[Federal Register Volume 62, Number 197 (Friday, October 10, 1997)]
[Notices]
[Pages 53062-53130]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-26522]


      

[[Page 53061]]

_______________________________________________________________________

Part II





Securities and Exchange Commission





_______________________________________________________________________



Self-Regulatory Organizations; Notice of Filing of a Proposed Rule 
Change by the National Association of Securities Dealers, Inc. 
(``NASD'') to Proposed Changes in the By-Laws and Restated Certificates 
of Incorporation of NASD, NASD Regulation, Inc., The Nasdaq Stock 
Market, Inc., and the Plan of Allocation and Delegation of Functions by 
the NASD to Subsidiaries; Notice

Federal Register / Vol. 62, No. 197 / Friday, October 10, 1997 / 
Notices

[[Page 53062]]



SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39175; File No. SR-NASD-97-71]


Self-Regulatory Organizations; Notice of Filing of a Proposed 
Rule Change by the National Association of Securities Dealers, Inc. 
(``NASD'') to Proposed Changes in the By-Laws and Restated Certificates 
of Incorporation of the NASD, NASD Regulation, Inc., The Nasdaq Stock 
Market, Inc., and the Plan of Allocation and Delegation of Functions by 
the NASD to Subsidiaries

September 30, 1997.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''), <SUP>1</SUP> notice is hereby given that on September 19, 
1997, the National Association of Securities Dealers, Inc. 
(``Association'' or ``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 the self-regulatory organization. <SUP>2</SUP> 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. Sec. 78s(b)(1).
    \2\ On September 29, 1997, the NASD filed a technical amendment 
to the proposed rule change, the substance of which is included in 
this notice. See letter from T. Grant Callery, General Counsel, 
NASD, to Katherine A. England, Assistant Director, Division of 
Market Regulation, Commission. On September 30, 1997, the filing was 
further amended by the NASD to correct non-substantive typographical 
errors. Meeting between Mary Dunbar, Office of General Counsel, NASD 
Regulation and Mandy S. Cohen, Division of Market Regulation, 
Commission.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The NASD is filing a proposed rule change to amend: (1) The By-Laws 
of the NASD; (2) the By-Laws of NASD Regulation, Inc. (``NASD 
Regulation''); (3) the By-Laws of The Nasdaq Stock Market, Inc. 
(``Nasdaq''); (4) the Plan of Allocation and Delegation of Functions By 
NASD to Subsidiaries (``Delegation Plan''); and (5) the Restated 
Certificates of Incorporation for the three corporations. Attachment A 
is the text of the proposed rule change. Proposed new language is 
italicized; proposed deletions are in brackets.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the self-regulatory organization 
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. The self-regulatory organization 
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
    a. Introduction: The purpose of the proposed rule change is to 
provide for a more efficient and effective corporate structure for the 
Association, to conform the Association's corporate documents to the 
recently amended Code of Procedure (Rule 9000 Series) and membership 
procedures (Rule 1010 Series), and to make the Association's corporate 
documents more consistent with one another. <SUP>3</SUP> In particular, 
the proposed corporate structure is designed to streamline the decision 
making process to be more responsive to investor interests, improve 
communication among Board members and the staff, enable the Association 
to act quickly and decisively when necessary, and preserve the 
principles set forth in the September 15, 1995 Report of the NASD 
Select Committee on Structure and Governance To The NASD Board of 
Governors (``Select Committee Report'').
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    \3\ All references to ``Rule'' followed by a four-digit number 
in this rule filing are references to one or more Rules of the 
Association, as defined in NASD By-Laws, Article I, Definitions.
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    Portions of the proposed rule change set forth in this rule filing 
were previously submitted and noticed in the Federal Register in SR-
NASD-96-20, <SUP>4</SUP> SR-NASD-96-29, <SUP>5</SUP> and SR-NASD-97-28. 
<SUP>6</SUP> No comments were received on those parts of these rule 
filings concerning the Association's corporate documents and the 
Delegation Plan. <SUP>7</SUP> The Association believes that the changes 
to its corporate structure would be better understood if all changes to 
these documents were included in one rule filing. Therefore, the 
Association withdrew its request for approval of the portion of the 
proposed rule change relating to the Association's corporate documents 
and the Delegation Plan set forth in SR-NASD-97-28 and included all 
proposed changes to its corporate documents and the Delegation Plan in 
this rule filing. <SUP>8</SUP> In the description of the proposed rule 
change for each document below, the Association has identified the rule 
changes that are proposed for the first time in this rule filing.
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    \4\ Securities Exchange Act Release No. 37282 (June 6, 1996), 61 
FR 29777 (June 12, 1996), as amended.
    \5\ Securities Exchange Act Release No. 37425 (July 11, 1996), 
61 FR 37518 (July 18, 1996), as amended.
    \6\ Securities Exchange Act Release No. 38545 (April 24, 1997) 
62 FR 25226 (May 8, 1997), as amended.
    \7\ SR-NASD-96-20 and SR-NASD-96-29 include temporary approvals 
of the corporate governance documents and the Delegation Plan, 
respectively. Upon approval of this rule filing, temporary approval 
of 96-20 and 96-29 will be rescinded.
    \8\ See letter from Alden S. Adkins, General Counsel, NASD 
Regulation, to Katherine A. England, Assistant Director, Division of 
Market Regulation, Commission, dated July 11, 1997 (Amendment No. 3 
to SR-NASD-97-28).
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    To achieve the corporate objectives set forth above, the 
Association proposes to retain the current three corporation structure, 
but reduce the overall number of board members for the three 
corporations and create a new board structure, with both the Nasdaq and 
NASD Regulation Boards of Directors shrinking in size and becoming part 
of an expanded NASD Board of Governors.<SUP>9</SUP> As a result, the 
Association would reduce the overall number of board members from 49 to 
27, reduce the number of board meetings from 17 to seven, reduce the 
number of board committees from nine to five, and replace two 
subsidiary board executive committees with one parent board executive 
committee.<SUP>10</SUP>
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    \9\ Currently, the NASD Board has 11 Governors, the NASD 
Regulation Board has 24 Directors, and the Nasdaq Board has 14 
Directors. The Board of Governors of the NASD is referred to herein 
as the NASD Board, and the Boards of Directors of NASD Regulation 
and Nasdaq are referred to herein as the NASD Regulation Board and 
the Nasdaq Board, respectively.
    \10\ As explained below, the by-laws of each subsidiary would 
continue to authorize its board to appoint executive and finance 
committees, but the Association does not anticipate that the 
subsidiary boards will find it necessary to continue to appoint such 
committees.
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    The NASD Board would consist of 21 to 27 Governors and include a 
nucleus of Governors who would not serve as directors on either 
subsidiary board. The subsidiary boards each would have five to eight 
Directors, each of whom would be NASD Governors. The number of 
directors on each subsidiary board would be equal, thereby enabling the 
nucleus of individuals who served only as NASD Governors to perform a 
tie-breaking function on the parent board.
    The NASD Board, while remaining ultimately responsible for the 
actions of its subsidiaries, would also retain its current authority to 
review and ratify or reject certain actions of the subsidiaries, 
although the process of exercising this authority would be expedited by 
transferring certain functions to new

