as of closing of the Transaction, the NYSE Group Board 
and the NASD Board in office prior to the closing will appoint the 
Public Governors and Industry Governors they, either individually or 
jointly, have the power to appoint. The Public Governors will hold 
office for the Transitional Period. The three Large Firm Governors, 
three Small Firm Governors and one Mid-Size Governor will be elected as 
Governors at the first annual meeting of members following the closing, 
which is expected to be held within ninety days after closing of the 
Transaction and will hold office until the first annual meeting of 
members following the Transitional Period. During the interim period 
from closing of the Transaction until the annual meeting, these seven 
seats will be filled by three interim Industry Governors appointed by 
the NASD Board prior to the closing of the Transaction from industry 
governors currently on the NASD Board, three interim Industry Governors 
appointed by the NYSE Group Board and one interim Industry Governor 
jointly appointed by the NYSE Group Board and the NASD Board prior to 
the closing of the Transaction.
    As a result of the NASD By-Law amendments, members will no longer 
have the ability to vote for all New SRO Board candidates in elections, 
but will have an opportunity to vote on designated seats on the New SRO 
Board. Specifically, firms will vote for industry nominees that are 
similar in size to their own firm. This means that small firms and 
large firms will vote for candidates running for the seats reserved for 
their firm size and the mid-sized firms will likewise vote for the mid-
sized firm seat. All other New SRO Board seats will be appointed as 
described above. All members will continue to have the ability to vote 
on any future amendments to the New SRO By-Laws, as well as in district 
elections.
    The New SRO Board will have a Governor who will preside over 
executive sessions of the New SRO Board in the event the Non-Executive 
Chairman is recused (``Lead Governor''). The Lead Governor will be 
selected by the New SRO Board, after consultation with the CEO. The 
Board, the CEO, the Non-Executive Chairman and the Lead Governor will 
have the authority to call meetings of the New SRO Board. Both the CEO 
and Non-Executive Chairman, and for matters from which the CEO and Non-
Executive Chairman are recused from considering, the Lead Governor, 
will have the authority to place items on the New SRO Board agendas.

[[Page 14151]]

Governor Vacancies During the Transitional Period
    In the event of a vacancy in the governor position held by the CEO 
of NYSE Regulation during the Transitional Period, the then CEO of NYSE 
Regulation will serve as a governor for the remainder of the 
Transitional Period. If the CEO of NYSE Regulation as of closing of the 
Transaction ceases to occupy the office of Non-Executive Chairman for 
any reason during the Transitional Period, then his successor as Non-
Executive Chairman shall be selected by and from a committee comprised 
of the Governors that were appointed or nominated by the NYSE Group 
Board, with the exception that those Governors that also serve as NYSE 
Group directors may not become Non-Executive Chairman nor may his 
successor as CEO of NYSE Regulation become Non-Executive Chairman.
    In the event of any vacancy among the Large Firm Governors, the 
Mid-Size Firm Governor, or the Small Firm Governors during the 
Transitional Period, such vacancy shall only be filled by, and 
nominations for persons to fill such vacancy shall be made by, a 
committee of the New SRO Board composed of the other Governors 
appointed or nominated by the NYSE Group Board in the case of a Large 
Firm Governor vacancy; such vacancy shall only be filled by the Board, 
and nominations for persons to fill such vacancy shall be made by the 
Nominating Committee in the case of a Mid-Size Firm Governor vacancy; 
or such vacancy shall only be filled by, and nominations for persons to 
fill such vacancy shall be made by, a committee of the New SRO Board 
composed of the other Governors appointed or nominated by the NASD 
Board in the case of a Small Firm Governor vacancy. In the event the 
remaining term of office of any such governor is more than twelve 
months, nominations shall be made as set forth above, but such vacancy 
will be filled by the New SRO members entitled to vote on such governor 
position at a meeting of such members called to fill the vacancy.
    In the event of any vacancy among the Floor Member Governor, the 
Investment Company Affiliate Governor or the Independent Dealer/
Insurance Affiliate Governor during the Transitional Period, such 
vacancy shall only be filled by, and nominations for persons to fill 
such vacancy shall be made by, a committee of the New SRO Board 
composed of the other Governors appointed or nominated by the NYSE 
Group Board in the case of a Floor Member Governor vacancy; such 
vacancy shall only be filled by the New SRO Board, and nominations for 
persons to fill such vacancy shall be made by the Nominating Committee 
in the case of an Investment Company Affiliate Governor vacancy; or 
such vacancy shall only be filled by, and nominations for persons to 
fill such vacancy shall be made by, a committee of the New SRO Board 
composed of other Governors appointed or nominated by the NASD Board in 
the case of an Independent Dealer/Insurance Affiliate Governor vacancy.
    In the event of any vacancy among those Public Governors appointed 
by the NYSE Group Board, such vacancy shall only be filled by, and 
nominations for persons to fill such vacancy shall be made by, a 
committee of the New SRO Board composed of the other Governors 
appointed or nominated by the NYSE Group Board. In the event of any 
vacancy among those Public Governors appointed by the NASD Board, such 
vacancy shall only be filled by, and nominations for persons to fill 
such vacancy shall be made by, a committee of the New SRO Board 
comprised of the other Governors appointed or nominated by the NASD 
Board. In the event of any vacancy of the Public Governor position 
jointly appointed by the NYSE Group Board and the NASD Board, such 
vacancy shall only be filled by the New SRO Board, and nominations for 
persons to fill such vacancy shall be made by the Nominating Committee.
Composition of the New SRO Board After the Transitional Period
    Upon the expiration of the Transitional Period, the term of office 
of the CEO of NYSE Regulation as a member of the New SRO Board will 
automatically terminate and the authorized number of members of the New 
SRO Board will be reduced by one.\7\
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    \7\ Under Article VII, Section 4 of the New SRO By-Laws 
(Composition and Qualification of the Board), the total number of 
Governors is determined by the Board of Governors, with such number 
being no fewer than 16 nor more than 25 Governors. The number of 
Public Governors must exceed the number of Industry Governors.
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    As of the first annual meeting of members following the 
Transitional Period, the Large Firm Governors, the Mid-Size Firm 
Governor and the Small Firm Governors will be elected into three 
classes. The composition of the classes will be arranged as follows:
     The first class, being comprised of one Large Firm 
Governor and one Small Firm Governor, will be elected for a term of 
office expiring at the first succeeding annual meeting of members;
     The second class, being comprised of one Large Firm 
Governor, one Mid-Size Firm Governor and one Small Firm Governor, will 
be elected for a term of office expiring at the second succeeding 
annual meeting of members; and
     The third class, being comprised of one Large Firm 
Governor and one Small Firm Governor, will be elected for a term of 
office expiring at the third succeeding annual meeting of members.
    While these classes are designed to ensure staggered board seats, 
at no time will there be less than ten Industry Governor positions on 
the New SRO Board. At each annual election following the first annual 
meeting of members after the Transitional Period, Large Firm Governors, 
Small Firm Governors, and Mid-Size Firm Governors will be elected for a 
term of three years to replace those whose terms expire.
    As of the first annual meeting of members following the 
Transitional Period, the Public Governors, the Floor Member Governor, 
the Independent Dealer/Insurance Affiliate Governor, and the Investment 
Company Affiliate Governor (the ``Appointed Governors'') will be 
divided by the New SRO Board into three classes, as equal in number as 
possible, with the first class holding office until the first 
succeeding annual meeting of members, the second class holding office 
until the second succeeding annual meeting of members, and the third 
class holding office until the third succeeding annual meeting of 
members. Each class will initially contain as equivalent a number as 
possible of Appointed Governors who were members of the New SRO Board 
appointed or nominated by the NYSE Group Board or are successors to 
such governor positions, on the one hand, and Appointed Governors who 
were members of the New SRO Board appointed or nominated by the NASD 
Board or are successors to such governor positions, on the other hand, 
to the extent the New SRO Board determines such persons are to remain 
Governors after the Transitional Period. At each annual election 
following the first annual meeting of members following the 
Transitional Period, Appointed Governors will be appointed by the New 
SRO Board for a term of three years to replace those whose terms 
expire.
Role and Composition of the Nominating Committee
    The Nominating Committee will be a committee of the New SRO Board 
and will replace the current National Nominating Committee. For the 
first