[[Page 53063]]

entities under each subsidiary board and changing several meeting 
schedules. First, the Association proposes to transfer the functions of 
the National Business Conduct Committee, a committee of the NASD 
Regulation Board composed entirely of Directors, to a new entity, the 
National Adjudicatory Council.<SUP>11</SUP> The National Adjudicatory 
Council would be appointed by the NASD Regulation Board, after 
nomination by the National Nominating Committee. Similarly, the 
Association proposes to transfer the functions of the Nasdaq Listing 
and Hearing Review Committee to a new Nasdaq Listing and Hearing Review 
Council (``Listing Council'').<SUP>12</SUP> Listing Council members 
would be appointed by the Nasdaq Board. Except for the Chair of 
National Adjudicatory Council, members of the councils would not serve 
on any of the Association's boards.
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    \11\ See proposed Article V of the NASD Regulation By-Laws.
    \12\ See proposed Article V of the Nasdaq By-Laws.
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    These new councils would meet at least 15 days before the 
subsidiary boards and generally would provide written reports of their 
decisions to their respective boards not later than 15 days before the 
subsidiary board meetings. The subsidiary board meetings then would be 
scheduled to occur one day before the meetings of the NASD 
Board.<SUP>13</SUP> Although matters delegated to each subsidiary 
would, as a matter of general practice, be considered by the subsidiary 
boards before proceeding to the NASD Board, the time required for final 
disposition would be significantly reduced by these structural and 
scheduling changes. Under the current structure and meeting schedule, 
the subsidiaries may have to delay issuing disciplinary, listing, and 
other decisions and filing rule proposals with the Commission until a 
parent board meeting is held, which may occur several weeks after the 
subsidiary board takes action. Such delay would be eliminated by the 
new corporate structure and meeting schedule.
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    \13\ Amendments to the Association's Code of Procedure and other 
rules that contain NASD Board call-out authority will be proposed in 
a separate rule filing.
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    In addition to compressing the time between subsidiary and parent 
board meetings, the proposed structural refinements would facilitate 
other efficiencies because members of the revamped subsidiary boards 
would constitute a subset of NASD Board members. For example, an NASD 
Regulation rule amendment that warrants consideration by the NASD Board 
could be taken directly to the NASD Board for action, thereby avoiding 
the need for duplicative discussions of the same matter. The same would 
be true of rule amendments as to which NASD Board review is mandatory 
under the Delegation Plan. Thus, action on significant or controversial 
matters could be accomplished in one step, rather than the two steps 
that are currently required. Furthermore, because the Directors of both 
subsidiary boards would be Governors of the NASD Board, the 
consideration of matters at the NASD Board level always would have the 
benefit of subsidiary board participation.
    To further expedite decision-making, the NASD Board would be 
specifically authorized by the Delegation Plan to take action on its 
own initiative. Thus, subsidiary board action on a matter within its 
sphere of delegated authority would not be a prerequisite to action by 
the NASD Board. Rather, the NASD Board would be authorized to take 
action ab initio.<SUP>14</SUP>
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    \14\ See Proposed Delegation Plan I.B.11.
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    The Association believes that these changes are consistent with the 
core principles of corporate governance outlined in the Select 
Committee Report and the November 1995 Select Committee on Structure 
and Governance--Staff Implementation Plan (``Staff Implementation 
Plan''). The principles of the Select Committee Report and the Staff 
Implementation Plan include maintaining a balanced governance 
structure, an independent corporate structure, an independent and 
autonomous operating structure, and a clear and distinct role for each 
corporation. The proposed rule change maintains a balanced governance 
structure by providing for diversity among Industry Governors and 
Directors; providing for a majority of Non-Industry Governors on the 
parent board, including at least five Public Governors; and providing 
for at least 50 percent Non-Industry and Public Directors on the board 
of directors of each subsidiary. Maintaining two separate, wholly owned 
subsidiaries with their own Presidents ensures that independent 
corporate structures continue to exist. Preserving separate and 
independent professional staffs and substantial deference to the 
subsidiaries in their areas of jurisdiction reinforces an independent 
and autonomous operating structure. Finally, each corporation retains 
its clear and distinct role under the proposed rule change: The NASD 
continues to resolve conflicts between the subsidiaries and retain 
ultimate responsibility for statutory obligations, including its 
responsibilities as a self-regulatory organization; NASD Regulation 
continues to perform the day-to-day regulation of brokers and dealers 
and to supervise surveillance of Nasdaq and other OTC markets; and 
Nasdaq continues to own and operate The Nasdaq Stock Market and develop 
and implement rules governing that market.
    The proposed corporate structure also is consistent with the 
Undertakings set forth in the Association's August 8, 1996, settlement 
with the Commission.<SUP>15</SUP> Specifically, the proposed rule 
changes comport with the requirements for balancing the Association's 
boards and committees,<SUP>16</SUP> placing primary day-to-day 
responsibility for regulatory matters with NASD 
Regulation,<SUP>17</SUP> providing for the autonomy and independence of 
the regulatory staff of the NASD and its subsidiaries,<SUP>18</SUP> and 
ensuring the existence of a substantial, independent internal audit 
staff that reports directly to an audit committee of the NASD 
Board.<SUP>19</SUP>
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    \15\ Securities Exchange Act Release No. 37538 (August 8, 1996), 
62 SEC Docket 1346, Order Instituting Public Proceedings Pursuant to 
Section 19(h)(1) of the Securities Exchange Act of 1934, Making 
Findings and Imposing Remedial Sanctions, In the Matter of National 
Association of Securities Dealers, Inc., Administrative Proceeding 
File No. 3-9056 (the ``Order'').
    \16\ See Proposed NASD By-Laws Article VII, Section 4 and 
Article IX; Proposed NASD Regulation By-Laws Article IV; Proposed 
Nasdaq By-Laws Article IV; Delegation Plan I.C., II.C.
    \17\ See Proposed Delegation Plan II.A.1.
    \18\ Id.
    \19\ See proposed NASD By-Laws Article IX, Section 5.
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    b. Proposed Changes to NASD By-Laws: The expanded NASD Board would 
function much as it does today, with ultimate responsibility for the 
regulatory and market operation functions delegated to the subsidiary 
boards. Substantive changes to the NASD By-Laws are set forth below. 
Key changes related to the corporate restructuring are found in 
proposed Article VII, Sections 4, 5, 9, 10, and 13; Article IX, 
Sections 4 through 6; Article XV, Section 4(b); Article XVI, Section 1; 
and Articles XX and XXI. Stylistic changes and other minor, non-
substantive changes are not described.<SUP>20</SUP>
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    \20\ All references to Articles or Sections in this section 
``b'' refer to the NASD By-Laws, unless otherwise noted.
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Proposed Article I. Definitions
    The Association proposes several substantive amendments to Article 
I, which sets forth definitions for the NASD By-Laws. First, the 
Association proposes to move the following