[[Page 14152]]

annual meeting following the closing of the Transaction, nominations 
for the seven elected industry seats will not be made by the Nominating 
Committee, but instead by the NASD Board and the NYSE Group Board as 
constituted prior to the closing of the Transaction. In addition, prior 
to the closing, the NASD Board and the NYSE Group Board will identify 
and appoint persons for the eleven public seats and three remaining 
industry seats.
    During the Transitional Period, the Nominating Committee will be 
responsible solely for nominating persons to fill vacancies in governor 
seats for which the full New SRO Board has the authority to fill. 
Following the Transitional Period, the Nominating Committee will be 
responsible for nominating persons for appointment or election to the 
New SRO Board, as well as nominating persons to fill vacancies in 
appointed or elected governor seats.
    During the Transitional Period, members of the Nominating Committee 
will be appointed jointly by the New SRO CEO and the CEO of NYSE 
Regulation as of closing of the Transaction (or his duly appointed 
successor as Chair of the New SRO Board), subject to ratification of 
the appointees by the New SRO Board. Following the Transitional Period, 
the composition of the Nominating Committee will be determined by the 
New SRO Board. At all times, the number of Public Governors on the 
Nominating Committee must equal or exceed the number of Industry 
Governors on the Nominating Committee. In addition, the Nominating 
Committee must at all times be comprised of a number of governors that 
is a minority of the entire New SRO Board. The New SRO CEO may not be a 
member of the Nominating Committee.

Proposed Changes and Comparison to Current NASD By-Laws

    The following chart summarizes the material proposed changes as 
compared to the current NASD By-Laws and the timing of their 
effectiveness. The following is only a summary; the text of the 
proposed rule change is available on the NASD's Web site (http://www.nasd.com), at the principal office of NASD, and at the Commission's 
Public Reference Room. The text of Exhibit 5 of the proposed rule 
change is also available on the Commission's Web site (http://www.sec.gov).

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                                                                By-Laws effective at    By-Laws effective at the
              Topic                     Current By-Laws          closing and for the        expiration of the
                                                                 transitional period       transitional period
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Composition and Qualification of   The Board consists of no   As of Closing, and for    Same as By-Laws for the
 the Board.                         fewer than 15 nor more     the Transitional          Transitional Period,
                                    than 25 Governors,         Period, the Board         except that: (i) The
                                    comprising (i) The Chief   consists of 23            Chief Executive Officer
                                    Executive Officer of the   authorized members,       of NYSE Regulation,
                                    NASD, (ii) if the Board    consisting of (i) The     Inc. is no longer a
                                    of Governors determines,   Chief Executive Officer   Governor; (ii) the
                                    from time to time, in      of the NASD, (ii) the     total number of
                                    its sole discretion,       Chief Executive Officer   Governors is determined
                                    that the appointment of    of NYSE Regulation,       by the Board of
                                    a second officer of the    Inc., (iii) eleven        Governors, with such
                                    NASD to the Board of       Public Governors, (iv)    number being no fewer
                                    Governors is advisable,    a Floor Member            than 16, nor more than
                                    a second officer of the    Governor, an              25 and (iii) the number
                                    NASD, (iii) the            Independent Dealer/       of Public Governors is
                                    President of NASD          Insurance Affiliate       determined by the Board
                                    Regulation, (iv) the       Governor and an           of Governors, provided
                                    Chair of the National      Investment Company        such number must exceed
                                    Adjudicatory Council and   Affiliate Governor and    the number of Industry
                                    (v) no fewer than 12 and   (v) three Small Firm      Governors.
                                    no more than 22            Governors, one Mid-Size
                                    Governors elected by the   Firm Governor and three
                                    members of the NASD. The   Large Firm Governors;
                                    Governors elected by the   provided, however that
                                    members of the NASD        the Board will not
                                    include a representative   include such Small Firm
                                    of an issuer of            Governors, Mid-Size
                                    investment company         Firm Governor or Large
                                    shares or an affiliate     Firm Governors, but
                                    of such an issuer, a       rather will include
                                    representative of an       three persons, who
                                    insurance company, a       immediately prior to
                                    representative of a        the Closing are
                                    national retail firm, a    Industry Governors,
                                    representative of a        selected by the Board
                                    regional retail or         in office prior to the
                                    independent financial      Closing, three persons,
                                    planning member firm, a    who immediately prior
                                    representative of a firm   to the Closing
                                    that provides clearing     qualified as Industry
                                    services to other NASD     Governors pursuant to
                                    members, and a             the By-Laws in
                                    representative of an       existence prior to the
                                    NASD member having not     Closing, selected by
                                    more than 150 registered   the Board of Directors
                                    persons. The number of     of NYSE Group, Inc.,
                                    Non-Industry Governors     and one person, who
                                    must exceed the number     immediately prior to
                                    of Industry Governors.     the Closing qualified
                                    If the number of           as an Industry Governor
                                    Industry and Non-          pursuant to the By-Laws
                                    Industry Governors is 13-  in existence prior to
                                    15, the Board must         the Closing, selected
                                    include at least four      by the Board of
                                    Public Governors. If the   Directors of NYSE
                                    number of Industry and     Group, Inc. and the
                                    Non-Industry Governors     Board of Governors in
                                    is 16-17, the Board must   office prior to the
                                    include at least five      Closing jointly, until
                                    Public Governors. If the   the election of such
                                    number of Industry and     Small Firm Governors,
                                    Non-Industry Governors     Mid-Size Firm Governor
                                    is 18-23, the Board must   and Large Firm
                                    include at least six       Governors at the first
                                    Public Governors.          annual meeting of
                                                               members following the
                                                               Closing. [NOTE: To
                                                               allow for the
                                                               possibility of a
                                                               contested election, the
                                                               nominees for the Small
                                                               Firm Governor, Mid-Size
                                                               Firm Governor or Large
                                                               Firm Governor will be
                                                               voted upon at an annual
                                                               meeting of members
                                                               which shall be held as
                                                               soon as practicable
                                                               after the closing of
                                                               the Transaction and is
                                                               expected to be held
                                                               within ninety days of
                                                               the closing of the
                                                               Transaction.].