[[Page 53064]]

definitions from the Delegation Plan <SUP>21</SUP> to the appropriate 
corporate by-laws: ``Industry Director''; ``Industry Governor'' or 
``Industry committee member''; ``National Nominating Committee''; 
``Non-Industry Director''; ``Non-Industry Governor'' or ``Non-Industry 
committee member''; ``Public Director''; ``Public Governor'' or 
``Public committee member''.<SUP>22</SUP> Related, substantive 
provisions of the Delegation Plan also would be moved to the By-Laws of 
the appropriate corporate entity.
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    \21\ See Delegation Plan, I.A. and I.C.
    \22\ See proposed NASD By-Laws Article I(n), (o),(bb), (cc), 
(dd), (ff), and (gg).
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    The Association also is proposing certain refinements to the NASD 
By-Laws' definitions of ``Industry Governor'', ``Industry committee 
member'', ``Non-Industry Governor'', and ``Non-Industry committee 
member''. Specifically, the Association proposes to exclude from the 
definition of Industry Governor or committee member a person who is or 
was an outside director of a broker or a dealer or a director not 
engaged in the day-to-day management of a broker or dealer. The 
Association proposes to include in the definition of Industry Governor, 
Director and Committee member a Governor, Director, or committee member 
who (1) is an employee of an entity that owns more than ten percent of 
the equity of a broker or dealer, and the broker or dealer accounts for 
more than five percent of the gross revenues received by the 
consolidated entity; (2) owns more than five percent of the equity 
securities of any broker or dealer, whose investments in brokers or 
dealers exceed ten percent of his or her net worth, or whose ownership 
interest otherwise permits him or her to be engaged in the day-to-day 
management of a broker or dealer; (3) 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; or (4) 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.
    The Association proposes to delete from the definition of Non-
Industry Governor or committee member specific references to (1) 
persons affiliated with brokers and dealers that operate solely to 
assist the securities-related activities of the business of non-member 
affiliates, such as a broker or dealer established to distribute an 
affiliate's securities which are issued on a continuous or regular 
basis, or process the limited buy and sell orders of the shares of 
employee owners of the affiliate; and (2) employees of an entity that 
is affiliated with a broker or dealer that does not account for a 
material portion of the revenues of the consolidated entity, and who 
are primarily engaged in the business of the non-member entity. The 
Association believes that any person engaged in the day-to-day 
management of any broker or dealer, including a limited purpose broker 
or dealer, should be considered an Industry Governor or committee 
member.
    Parallel amendments are proposed for the definitions of ``Non-
Industry Director'' or ``Non-Industry member'' at the subsidiary level.
    Second, the Association proposes to amend the term ``person 
associated with a member'' by adding a clause to clarify that the term 
includes any natural person registered under the Rules of the 
Association. The impetus for the proposed change is Slade versus 
Metropolitan Life Ins. Co.<SUP>23</SUP> Slade involved a former 
registered representative who sued his former employer, an NASD member, 
for wrongful termination. The member filed a motion to compel 
arbitration of the dispute. The member argued that because the former 
employee had signed a Form U-4, Uniform Application for Securities 
Industry Registration or Transfer, and had become registered with the 
firm, he was subject to the provision of the Form U-4 that requires 
arbitration of employment-related disputes. The former employee argued 
that although he signed the Form U-4, he never conducted any securities 
activities and never acted as an associated person of the member. The 
lower court ruled that the former employee was not required to 
arbitrate this dispute. The court held that the NASD's definition of 
associated person in Article 1(q) of its By-Laws used the words 
``engaged'' in the member's investment banking and securities business, 
and because the former employee was not ``engaged'' in such business, 
he was not covered by the definition of associated person. The court 
also noted that the former employee's job responsibilities were not 
among those listed by the associated person definition in the By-Laws. 
The member appealed this ruling and in September 1996, the Supreme 
Court, Appellate Division, affirmed the lower court 
ruling.<SUP>24</SUP> The New York Court of Appeals denied the member's 
request to review the September 1996 ruling.<SUP>25</SUP>
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    \23\ Index No. 117688/94, Decision and Order of April 9, 1996 
(Sup. Ct., N.Y. Co.), aff'd, 231 A.D.2d 467 (N.Y. 1996), appeal 
denied, 676 N.E.2d 500 (N.Y. 1996).
    \24\ 231 A.D.2d at 467.
    \25\ 676 N.E.2d at 500.
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    Slade suggests that any person whose job title or position is not 
specifically identified in the By-Laws' definition of associated person 
would not be considered an associated person if he or she were not 
deemed to be ``engaged'' in the member's securities business. The same 
result might hold even for persons who are registered with a member 
firm pursuant to NASD Rules. To avoid this result, the NASD proposes to 
amend the definition of associated person to clarify that all 
registered persons are associated persons, regardless of whether they 
would be deemed to be engaged in the securities business.<SUP>26</SUP>
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    \26\ See proposed NASD By-Laws Article I, ``Definitions''; 
proposed NASD Regulation By-Laws Article I, ``Definitions''; and 
proposed Nasdaq By-Laws Article I, ``Definitions''.
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    Third, the Association proposes to delete the definition ``rules of 
the Corporation'' to avoid confusion with the more commonly used, but 
differently defined term, ``Rules of the Association''.<SUP>27</SUP> 
The term ``rules of the Corporation'' currently is used to refer 
collectively to the NASD Certificate of Incorporation, the NASD By-
Laws, and the Rules of the Association. Given the restructuring of the 
NASD into three legal entities, such a collective term for all of the 
corporate documents of the Association would not be useful. Thus, under 
the proposed rule change, where a particular provision must be 
consistent with a particular corporate document, that document is 
specified. Similarly, the Association also proposes to delete the 
definitions of ``Boards'' and ``Corporations'' and instead refer to 
each corporate entity specifically where intended.<SUP>28</SUP> The 
term ``Rules of the Association'' or ``Rules'' is defined to mean the 
numbered rules set forth in the NASD Manual beginning with the Rule 
0100 Series, as adopted by the NASD Board pursuant to the NASD By-Laws, 
as amended or supplemented. A cross-reference from the Rules of the

[[Page 53065]]