[[Page 14153]]

 
Term of Office of Governors......  The Chief Executive        The Chief Executive       The Chief Executive
                                    Officer and, if            Officer serves as a       Officer serves as a
                                    appointed, the second      Governor until a          Governor until a
                                    officer of the NASD, and   successor is elected,     successor is elected,
                                    the President of NASD      or until death,           or until death,
                                    Regulation serve as        resignation or removal.   resignation or removal.
                                    Governors until a         The Chief Executive       Public Governors and the
                                    successor is elected, or   Officer of NYSE           Floor Member Governor,
                                    until death, resignation   Regulation, Inc. as of    the Independent Dealer/
                                    or removal.                Closing serves as a       Insurance Affiliate
                                   The Chair of the National   Governor during the       Governor and the
                                    Adjudicatory Council       Transitional Period,      Investment Company
                                    serves as a Governor for   until death,              Affiliate Governor (the
                                    a term of one year, or     resignation or removal.   ``Appointed
                                    until a successor is      Effective as of Closing,   Governors'') are
                                    duly elected and           the Board of Directors    appointed by the Board.
                                    qualified, or until        of NYSE Group, Inc.      As of the first annual
                                    death, resignation,        appoints the NYSE         meeting of members
                                    disqualification or        Public Governors, the     following the
                                    removal.                   Board in office prior     Transitional Period,
                                   The Governors elected by    to the Closing appoints   the Appointed Governors
                                    the members of the NASD    the NASD Public           are divided by the
                                    are divided into three     Governors and the Board   Board into three
                                    classes and hold office    of Directors of NYSE      classes, as equal in
                                    for a term of no more      Group, Inc. and the       number as possible,
                                    than three years, such     Board in office prior     with the first class
                                    term being fixed by the    to the Closing jointly    holding office until
                                    Board at the time of the   appoint the Joint         the first succeeding
                                    nomination or              Public Governor.          annual meeting of
                                    certification of each     Effective as of Closing,   members, the second
                                    such Governor, or until    the Board of Directors    class holding office
                                    a successor is duly        of NYSE Group, Inc.       until the second
                                    elected and qualified,     appoints the Floor        succeeding meeting of
                                    or until death,            Member Governor, the      members and the third
                                    resignation,               Board of Governors in     class holding office
                                    disqualification or        office prior to the       until the third
                                    removal.                   Closing appoints the      succeeding annual
                                                               Independent Dealer/       meeting of members, or
                                                               Insurance Affiliate       until a successor is
                                                               Governor and the Board    duly appointed and
                                                               of Directors of NYSE      qualified, or until
                                                               Group, Inc. and the       death, resignation,
                                                               Board of Governors in     disqualification or
                                                               office prior to the       removal. Each class
                                                               Closing jointly appoint   initially contains as
                                                               the Investment Company    equivalent a number as
                                                               Affiliate Governor.       possible of Appointed
                                                              The Public Governors and   Governors who were
                                                               the Floor Member          members of the NYSE
                                                               Governor, the             Group Committee during
                                                               Investment Company        the Transitional Period
                                                               Affiliate Governor and    or are successors to
                                                               the Independent Dealer/   such Governor
                                                               Insurance Affiliate       positions, on the one
                                                               Governor appointed in     hand, and Appointed
                                                               accordance with the       Governors who were
                                                               preceding paragraphs      members of the NASD
                                                               hold office for the       Group Committee during
                                                               Transitional Period, or   the Transitional Period
                                                               until death,              or are successors to
                                                               resignation,              such Governor
                                                               disqualification or       positions, on the other
                                                               removal.                  hand, to the extent the
                                                              Three Large Firm           Board determines such
                                                               Governors, three Small    persons are to remain
                                                               Firm Governors and one    Governors after the
                                                               Mid-Size Governor are     Transitional Period. At
                                                               elected as Governors at   each annual election
                                                               the first annual          following the first
                                                               meeting of members        annual meeting of
                                                               following the Closing     members following the
                                                               (the ``Initial Member     Transitional Period,
                                                               Elected Governors'').     Appointed Governors are
                                                               The Initial Member        appointed by the Board
                                                               Elected Governors hold    for a term of three
                                                               office until the first    years to replace those
                                                               annual meeting of         whose terms expire.
                                                               members following the    As of the first annual
                                                               Transitional Period, or   meeting of members
                                                               until a successor is      following the
                                                               duly elected and          Transitional Period,
                                                               qualified, or until       the Large Firm
                                                               death, resignation,       Governors, the Mid-Size
                                                               disqualification or       Firm Governor and the
                                                               removal.                  Small Firm Governors
                                                              Upon the expiration of     are divided into three
                                                               the Transitional          classes, as equal in
                                                               Period, the term of       number as possible,
                                                               office of the Chief       with the first class,
                                                               Executive Officer of      being comprised of one
                                                               NYSE Regulation, Inc.     Large Firm Governor and
                                                               as a member of the        one Small Firm
                                                               Board automatically,      Governor, holding
                                                               and without any further   office until the first
                                                               action, terminates,       succeeding annual
                                                               such person no longer     meeting of members, the
                                                               is a member of the        second class, being
                                                               Board and the             comprised of one Large
                                                               authorized number of      Firm Governor, one Mid-
                                                               members of the Board      Size Firm Governor and
                                                               automatically is          one Small Firm
                                                               reduced by one.           Governor, holding
                                                                                         office until the second
                                                                                         succeeding annual
                                                                                         meeting of members and
                                                                                         the third class, being
                                                                                         comprised of one Large
                                                                                         Firm Governor and one
                                                                                         Small Firm Governor,
                                                                                         holding office until
                                                                                         the third succeeding
                                                                                         annual meeting of
                                                                                         members, or until a
                                                                                         successor is duly
                                                                                         elected and qualified,
                                                                                         or until death,
                                                                                         resignation,
                                                                                         disqualification or
                                                                                         removal. At each annual
                                                                                         election following the
                                                                                         first annual meeting of
                                                                                         members following the
                                                                                         Transitional Period,
                                                                                         Large Firm Governors,
                                                                                         Small Firm Governors
                                                                                         and the Mid-Size Firm
                                                                                         Governor are elected
                                                                                         for a term of three
                                                                                         years to replace those
                                                                                         whose terms expire.