Association deferring to the NASD By-Laws is included in Rule 0121.
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    \27\ See Current NASD By-Laws Article I(v).
    \28\ See Current NASD By-Laws Article I (d) and (i)).
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    Finally, the following definitions are added or amended to reflect 
drafting conventions adopted to reflect the three corporation structure 
or other drafting conventions. Those definitions are: ``Board''; 
``branch office''; ``day''; ``dealer''; ``Delegation Plan''; 
``district''; ``member''; ``municipal securities dealer''; ``NASD''; 
``Nasdaq''; ``Nasdaq Board''; ``Nasdaq Listing and Hearing Review 
Council''; ``NASD Regulation''; ``NASD Regulation Board''; and 
``National Adjudicatory Council''.<SUP>29</SUP>
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    \29\ See proposed NASD By-Laws Article I (c), (d), (g), (h), 
(i), (j), (q), (t), (u), (v), (w), (x), (y), (z), and (aa).
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Proposed Article II. Offices
    The Association proposes to add a new Article II ``Offices'' that 
states the location of the registered corporate office of the NASD. 
This change makes the NASD By-Laws consistent with the NASD Regulation 
and Nasdaq By-Laws, which both include such a provision.
Proposed Article III. Qualifications of Members and Associated Persons
    Current Article II, ``Qualifications of Members and Associated 
Persons'', is renumbered as proposed Article III. The Association 
proposes to conform Section 3, which addresses ineligibility of certain 
persons for membership or association, to the Rule 9520 Series, which 
sets forth rules for the Association's eligibility proceedings. 
Specifically, the Association proposes to amend Section 3(d) to clarify 
that members may use eligibility proceedings to obtain relief from the 
Association's eligibility requirements, e.g., to resolve a statutory 
disqualification problem. As written, current Section 3(d) could be 
read to suggest that a broker or dealer seeking admission to the 
Association could use such proceedings to obtain relief from 
eligibility requirements as a means of gaining admission to the 
Association. That is not the Association's practice or the intent of 
the provision, and Section 3(d) is amended to remove this potential 
ambiguity.
    The Association proposes to delete Section 3(d)(2), which addresses 
the status of members or persons engaged in eligibility proceedings, 
because that subject is addressed in the Rule 9520 Series. This change 
does not result in a substantive change in the Association's practice. 
Specifically, if a person is already associated with a member at the 
time a statutory disqualification is discovered, the person may remain 
associated with the member until final action is taken under the Rules 
of the Association. If the person is a prospective employee, the person 
may not become associated with the member until the Association takes 
final action under the Rule 9520 Series.
    The Association proposes to add a new Section 3(g) to clarify that 
the Board may delegate its authority under Section 3 in a manner not 
inconsistent with the Delegation Plan.
    Finally, the Association proposes to amend Section 4(h) to conform 
it to the Act.
Proposed Article IV. Membership
    Current Article III, Membership, is renumbered as proposed Article 
IV. The Association proposes to delete Section 1(a)(3), which requires 
members to release the Association from liability except for willful 
malfeasance.<SUP>30</SUP> The Association also proposes to conform 
Section 7 to changes in the Rule 1010 Series, which sets forth 
procedures for membership applications and changes in a member's 
ownership or operations.
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    \30\ This proposed deletion was not included in SR-NASD-97-28.
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Proposed Article V. Registered Representatives and Associated Persons
    Current Article IV, ``Registered Representatives and Associated 
Persons'', is renumbered as proposed Article V. The Association 
proposes to delete current Section 2(a)(2), which requires registered 
representatives to release the Association from liability except for 
willful malfeasance.<SUP>31</SUP>
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    \31\ This proposed deletion was not included in SR-NASD-97-28.
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Proposed Article VI. Dues, Assessments, and Other Charges
    Current Article V, ``Dues, Assessments, and Other Charges'', is 
renumbered as proposed Article VI. The Association proposes to add a 
new Section 5 that states that the NASD may delegate its authority 
regarding dues, assessments, and other charges in a manner not 
inconsistent with the Delegation Plan.
Proposed Article VII. Board of Governors
    Current Article VI, ``Board of Governors'', is renumbered as 
proposed Article VII. The Association proposes to amend Section 1(c) to 
clarify the Board's authority to delegate its powers. Specifically, the 
Association proposes to amend Section 1(c) to provide that to the 
fullest extent permitted by applicable law, the Restated Certificate of 
Incorporation, and the By-Laws, the NASD may delegate any power of the 
NASD or its Board of Governors to a committee appointed pursuant to 
proposed Article IX, Section 1, the NASD Regulation Board, the Nasdaq 
Board, or NASD staff in a manner not inconsistent with the Delegation 
Plan. The Association proposes to add parallel provisions to the NASD 
Regulation By-Laws and the Nasdaq By-Laws.<SUP>32</SUP>
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    \32\ See proposed NASD Regulation By-Laws Article IV, Section 
4.1 and proposed Nasdaq Article IV, Section 4.1, respectively.
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    The Association proposes to amend Section 2. Proposed Section 2 
authorizes the Board to cancel or suspend the membership of a member or 
suspend the association of a person associated with a member for 
failure to provide requested information. The proposed amendment 
provides for reinstatement pursuant to the Rules of the 
Association.<SUP>33</SUP> The Association also proposes to delete the 
delegation to the Chief Executive Officer and replace it with a 
delegation provision consistent with other provisions set forth in the 
proposed NASD By-Laws. Specifically, the Association proposes that the 
Board be permitted to delegate its authority under this Section in a 
manner not inconsistent with the Delegation Plan and otherwise in 
accordance with the Rules of the Association.
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    \33\ See, e.g., Rules 8225 and 9516.
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    The Association proposes to amend Section 4, which addresses the 
composition and qualifications of the Board, to conform to the new 
corporate structure. Under the proposed rule change, the NASD Board 
would consist of the Chief Executive Officer and the Chief Operating 
Officer of the NASD, the Presidents of NASD Regulation and Nasdaq, the 
Chair of the National Adjudicatory Council,<SUP>34</SUP> and at least 
16 and not more than 22 Governors elected by the members of the NASD. 
Thus, the By-Laws would authorize a Board of 21 to 27 Governors in 
total. Proposed Section 4(a) further provides that the Governors 
elected by the members would include a representative of an issuer of 
investment company shares or an affiliate of such an issuer, a 
representative of an insurance company, and a Nasdaq issuer. A majority 
of the Governors would be Non-Industry Governors, and the Non-Industry 
Governors would include five or six Public Governors, depending on the 
size of the Board. Section 4(b) is amended to prohibit the Chair of the 
National

[[Page 53066]]

Adjudicatory Council from serving as Chair of the Board. The 
Association believes that the responsibilities of each chairmanship 
require the attention of one individual.
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    \34\ The National Adjudicatory Council is a new entity that 
would be appointed by the NASD Regulation Board and assume the 
responsibilities of the National Business Conduct Committee. A more 
detailed discussion of the National Adjudicatory Council's role and 
responsibilities is included below in the description of proposed 
Article V of the NASD Regulation By-Laws.
---------------------------------------------------------------------------