[[Page 14154]]

 
Filling of Vacancies.............  If an elected Governor     In the event the Chief    In the event of any
                                    position becomes vacant,   Executive Officer of      vacancy among the Large
                                    whether because of         NYSE Regulation, Inc.     Firm Governors, the Mid-
                                    death, disability,         as of Closing no longer   Size Firm Governor or
                                    disqualification,          serves as a Governor      the Small Firm
                                    removal or resignation,    during the Transitional   Governors, such vacancy
                                    the National Nominating    Period, the then Chief    is only filled by the
                                    Committee nominates, and   Executive Officer of      Large Firm Governor
                                    the Board elects by        NYSE Regulation, Inc.     Committee in the case
                                    majority vote of the       serves as a Governor      of a Large Firm
                                    remaining Governors then   for the remainder of      Governor vacancy, the
                                    in office, a person        the Transitional          Board in the case of a
                                    satisfying the             Period, until death,      Mid-Size Firm Governor
                                    classification             resignation or removal.   vacancy or the Small
                                    (Industry, Non-Industry   In the event of any        Firm Governor Committee
                                    or Public Governor) for    vacancy among the NYSE    in the case of a Small
                                    the governorship to fill   Public Governors, the     Firm Governor vacancy;
                                    such vacancy, except       Joint Public Governor     provided, however, that
                                    that if the remaining      or NASD Public            in the event the
                                    term of office for the     Governors during the      remaining term of
                                    vacant Governor position   Transitional Period,      office of any Large
                                    is not more than six       such vacancy is only      Firm, Mid-Size Firm or
                                    months, no replacement     filled by, and            Small Firm Governor
                                    is required. If the        nominations for persons   position that becomes
                                    remaining term of office   to fill such vacancy      vacant is for more than
                                    for the vacant Governor    are made by, the NYSE     12 months, such vacancy
                                    position is more than      Group Committee in the    is filled by the
                                    one year, the Governor     case of a vacant NYSE     members of the New SRO
                                    elected by the Board to    Public Governor           entitled to vote
                                    fill such position         position, such vacancy    thereon at a meeting
                                    stands for election in     is only filled by the     thereof convened to
                                    the next annual election.  Board, and nominations    vote thereon.
                                                               for persons to fill      All other vacancies are
                                                               such vacancy are made     filled by the Board.
                                                               by the Nominating
                                                               Committee, in the case
                                                               of a vacant Joint
                                                               Public Governor
                                                               position or such
                                                               vacancy is only filled
                                                               by, and nominations for
                                                               persons to fill such
                                                               vacancy are made by,
                                                               the NASD Group
                                                               Committee in the case
                                                               of a vacant NASD Public
                                                               Governor position.
                                                              In the event of any
                                                               vacancy among the Floor
                                                               Member Governor, the
                                                               Investment Company
                                                               Affiliate Governor or
                                                               the Independent Dealer/
                                                               Insurance Affiliate
                                                               Governor during the
                                                               Transitional Period,
                                                               such vacancy is only
                                                               filled by, and
                                                               nominations for persons
                                                               to fill such vacancy
                                                               are made by, the NYSE
                                                               Group Committee in the
                                                               case of a Floor Member
                                                               Governor vacancy, such
                                                               vacancy is only filled
                                                               by the Board, and
                                                               nominations for persons
                                                               to fill such vacancy
                                                               are made by the
                                                               Nominating Committee,
                                                               in the case of an
                                                               Investment Company
                                                               Affiliate Governor
                                                               vacancy or such vacancy
                                                               is only filled by, and
                                                               nominations for persons
                                                               to fill such vacancy
                                                               are made by, the NASD
                                                               Group Committee in the
                                                               case of an Independent
                                                               Dealer/Insurance
                                                               Affiliate Governor
                                                               vacancy.
                                                              In the event of any
                                                               vacancy among the Large
                                                               Firm Governors, the Mid-
                                                               Size Firm Governor or
                                                               the Small Firm
                                                               Governors during the
                                                               Transitional Period,
                                                               such vacancy is only
                                                               filled by, and
                                                               nominations for persons
                                                               to fill such vacancy
                                                               are made by, the NYSE
                                                               Group Governor
                                                               Committee in the case
                                                               of a Large Firm
                                                               Governor vacancy, such
                                                               vacancy is only filled
                                                               by the Board, and
                                                               nominations for persons
                                                               to fill such vacancy
                                                               are made by the
                                                               Nominating Committee,
                                                               in the case of the Mid-
                                                               Size Firm Governor
                                                               vacancy or such vacancy
                                                               is only filled by, and
                                                               nominations for persons
                                                               to fill such vacancy
                                                               are made by, the NASD
                                                               Governor Committee in
                                                               the case of a Small
                                                               Firm Governor vacancy:
                                                               provided, however, that
                                                               in the event the
                                                               remaining term of
                                                               office of any Large
                                                               Firm, Mid-Size Firm or
                                                               Small Firm Governor
                                                               position that becomes
                                                               vacant is for more than
                                                               12 months, nominations
                                                               shall be made as set
                                                               forth above in this
                                                               paragraph, but such
                                                               vacancy is filled by
                                                               the members of the New
                                                               SRO entitled to vote
                                                               thereon at a meeting
                                                               thereof convened to
                                                               vote thereon.