    Section 5, ``Term of Office of Governors'', is amended to reflect 
the Board structure. Under proposed Section 5, the Chief Executive 
Officer and the Chief Operating Officer of the NASD and the Presidents 
of NASD Regulation and Nasdaq would serve as Governors until a 
successor was selected, or until death, resignation, or removal. The 
Chair of the National Adjudicatory Council would serve as a Governor 
for a term of one year, and generally could not serve more than two 
consecutive terms.<SUP>35</SUP> However, proposed Section 5 provides 
that a former Chair of the National Adjudicatory Council could serve as 
a Governor elected by the members of the NASD. The Governors elected by 
the members of the NASD would be divided into three classes and serve 
three-year terms. Such Governors generally could not serve more than 
two consecutive terms.
---------------------------------------------------------------------------

    \35\ Under the proposed rule change, the Chair of the National 
Adjudicatory Council, who serves a term of one year, simultaneously 
would serve as a Governor of the NASD Board and a Director of the 
NASD Regulation Board. See proposed Articles IV and V of the NASD 
Regulation By-Laws. Thus, this proposed change is intended to ensure 
that the terms for each of these positions run concurrently.
---------------------------------------------------------------------------

    The Association proposes to add a new Section 6, 
``Disqualification'', which addresses the disqualification of a Board 
member. Proposed Section 6 states that a Governor's term of office 
immediately terminates if the Board determines that: (a) The Governor 
no longer satisfies the classification (Industry, Non-Industry or 
Public Governor) for which the Governor was elected; and (b) failure to 
remove the Governor would violate the compositional requirements of the 
Board set forth in proposed Section 4. If a Governor's term of office 
terminates under this Section, and the remaining term of office of such 
Governor was not more than six months, during the period of vacancy the 
Board would not be deemed to be in violation of its compositional 
requirements by virtue of such vacancy. Proposed Section 6 replaces a 
provision currently in the Delegation Plan that provides for 
``automatic removal'' if a Governor no longer satisfies the 
classification for which he or she was elected without describing any 
process for such removal.<SUP>36</SUP> The Association proposes this 
rule change to avoid any potential for the Board to take an ultra vires 
action in the event that a Governor failed to notify the Board promptly 
of a change in his or her classification and continued to sit on the 
Board and cast votes before such removal took place.<SUP>37</SUP>
---------------------------------------------------------------------------

    \36\ See Delegation Plan, I.C.5.b.
    \37\ If a disqualified governor's term is greater than 6 months, 
a qualifying replacement would be provided pursuant to proposed 
Section 7.
---------------------------------------------------------------------------

    Current Section 6, which addresses the filling of vacancies on the 
Board, is renumbered as proposed Section 7, ``Filling of Vacancies''. 
The Association proposes to move the current provisions of the 
Delegation Plan that address the filling of vacancies to this Section 
and to provide further that if the remaining term of office of the 
governorship to be filled is more than one year, then the replacement 
Governor must stand for election in the next annual 
election.<SUP>38</SUP>
---------------------------------------------------------------------------

    \38\ See current Delegation Plan, I.C.5.
---------------------------------------------------------------------------

    Current Section 7, ``The National Nominating Committee'', which 
describes nomination and election procedures, is expanded and 
renumbered as proposed Sections 9 through 14. Proposed Section 9, ``The 
National Nominating Committee'', sets forth the powers of the National 
Nominating Committee. The National Nominating Committee nominates 
Industry, Non-Industry, and Public Governors for each vacant or new 
Governor position on the NASD Board; Industry, Non-Industry, and Public 
Directors for the NASD Regulation Board and the Nasdaq Board; and 
Industry, Non-Industry, and Public members for the National 
Adjudicatory Council; and Industry and Non-Industry members for the 
Nasdaq Listing and Hearing Review Council.
    Proposed Section 9 also includes and clarifies the compositional 
requirements for the National Nominating Committee, which are currently 
set forth in the Delegation Plan.<SUP>39</SUP> The Delegation Plan 
currently provides that a National Nominating Committee member may be 
removed for cause by a majority vote of the NASD Board. Proposed 
Section 9 refines this provision by specifying the causes for which a 
National Nominating Committee member may be removed--refusal, failure, 
neglect, or inability to discharge such member's duties. This same 
specific standard for removal is used throughout the Association's 
corporate documents for committee and council members.
---------------------------------------------------------------------------

    \39\ See current Delegation Plan, I.C.2.b.(1).
---------------------------------------------------------------------------

    Proposed Section 9 also includes a new provision that requires the 
Secretary of the NASD to collect from each nominee for Governor such 
information as is reasonably necessary to serve as the basis for a 
determination of the nominee's classification as an Industry, Non-
Industry, or Public Governor. The Association proposes that the 
Secretary certify to the National Nominating Committee each nominee's 
classification to ensure that the compositional requirements of each 
Board are met.
    Proposed Section 10, ``Procedures for Nomination of Governors'', 
largely parallels current Section 7(c) and adds provisions regarding 
contested elections currently located in the Delegation Plan. 
Conforming references also are made to proposed Article XXI, ``Meetings 
of Members'', a new article that provides for meetings of the 
membership. Proposed Section 10 clarifies the procedures for contested 
elections and changes the number of members that must sign a petition 
to support adding a candidate to the ballot for NASD Board elections. 
Currently, a person seeking to be added to a ballot must obtain the 
support of two percent of the members of the NASD. The Association 
proposes to increase the level to three percent of the 
members.<SUP>40</SUP> As is currently the case, a petition may be 
signed only by a member's Executive Representative. Proposed Section 10 
also transfers the authority to certify the additional candidate from 
the National Nominating Committee to the Secretary. Because the 
Secretary maintains the records of Executive Representatives, and under 
the proposed rule change would be charged with reviewing information 
regarding the classification (Industry, Non-Industry, or Public) for 
each governorship, the Association believes that it would be more 
efficient for the Secretary to exercise this authority.
---------------------------------------------------------------------------

    \40\ In SR-NASD-97-28, the Association proposed to change this 
provision to require supporting petitions from three percent of the 
members, one-half of which would have to be obtained from members 
outside of the district in which the challenger was employed. The 
Association has determined that it will not propose a requirement 
for out-of-district support.
---------------------------------------------------------------------------

    Proposed Sections 11, ``Communication of Views'', 12, 
``Administrative Support'', and 15, ``Resignation'', are new provisions 
that parallel new provisions added to the NASD Regulation and Nasdaq 
By-Laws. Proposed Section 11 prohibits the NASD, the Board, the 
National Nominating Committees, other committees, and NASD staff from 
taking any official position regarding a contested nomination or 
election under the proposed NASD or NASD Regulation By-Laws. Proposed 
Section 11 permits Board and committee members to communicate their 
views with respect to a candidate in a contested election only if the 
Board or committee member acts solely in his or