[[Page 14155]]

 
Nominations......................  The National Nominating    In the case of the first  The Nominating
                                    Committee, which is not    annual meeting of         Committee, which is a
                                    a committee of the         members following the     committee of the Board,
                                    Board, nominates and, in   Closing, nominations      nominates and, in the
                                    the event of a contested   are by the Board of       event of a contested
                                    election, may support:     Directors of NYSE         election, may support:
                                    Industry, Non-Industry     Group, Inc. with          Large Firm, Mid-Size
                                    and Public Governors for   respect to Large Firm     Firm, Small Firm,
                                    each vacant or new         Governors, jointly by     Public, Floor Member,
                                    Governor position on the   the Board of Directors    Independent Dealer/
                                    NASD Board for election    of NYSE Group, Inc. and   Insurance Affiliate and
                                    by the membership;         the Board in office       Investment Company
                                    Industry, Non-Industry     prior to the Closing      Affiliate Governors for
                                    and Public Directors for   with respect to the Mid-  each vacant or new
                                    each vacant or new         Size Firm Governor and    Governor position on
                                    position on the NASD       by the Board in office    the New SRO Board;
                                    Regulation Board and the   prior to the Closing      Industry and Public
                                    NASD Dispute Resolution    with respect to Small     Directors for each
                                    Board for election by      Firm Governors.           vacant or new position
                                    the stockholder; and                                 on the NASD Regulation
                                    Industry, Non-Industry,                              Board and the NASD
                                    and Public members for                               Dispute Resolution
                                    each vacant or new                                   Board for election by
                                    position on the National                             the stockholder; and
                                    Adjudicatory Council for                             Industry and Public
                                    appointment by the NASD                              members for each vacant
                                    Regulation Board.                                    or new position on the
                                                                                         National Adjudicatory
                                                                                         Council for appointment
                                                                                         by the NASD Regulation
                                                                                         Board.
Composition and Qualifications of  The National Nominating    The Nominating Committee  The Nominating Committee
 the Nominating Committee.          Committee consists of no   is jointly populated by   consists of such number
                                    fewer than six and no      the Chief Executive       of members of the Board
                                    more than nine members.    Officer and the Chief     as the Board determines
                                    The number of Non-         Executive Officer of      from time to time. The
                                    Industry committee         NYSE Regulation, Inc.     number of Public
                                    members equals or          as of Closing (or his     Governors on the
                                    exceeds the number of      duly appointed or         Nominating Committee
                                    Industry committee         elected successor as      equals or exceeds the
                                    members. If the National   Chair of the Board),      number of Industry
                                    Nominating Committee       subject to ratification   Governors on the
                                    consists of six members,   of the appointees by      Nominating Committee.
                                    at least two must be       the Board. The number     The Nominating
                                    Public committee           of Public Governors on    Committee is at all
                                    members. If the National   the Nominating            times comprised of a
                                    Nominating Committee       Committee equals or       number of members which
                                    consists of seven or       exceeds the number of     is a minority of the
                                    more members, at least     Industry Governors on     entire Board and the
                                    three must be Public       the Nominating            Chief Executive Officer
                                    committee members. No      Committee. The            may not be a member of
                                    officer or employee of     Nominating Committee is   the Nominating
                                    the NASD serves as a       at all times comprised    Committee.
                                    member of the National     of a number of members
                                    Nominating Committee in    which is a minority of
                                    any voting or non-voting   the entire Board and
                                    capacity. No more than     the Chief Executive
                                    three of the National      Officer may not be a
                                    Nominating Committee       member of the
                                    members and no more than   Nominating Committee.
                                    two of the Industry
                                    committee members are
                                    current members of the
                                    NASD Board.
                                   A National Nominating
                                    Committee member may not
                                    simultaneously serve on
                                    the National Nominating
                                    Committee and the Board,
                                    unless such member is in
                                    his or her final year of
                                    service on the Board,
                                    and following that year,
                                    that member may not
                                    stand for election to
                                    the Board until such
                                    time as he or she is no
                                    longer a member of the
                                    National Nominating
                                    Committee.
Required Board Committees........  NASD is required to have   New SRO is required to    New SRO is required to
                                    an Audit Committee and a   have the following        have the following
                                    National Nominating        committees of the         committees of the
                                    Committee.                 Board: the NASD Group     Board: The Small Firm
                                                               Committee; The NYSE       Governor Committee and
                                                               Group Committee; the      the Large Firm Governor
                                                               Small Firm Governor       Committee, which have
                                                               Committee and the Large   the authority described
                                                               Firm Governor             above in ``Filling of
                                                               Committee, which have     Vacancies.'' New SRO
                                                               the authority described   also is required to
                                                               above in ``Filling of     have Audit, Finance and
                                                               Vacancies'' and below     Nominating Committees.
                                                               in ``Chair.'' New SRO
                                                               also is required to
                                                               have Audit, Finance and
                                                               Nominating Committees
                                                               and, during the first
                                                               year of the
                                                               Transitional Period or
                                                               as may be extended
                                                               thereafter by the
                                                               Board, an Integration
                                                               Committee.

[[Page 14156]]

 
Composition of Board Committees..  Unless otherwise provided  The NASD Group            The Small Firm Governor
                                    in the By-Laws, any        Committee, the NYSE       Committee and the Large
                                    committee having the       Group Committee, the      Firm Governor Committee
                                    authority to exercise      Small Firm Governor       are composed as
                                    the powers and authority   Committee and the Large   described below in the
                                    of the Board has a         Firm Governor Committee   description of such
                                    percentage of Non-         are composed as           defined terms. Unless
                                    Industry committee         described below in the    otherwise provided in
                                    members at least as        description of such       the By-Laws, any other
                                    great as the percentage    defined terms. Unless     committee having the
                                    of Non-Industry            otherwise provided in     authority to exercise
                                    Governors on the Board     the By-Laws, any other    the powers and
                                    and a percentage of        committee having the      authority of the Board
                                    Public committee members   authority to exercise     has a number of Public
                                    at least as great as the   the powers and            Governors as members
                                    percentage of Public       authority of the Board    thereof in excess of
                                    Governors on the Board.    has a number of Public    the number of Industry
                                                               Governors as members      Governors which are
                                                               thereof in excess of      members thereof.
                                                               the number of Industry
                                                               Governors which are
                                                               members thereof. In
                                                               addition, any committee
                                                               of the Board having the
                                                               authority to exercise
                                                               the powers and
                                                               authority of the Board
                                                               (with the exception of
                                                               the Large Firm Governor
                                                               Committee, the Small
                                                               Firm Governor
                                                               Committee, the NASD
                                                               Group Committee and the
                                                               NYSE Group Committee)
                                                               also has (i) a
                                                               percentage of members
                                                               (to the nearest whole
                                                               number of committee
                                                               members) that are
                                                               members of the NASD
                                                               Group Committee at
                                                               least as great as the
                                                               percentage of Governors
                                                               on the Board that are
                                                               members of the NASD
                                                               Group Committee; and
                                                               (ii) a percentage of
                                                               members (to the nearest
                                                               whole number of
                                                               committee members) that
                                                               are members of the NYSE
                                                               Group Committee at
                                                               least as great as the
                                                               percentage of Governors
                                                               on the Board that are
                                                               members of the NYSE
                                                               Group Committee.
Executive Committee Composition..  The Executive Committee    The Executive Committee   Same as Transitional
                                    consists of no fewer       consists of no fewer      Period.
                                    than five and no more      than five and no more
                                    than eight Governors.      than eight Governors.
                                    The Executive Committee    The Executive Committee
                                    includes the Chief         includes the Chief
                                    Executive Officer of the   Executive Officer of
                                    NASD, and at least one     the New SRO and the
                                    Director of NASD           Chair of the Board.
                                    Regulation. The
                                    Executive Committee has
                                    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.
Integration Committee............  No such committee........  The Board shall appoint   Not applicable.
                                                               an Integration
                                                               Committee with a term
                                                               of one year unless
                                                               continued for a longer
                                                               period by resolution of
                                                               the Board. The Chair of
                                                               the Board shall be the
                                                               Chair of the
                                                               Integration Committee.
Annual Meetings of Members.......  An annual meeting of       Except for the first      An annual meeting of
                                    members of the NASD is     annual meeting            members of the New SRO
                                    held on such date and at   following the Closing     is held on such date
                                    such place as the Board    at which Large Firm       and at such place as
                                    designates. The business   Governors, the Mid-Size   the Board designates.
                                    of the annual meeting      Firm Governor and Small   The business of the
                                    includes the election of   Firm Governors are        annual meeting includes
                                    the members of the         elected, there are no     the election of the
                                    Board, Industry, Non-      annual meetings of        Small, Mid-Size and
                                    Industry and Public, by    members during the        Large Firm members of
                                    all of the members of      Transitional Period. At   the Board. Small Firm
                                    the NASD.                  such first annual         members are only
                                                               meeting, Small Firm       entitled to vote for
                                                               members are only          the election of Small
                                                               entitled to vote for      Firm Governors, Mid-
                                                               the election of Small     Size Firm members are
                                                               Firm Governors, Mid-      only entitled to vote
                                                               Size Firm members are     for the election of the
                                                               only entitled to vote     Mid-Size Firm Governor
                                                               for the election of the   and Large Firm members
                                                               Mid-Size Firm Governor    are only entitled to
                                                               and Large Firm members    vote for the election
                                                               are only entitled to      of Large Firm
                                                               vote for the election     Governors.
                                                               of Large Firm Governors.
Authority to Call Special          Not specified............  Special meetings of the   Same as the Transitional
 Meetings of the Board.                                        Board of the New SRO      Period.
                                                               may be called by the
                                                               Board, the Chief
                                                               Executive Officer of
                                                               the New SRO, the Chair
                                                               or the Lead Governor.

[[Page 14157]]

 
Authority to Include Items on the  Not specified............  Each of the Chief         Same as the Transitional
 Agenda for Meetings of the Board.                             Executive Officer of      Period.
                                                               the New SRO and the
                                                               Chair, and with respect
                                                               to matters from which
                                                               the Chief Executive
                                                               Officer of the New SRO
                                                               and the Chair recuse
                                                               themselves, the Lead
                                                               Governor, has the
                                                               authority to include
                                                               matters on the agenda
                                                               of a meeting of the
                                                               Board.
Chair............................  Elected by the Board from  The Chair is the Chief    Elected by the Board
                                    among its members.         Executive Officer of      from among its members.
                                                               NYSE Regulation, Inc.
                                                               as of Closing so long
                                                               as he remains a
                                                               Governor. In the event
                                                               the Chief Executive
                                                               Officer of NYSE
                                                               Regulation, Inc. as of
                                                               the Closing ceases to
                                                               be a Chair during the
                                                               Transitional Period,
                                                               subject to the Restated
                                                               Certificate of
                                                               Incorporation and the
                                                               By-Laws, the Chair is
                                                               selected by the NYSE
                                                               Group Committee from
                                                               among its members;
                                                               provided that the Chair
                                                               so selected may not be
                                                               a member of the Board
                                                               of Directors of NYSE
                                                               Group, Inc. nor may the
                                                               successor Chief
                                                               Executive Officer of
                                                               NYSE Regulation, Inc.
                                                               serve as Chair.
----------------------------------------------------------------------------------------------------------------

    The proposed amendments to the NASD By-Laws also include changes or 
additions to certain defined terms. In addition to changes to 
accommodate the new governance structure, the proposed rule change 
would amend the definition of ``disqualification'' in the NASD By-Laws 
to conform to the federal securities laws, such that any person subject 
to a statutory disqualification under the Exchange Act also would be 
subject to disqualification under NASD rules.\8\
---------------------------------------------------------------------------

    \8\ NASD will be filing a subsequent rule change to address the 
applicable eligibility proceedings for persons subject to 
disqualification as a result of the proposed change in definition.
---------------------------------------------------------------------------