[[Page 53067]]

her individual capacity and disclaims any intention to communicate in 
any official capacity. Under proposed Section 12, administrative 
support to the candidates in a contested NASD election is limited to 
two mailings; any other administrative support in any NASD or NASD 
Regulation contested election or nomination is prohibited. Proposed 
Section 15 adds resignation provisions that parallel Article 4, Section 
4.5 in the NASD Regulation and Nasdaq By-Laws.
    Proposed Section 13, ``Election of Governors'', is largely parallel 
to current Section 7(a), with conforming amendments to proposed 
Sections 9 through 12 and a new cross-reference to proposed Article 
XXI, which sets forth procedures for membership meetings.
    Proposed Section 14, ``Maintenance of Compositional Requirements of 
the Board'', is a new procedure that requires each Governor to update 
the information submitted to the NASD Secretary under proposed Section 
9(e) regarding his or her classification as an Industry, Non-Industry, 
or Public Governor at least annually and upon request of the Secretary 
and to report immediately to the Secretary any change in such 
classification. Parallel provisions are proposed for the NASD 
Regulation and Nasdaq By-Laws. These submissions and reports will help 
the Association ensure that the compositional requirements of the Board 
and its committees are maintained.
    The Association proposes to amend current Section 8, ``Meetings of 
Board; Quorum; Required Vote'', which addresses meetings, quorums, and 
voting of the Board, to provide that a quorum consists of a majority of 
the Board then in office, including not less than 50 percent of the 
Non-Industry Governors.<SUP>41</SUP> This proposed change would ensure 
that Industry Governors alone could not constitute or dominate a quorum 
of the Board, and thereby thwart the balanced compositional 
requirements of the Board under proposed Section 4. Current Section 8 
is not renumbered.
---------------------------------------------------------------------------

    \41\ Other provisions in this filing that state that a quorum 
consists of a majority of a board, committee, or council also mean a 
majority of the board, committee, or council then in office.
---------------------------------------------------------------------------

Proposed Article VIII. Officers, Agents, And Employees
    Current Article VII, ``Officers, Agents, and Employees'', is 
renumbered as proposed Article VIII. The Association proposes to amend 
Section 1, ``Officers'', to require that the NASD Board elect a 
Secretary and a Chief Operating Officer. Under current Section 1, the 
NASD Board is authorized, but not required, to elect a Secretary. Given 
the number of responsibilities assigned to the Secretary under the 
proposed By-Laws and the NASD Board's practice of always electing a 
person to such position, the Association proposes to require that a 
Secretary be elected. The Board also must elect a Chief Operating 
Officer because such officer serves on the Board under proposed Article 
VII, Section 4.
    The Association proposes to amend Section 3, ``Agents and 
Employees'', to provide that agents and employees shall be under the 
supervision and control of the officers, unless the Board, by 
resolution, provides that an agent or employee shall be under the 
supervision and control of the Board.<SUP>42</SUP> Generally, agents 
and employees are under the supervision and control of the officers, 
but the NASD Board may wish in certain circumstances to retain control 
over an employee or agent, e.g., as in Section 4, when the Board 
determines that it wishes to retain counsel.
---------------------------------------------------------------------------

    \42\ But see proposed NASD By-Laws Article IX, Section 5(d). The 
Office of Internal Review and the Director of Internal Review are 
under the supervision and control of the Audit Committee.
---------------------------------------------------------------------------

    The Association proposes to move current Section 5, which provides 
for compensation of Board and committee members, to its own Article, 
proposed Article X, ``Compensation of Board and Committee Members''.
    The Association proposes to add new Sections 5, 6, and 7 to this 
Article to conform it to proposed Article 7 of the NASD Regulation By-
Laws and proposed Article 6 of the Nasdaq By-Laws. Proposed Section 5 
permits the Board to delegate the duties and powers of any officer to 
any other officer. Proposed Section 6 provides for the resignation and 
removal of officers. Proposed Section 7 permits the NASD to secure the 
fidelity of its officers, agents, and employees by bond or otherwise.

Proposed Article IX. Committees

    Current Article VIII, ``Committees'', which addresses the formation 
and powers of committees, is renumbered as proposed Article IX. The 
Association proposes to amend Section 1 to cross-reference proposed 
Article VII, Section 1(c), which limits the Board's authority to 
delegate its powers and authority.
    The Association proposes to add a new Section 2, ``Maintenance of 
Compositional Requirements of Committees'', which is designed to help 
the Association maintain the compositional requirements of certain 
committees. Undertakings 1 and 6 under the Order require certain 
committees <SUP>43</SUP> to have a particular balance of Industry, Non-
Industry, and Public committee members.<SUP>44</SUP> To help ensure 
that compositional requirements are maintained for committees appointed 
by the NASD Board, proposed Section 2 authorizes the Secretary to 
collect from each prospective member of a committee that must be 
balanced such information as is reasonably necessary to serve as the 
basis for a determination of the prospective committee member's 
classification as an Industry, Non-Industry, or Public committee 
member. The Secretary must certify to the Board each prospective 
committee member's classification. Each committee member must update 
the information submitted at least annually and upon request of the 
Secretary of the NASD, and must report immediately to the Secretary any 
change in such classification. Parallel provisions are set forth in 
proposed Article 4, Section 4.13(h) of the NASD Regulation By-Laws and 
proposed Article 4, Section 4.13(h) of the Nasdaq By-Laws.
---------------------------------------------------------------------------

    \43\ Undertaking 1 sets forth compositional requirements for 
``the National Nominating Committee, the Trading/Quality of Markets 
Committee, the Arbitration Committee, the Market Surveillance 
Committee, the National Business Conduct Committee, the Management 
Compensation Committee, and all successors thereto.'' Undertaking 6 
sets forth compositional requirements for an audit committee. The 
current names of such committees are the National Nominating 
Committee, the Quality of Markets Committee, the National 
Arbitration and Mediation Committee, the Market Regulation 
Committee, the National Adjudicatory Council, the Management 
Compensation Committee, and the Audit Committee.
    \44\ The compositional requirements for the National Nominating 
Committee and the Audit Committee are set forth in the NASD By-Laws. 
The compositional requirements for the National Adjudicatory Council 
are set forth in the NASD Regulation By-Laws. The compositional 
requirements for the Quality of Markets Committee, the National 
Arbitration and Mediation Committee, the Market Regulation 
Committee, and the Management Compensation Committee are set forth 
in the Delegation Plan and the Order.
---------------------------------------------------------------------------