    These changes or additions to the defined terms in the NASD By-Laws 
include the following:

----------------------------------------------------------------------------------------------------------------
                                                                              By-Laws effective at closing and
                Term                             Current By-Laws             through and after the transitional
                                                                                           period
----------------------------------------------------------------------------------------------------------------
Closing.............................  Not applicable......................  Means the closing of the
                                                                             consolidation of certain member
                                                                             firm regulatory functions of NYSE
                                                                             Regulation, Inc. and NASD.
Disqualification....................  As currently written, the definition  Means the definition that is
                                       lists some, but not all, of the       contained in Section 3(a)(39) of
                                       grounds for statutory                 the Exchange Act. The purpose of
                                       disqualification contained in         the amendment is to conform the By-
                                       Section 3(a)(39) of the Exchange      Laws directly to the statutory
                                       Act.                                  provision that NASD is obligated to
                                                                             enforce, as well as to conform the
                                                                             By-Laws to any subsequent
                                                                             amendments to the statute.
Floor Member Governor...............  Not applicable......................  Means a member of the Board
                                                                             appointed as such who is a person
                                                                             associated with a member (or a firm
                                                                             in the process of becoming a
                                                                             member) which is a specialist or
                                                                             floor broker on the New York Stock
                                                                             Exchange trading floor.
Independent Dealer/Insurance          Not applicable......................  Means a member of the Board
 Affiliate Governor.                                                         appointed as such who is a person
                                                                             associated with a member which is
                                                                             an independent contractor financial
                                                                             planning member firm or an
                                                                             insurance company, or an affiliate
                                                                             of such a member.

[[Page 14158]]

 
Industry Governor or Industry         Means a Governor (excluding the       Means the Floor Member Governor, the
 committee member.                     Chief Executive Officer of the NASD   Independent Dealer/Insurance
                                       and the President of NASD             Affiliate Governor and the
                                       Regulation) or committee member       Investment Company Affiliate
                                       who: (1) Is or has served in the      Governor and any other Governor
                                       prior three years as an officer,      (excluding the Chief Executive
                                       director or employee of a broker or   Officer of the New SRO and, during
                                       dealer, excluding an outside          the Transitional Period, the Chief
                                       director or a director not engaged    Executive Officer of NYSE
                                       in the day-to-day management of a     Regulation, Inc.) or committee
                                       broker or dealer; (2) is an           member who: (1) Is or has served in
                                       officer, director (excluding an       the prior year as an officer,
                                       outside director) or employee of an   director (other than as an
                                       entity that owns more than ten        independent director), employee or
                                       percent of the equity of a broker     controlling person of a broker or
                                       or dealer, and the broker or dealer   dealer, or (2) has a consulting or
                                       accounts for more than five percent   employment relationship with or
                                       of the gross revenues received by     provides professional services to a
                                       the consolidated entity; (3) owns     self-regulatory organization
                                       more than five percent of the         registered under the Exchange Act,
                                       equity securities of any broker or    or has had any such relationship or
                                       dealer, whose investments in          provided any such services at any
                                       brokers or dealers exceed ten         time within the prior year.
                                       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; or (6) has a
                                       consulting or employment
                                       relationship with or provides
                                       professional services to the NASD,
                                       NASD Regulation, NASD Dispute
                                       Resolution, 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.
Investment Company Affiliate          Not applicable......................  Means a member of the Board
 Governor.                                                                   appointed as such who is a person
                                                                             associated with a member which is
                                                                             an investment company (as defined
                                                                             in The Investment Company Act of
                                                                             1940, as amended) or an affiliate
                                                                             of such a member.
Joint Public Governor...............  Not applicable......................  Means the one Public Governor to be
                                                                             appointed as such by the Board of
                                                                             Directors of NYSE Group, Inc. and
                                                                             the Board in office prior to the
                                                                             Closing jointly.
Large, Mid-Size and Small Firms.....  Not applicable......................  Mean any broker or dealer admitted
                                                                             to membership in the New SRO which,
                                                                             at the time of determination, has 1-
                                                                             150, 151-499 or 500 or more
                                                                             registered persons, respectively.
Large Firm, Mid-Size Firm and Small   Not applicable......................  Mean members of the Board to be
 Firm Governors.                                                             elected by Large, Mid-Size, and
                                                                             Small Firm members, respectively,
                                                                             provided, however, that in order to
                                                                             be eligible to serve, a Large Firm,
                                                                             Mid-Size Firm, and Small Firm
                                                                             Governor must be an Industry
                                                                             Governor and must be registered
                                                                             with a member which is a Large
                                                                             Firm, Mid-Size Firm, or Small Firm
                                                                             member, as the case may be.

[[Page 14159]]

 
Large Firm Governor and Small Firm    Not applicable......................  Means a committee of the Board
 Governor Committees.                                                        comprised of all of the Large Firm
                                                                             Governors or Small Firm Governors,
                                                                             as the case may be.
Lead Governor.......................  Not applicable......................  Means a member of the Board elected
                                                                             as such by the Board, provided,
                                                                             however, that any member of the
                                                                             Board who is concurrently serving
                                                                             as a member of the Board of
                                                                             Directors of NYSE Group, Inc. is
                                                                             not eligible to serve as the Lead
                                                                             Governor.
NASD Public Governors and NYSE        Not applicable......................  Mean the five Public Governors to be
 Public Governors.                                                           appointed as such by the Board in
                                                                             office prior to the Closing and the
                                                                             five Public Governors to be
                                                                             appointed as such by the Board of
                                                                             Directors of NYSE Group, Inc.,
                                                                             respectively, effective as of
                                                                             Closing.
NASD Group Committee................  Not applicable......................  Means a committee of the Board
                                                                             comprised of the five Public
                                                                             Governors and the Independent
                                                                             Dealer/Insurance Affiliate Governor
                                                                             appointed as such by the Board in
                                                                             office prior to Closing, and the
                                                                             Small Firm Governors which were
                                                                             nominated for election as such by
                                                                             the Board in office prior to
                                                                             Closing, and in each case their
                                                                             successors.
NYSE Group Committee................  Not applicable......................  Means a committee of the Board
                                                                             comprised of the five Public
                                                                             Governors and the Floor Member
                                                                             Governor appointed as such by the
                                                                             Board of Directors of NYSE Group,
                                                                             Inc., and the Large Firm Governors
                                                                             which were nominated for election
                                                                             as such by the Board of Directors
                                                                             of NYSE Group, Inc., and in each
                                                                             case their successors.
Non-Industry Governor or Non-         Means a Governor (excluding the       Not applicable.
 Industry committee member.            Chief Executive Officer and any
                                       other officer of the NASD, the
                                       President of NASD Regulation) or
                                       committee member who is: (1) A
                                       Public Governor or committee
                                       member; (2) an officer or employee
                                       of an issuer of securities listed
                                       on 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 (4) any
                                       other individual who would not be
                                       an Industry Governor or committee
                                       member.
Public Governor or Public committee   Means a Governor or committee member  Means any Governor or committee
 member.                               who has no material business          member who is not the Chief
                                       relationship with a broker or         Executive Officer of the New SRO
                                       dealer or the NASD, NASD              or, during the Transitional Period,
                                       Regulation, NASD Dispute              the Chief Executive Officer of NYSE
                                       Resolution, or a market for which     Regulation, Inc., who is not an
                                       NASD provides regulation.             Industry Governor and who otherwise
                                                                             has no material business
                                                                             relationship with a broker or
                                                                             dealer or a self-regulatory
                                                                             organization registered under the
                                                                             Exchange Act, other than as a
                                                                             public director of such a self-
                                                                             regulatory organization.
Transitional Period.................  Not applicable......................  Means the period commencing on the
                                                                             date of the Closing and ending on
                                                                             the third anniversary of the date
                                                                             of the Closing.
----------------------------------------------------------------------------------------------------------------