    Current Section 2, ``Removal of Committee Member'', which addresses 
removal of a committee member, is renumbered as proposed Section 3 and 
amended to clarify that a committee member can only be removed for 
refusal, failure, neglect, or inability to discharge his or her duties 
by majority vote of the whole Board.
    The Association proposes to add new sections to authorize the 
appointment of an Executive Committee and a Finance Committee and to 
require, consistent with Undertaking 6, the appointment of an Audit 
Committee. Proposed Section 4, ``Executive Committee'', authorizes the 
NASD Board to appoint an

[[Page 53068]]

Executive Committee composed of five to nine Governors of the NASD 
Board, with percentages of Non-Industry and Public committee members as 
least as great as the percentages of Non-Industry and Public Governors 
on the Board. The Executive Committee would include the NASD Chief 
Executive Officer/Chairman, at least one member each of the NASD 
Regulation and Nasdaq Boards, and at least two Governors who are not 
Directors of NASD Regulation of Nasdaq. The Executive Committee would 
be authorized (consistent with Delaware law) to act on behalf of the 
NASD Board. A quorum for the transaction of business at Executive 
Committee meetings would consist of a majority of the Executive 
Committee, including at least 50 percent of the Non-Industry committee 
members.<SUP>45</SUP>
---------------------------------------------------------------------------

    \45\ Similar quorum requirements would be imposed on the 
Executive Committees of the subsidiaries, the NASD Finance 
Committee, the National Nominating Committee, the Audit Committee, 
the Management Compensation Committee, and the National Adjudicatory 
Council.
---------------------------------------------------------------------------

    Proposed Section 5, ``Audit Committee'', contains the provisions 
relating to the Audit Committee currently found in the Delegation 
Plan,<SUP>46</SUP> except that the compositional provisions are amended 
to require that two (rather than one) Public Governors serve on the 
Committee. A quorum for the transaction of business at Audit Committee 
meetings would consist of a majority of the Audit Committee, including 
at least 50 percent of the Non-Industry committee members. The current 
Delegation Plan provides that subsidiary directors serve as liaisons to 
the Audit Committee rather than as full members of the Committee.
---------------------------------------------------------------------------

    \46\ See current Delegation Plan, I.D.
---------------------------------------------------------------------------

    Proposed Section 6, ``Finance Committee'', authorizes the Board to 
appoint a Finance Committee composed of at least four Governors, 
including the Chief Executive Officer of the NASD. The Finance 
Committee would be balanced, with the number of Non-Industry Governors 
equaling or exceeding the number of Industry Governors plus the Chief 
Executive Officer. A quorum for the transaction of business at Finance 
Committee meetings would consist of a majority of the Finance 
Committee, including at least 50 percent of the Non-Industry committee 
members.
    If any officer of the NASD, NASD Regulation or Nasdaq serves as a 
member (other than an ex-officio member) of a committee appointed under 
the by-laws of any of the three corporations, such officer will be 
counted with the Industry committee members for purposes of any 
compositional or quorum requirements.
    Finally, the resolution concerning interpretations and explanations 
is deleted because the NASD Board rescinded it on June 26, 1997. The 
resolution no longer conforms to Association practice and is contrary 
to Undertaking 4.
Proposed Article X. Compensation of Board and Committee Members
    As noted previously, current Article VII, Section 5, which 
addresses compensation of Board and committee members, is renumbered as 
proposed Article X, ``Compensation of Board and Committee Members''.
Proposed Article XI. Rules
    Current Article IX, ``Rules'', which authorizes the NASD to adopt 
rules, is renumbered as proposed Article XI. No substantive changes are 
proposed.
Proposed Article XII. Disciplinary Proceedings
    Current Article X, ``Disciplinary Proceedings'', which authorizes 
disciplinary proceedings, is renumbered as proposed Article XII. No 
substantive changes are proposed.
Proposed Article XIII. Powers of Board to Impose Sanctions
    Current Article XI, ``Powers of Board to Prescribe Sanctions'', 
which authorizes the NASD Board to impose sanctions, is renumbered as 
proposed Article XIII. The Association proposes to amend Section 1(e) 
and add a new Section (2) to clarify that any delegation under the 
proposed Article must be in conformity with the Delegation Plan.
Proposed Article XIV. Uniform Practice Code
    Current Article XII, ``Uniform Practice Code'', is renumbered as 
proposed Article XIV. The Association proposes to amend Section 2, 
``Administration Code'', to provide that the Board may delegate its 
authority with respect to administering the Uniform Practice Code to 
the NASD Regulation Board and Nasdaq Board in accordance with the 
Delegation Plan.
Proposed Article XV. Limitation of Powers
    Current Article XIII, ``Limitation of Powers'', is renumbered as 
proposed Article XV. On June 26, 1997, the NASD Board rescinded the 
resolution that follows current Article XIII, Section 2, which provides 
for the use of the NASD's name by members. The provisions of the 
resolution have been moved to IM-2210-4 of the Rules of the 
Association.
    The Association proposes to amend Section 4, ``Conflicts of 
Interest'', which addresses conflicts of interest. The Association 
proposes to amend Section 4 by redesignating it as Section 4(a) and 
therein prohibiting any Governor or committee member from directly or 
indirectly participating in any adjudication of the interests of any 
party if the Governor or committee member has a conflict of interest or 
bias, or if circumstances otherwise exist where his or her fairness 
might reasonably be questioned. Proposed Section 4(a) further requires 
the Governor or committee member to recuse himself or herself or be 
disqualified in accordance with the Rules of the 
Association.<SUP>47</SUP> Current Section 4 simply references the Rules 
of the Association. The standard set forth in proposed Section 4(a) is 
consistent with the conflict of interest standard in Rule 9160.
---------------------------------------------------------------------------

    \47\ See, e.g., Rule 9160.
---------------------------------------------------------------------------

    In addition, the Association proposes to add a new Section 4(b) to 
address conflicts of interests in non-adjudicatory matters in a manner 
consistent with the By-Laws for the NASD Regulation Board and the 
Nasdaq Board. Proposed Section 4(b) provides that a contract or 
transaction between the NASD and a Governor or officer, or between the 
NASD and any entity in which a Governor or officer is a director or 
officer, or has a financial interest, is not void or voidable solely 
for this reason, or solely because the Governor or officer is present 
at the meeting of the Board or committee that authorizes the contract 
or transaction, or solely because the Governor's or officer's vote is 
counted for such purposes if: (1) The material facts pertaining to such 
relationship or interest are disclosed or are known to the Board or the 
committee, and the Board or committee in good faith authorizes the 
contract or transaction by the affirmative vote of a majority of the 
disinterested Governors; or (2) the contract or transaction is fair to 
the NASD as of the time it is authorized, approved, or ratified by the 
Board or committee. Proposed Section 4(b) provides that only 
disinterested Governors may be counted in determining the presence of a 
quorum at a meeting of the Board or of a committee which authorizes the 
contract or transaction. A contract or transaction between the NASD and 
one of its subsidiaries would not be subject to proposed Section 4(b).
    Finally, Section 6, ``Government Securities'', which limits the 
Association rulemaking authority over