    There also are certain other non-substantive changes reflected in 
the rule text. For example, each reference to ``the NASD'' or ``NASD'' 
in the NASD By-Laws will be replaced with ``the Corporation'' in 
contemplation of the change in the name of the corporation. In 
addition, each reference to the ``Rules of the Association'' in the 
NASD By-Laws will be replaced with the ``Rules of the Corporation.'' 
The effective date of the proposed rule change will be the closing of 
the Transaction. Assuming SEC approval of the proposed rule change, 
corresponding changes will be made to NASD's Certificate of 
Incorporation. The effective date of the corresponding changes to 
NASD's Certificate of Incorporation also will be the closing of the 
Transaction.
Proposed Changes to NASD Regulation By-Laws
    In 1996, based on recommendations of a committee appointed by the 
NASD Board, NASD formed its subsidiary NASD Regulation (in addition to 
the already existing Nasdaq) and adopted the Plan of Allocation and 
Delegation of Functions by NASD to Subsidiaries (``Delegation Plan'') 
to reflect its change

[[Page 14160]]

in corporate structure.\9\ In 2000, NASD created another subsidiary for 
its mediation and arbitration functions, NASD Dispute Resolution. 
Following the closing of the Transaction, the New SRO will evaluate the 
role and governance structure of the subsidiaries and the ongoing need 
for the Delegation Plan. At this time, the proposed rule change would 
make limited conforming changes to the NASD Regulation By-Laws solely 
to reflect the proposed governance structure of the New SRO Board.
---------------------------------------------------------------------------

    \9\ On December 20, 2006, NASD eliminated its delegation of 
authority to Nasdaq under the Delegation Plan and effectuated 
complete separation with Nasdaq, including dissolution of NASD's 
controlling share in Nasdaq.
---------------------------------------------------------------------------

    First, in light of the new proposed composition of the New SRO 
Board, the proposed rule change would amend Section 5.2 of the NASD 
Regulation By-Laws (Number of Members and Qualifications of the 
National Adjudicatory Council (``NAC'')) to eliminate the reference 
that the Chairman of the NAC shall serve as a Governor of the NASD 
Board for a one-year term. Second, because the Chairman of the NAC may 
continue to serve as a Director of the NASD Regulation Board, the 
proposed rule change would eliminate the requirement in Section 4.3 
(Qualifications) that only Governors of the NASD Board shall be 
eligible for election to the NASD Regulation Board. Finally, NASD 
proposes to amend the statement in Section 4.3 that provides that the 
CEO of NASD shall be an ex-officio non-voting member of the NASD 
Regulation Board, to reflect that Ms. Schapiro will occupy both the 
position of CEO of the New SRO and the President of NASD Regulation. In 
particular, the proposed rule change would clarify that where the CEO 
of the New SRO also serves as President of NASD Regulation, then the 
person shall have all powers, including voting powers, granted to all 
other Directors pursuant to applicable law, the Restated Certificate of 
Incorporation, the Delegation Plan and the NASD Regulation By-Laws.
    The effective date of the proposed rule change will be the closing 
of the Transaction.
2. Statutory Basis
    NASD believes that the proposed rule change is consistent with the 
provisions of Section 15A of the Act, including Section 15A(b)(2) of 
the Act,\10\ in that it provides for the organization of the New SRO in 
a manner that will permit the New SRO to carry out the purposes of the 
Act, to comply with the Act, and to enforce compliance by New SRO 
members and persons associated with members with the Act, the rules and 
regulations thereunder, New SRO rules and the federal securities laws. 
NASD further believes that the proposed rule change is consistent with 
Section 15A(b)(4) of the Act \11\ in that the amendments are designed 
to assure a fair representation of the New SRO's members in the 
selection of its Governors and administration of its affairs, as well 
as to comply with the public participant requirements of the Act. 
Moreover, firms that today are regulated by both NASD and NYSE 
Regulation will benefit from the elimination of the current duplication 
of regulatory review of these firms. The Transaction, as reflected in 
the proposed rule change, will further benefit members as it will 
streamline the broker-dealer regulatory system, combine technologies 
and permit the establishment of a single set of rules and group 
examiners with complementary areas of expertise in a single 
organization--all of which will serve to enhance oversight of U.S. 
securities firms and help to ensure investor protection.
---------------------------------------------------------------------------

    \10\ 15 U.S.C. 78o-3(b)(2).
    \11\ 15 U.S.C. 78o-3(b)(4).
---------------------------------------------------------------------------

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.

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 NASD 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:

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-2007-023 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-NASD-2007-023. 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 such 
filing also will be available for inspection and copying at the 
principal office of 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-2007-023 and should be submitted on or before April 16, 2007.


[[Page 14161]]


    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
---------------------------------------------------------------------------

    \12\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E7-5422 Filed 3-23-07; 8:45 am]
BILLING CODE 8010-01-P