[[Page 53069]]

government securities activities, is deleted to conform the By-Laws to 
changes previously made to the Association's authority over the 
government securities activities of its members.
Proposed Article XVI. Procedure for Adopting Amendments to By-Laws
    Current Article XIV, ``Procedure for Adopting Amendments To By-
Laws'', is renumbered as proposed Article XVI and amended. Currently, a 
Governor, a district committee, or 25 members may propose amendments to 
the By-Laws. Proposed Article XVI permits committees appointed by the 
Board, rather than district committees, to propose By-Law amendments. 
Under the new corporate structure, proposals by the district committees 
normally would be presented to the NASD Regulation Board first, or if 
presented directly to the NASD Board, would be presented by the NASD 
Regulation President.
Proposed Article XVII. Corporate Seal
    Current Article XV, ``Corporate Seal'', is renumbered as proposed 
Article XVII. There are no substantive changes to proposed Article 
XVII.
Proposed Article XVIII. Checks
    Current Article XVI, ``Checks'', is renumbered as proposed Article 
XVIII. There are no substantive changes to proposed Article XVIII.
Proposed Article XIX. Annual Financial Statement
    Current Article XVII, ``Annual Financial Statement'', is renumbered 
as proposed Article XIX. There are no substantive changes to proposed 
Article XIX.
Proposed Article XX
    The Association proposes to add a new Article XX, ``Record Dates''. 
Consistent with Delaware law, proposed Section 1, ``Fixing of Date by 
Board'', permits the Board to fix a record date to determine the 
members that are entitled to notice of or to vote at member meetings. 
Proposed Section 2, ``Default Date'', provides for a default record 
date if the Board does not fix such a date. Proposed Section 3, 
``Adjournment'', provides that a determination of members of record 
also applies to an adjournment of a member meeting.
Proposed Article XXI
    The Association proposes to add a new Article XXI, ``Meetings of 
Members''. Proposed Section 1, ``Annual Meeting'', authorizes the NASD 
Board to designate a time and place and set an agenda for an annual 
meetings of members. Proposed Section 2, ``General Meeting'', sets 
forth procedures for setting the agenda of special meetings. Proposed 
Section 3, ``Notice of Meeting; Member Business'', sets forth notice 
requirements for meetings. Proposed Section 4, ``Inspector'', describes 
voting procedures. Proposed Section 5, ``Conduct of Meeting'', states 
that the Chief Executive Officer of the NASD acts as Chair of the 
meeting and authorizes the Board to adopt rules and regulations for the 
conduct of meetings.
    c. Proposed Changes to NASD Regulation By-Laws: NASD Regulation 
adopted its current By-Laws on July 19, 1996. The Association proposes 
to amend the NASD Regulation By-Laws to conform them to the changes 
described in the introduction to Section II of this rule filing. In 
addition, the Association proposes to explicitly recognize the NASD as 
the sole stockholder of NASD Regulation capital stock and add new 
articles describing the composition and powers of a new National 
Adjudicatory Council, procedures for nominations to the National 
Adjudicatory Council, and procedures for district elections. 
Significant changes to the NASD Regulation By-Laws are described below, 
including changes relating to the corporate restructuring in proposed 
Article IV, Sections 4.2, 4.3, 4.4(b), 4.13, 4.14(b); Article V; 
Article VI. Minor, non-substantive changes and changes to reflect 
drafting conventions are not described.<SUP>48</SUP>
---------------------------------------------------------------------------

    \48\ All references to Articles or Sections in this section 
``c'' refer to the NASD Regulation By-Laws, unless otherwise noted.
---------------------------------------------------------------------------

Proposed Article I. Definitions
    First, a new Article I, entitled ``Definitions'', is proposed. 
Current Article I, ``Offices'' is renumbered as proposed Article II.
    The Association proposes that the By-Laws for each corporate entity 
have a free-standing set of definitions. Therefore, the Association 
proposes to add definitions for the following terms, which conform to 
the definitions in proposed Article I of the NASD By-Laws: ``Delegation 
Plan''; ``Executive Representative''; ``Industry Director'' or 
``Industry member''; ``NASD Regulation''; ``National Adjudicatory 
Council''; ``National Nominating Committee''; ``Non-Industry Director'' 
or ``Non-Industry member''; ``person associated with a member''; and 
``Public Director'' or ``Public member''.<SUP>49</SUP>
---------------------------------------------------------------------------

    \49\ See proposed Section 1.1(h), (o), (q), (u), (v) (w), (x), 
(y), and (z).
---------------------------------------------------------------------------

    The Association proposes to include the following definitions only 
in the NASD Regulation By-Laws: ``District Committee''; ``District 
Director''; ``District Nominating Committee''; ``district office''; 
``Independent Agent''; and ``Regional Nominating Committee''. These 
terms relate to the nomination and election procedures set forth in 
proposed Article VI, ``National Adjudicatory Council Regional 
Nominations for Industry Members'', and Article VIII, ``District 
Committee and District Nominating Committee'' and therefore are not 
used in the proposed NASD and Nasdaq By-Laws.
    In addition, the Association proposes to add the following 
definitions for clarity and to conform to the drafting conventions 
adopted generally, but which do not result in any substantive change: 
``Board''; ``day''; ``Delaware law''; `` Director''; ``NASD''; ``NASD 
member''; and ``Rules of the Association'' or ``Rules''.<SUP>50</SUP>
---------------------------------------------------------------------------

    \50\ See proposed Section 1.1(b), (e), (g), (i), (r), (t), and 
(bb).
---------------------------------------------------------------------------

Proposed Article II. Offices
    Current Article I, ``Offices'', is renumbered as proposed Article 
II. Sections 1.1 and 1.2 are renumbered as Sections 2.1 and 2.2. There 
are no substantive changes in proposed Article II.
Proposed Article III. Meetings of Stockholders
    Current Article II, ``Meetings of Stockholders'', is renumbered as 
proposed Article III. Current Article II sets forth general provisions 
for meetings of stockholders consistent with Delaware law. In proposed 
Article III, in recognition of the fact that NASD Regulation has only 
one stockholder, the Association proposes to delete all of the general 
provisions regarding meetings of stockholders and retain only the 
provision on which NASD Regulation generally relies, namely obtaining 
the stockholder's written consent for any action that is required or 
permitted to be taken at a stockholder meeting. Thus, Sections 2.1 
through 2.6 are deleted, and Section 2.7 is renumbered as Section 3.1.
Proposed Article IV. Board of Directors
    Current Article III, ``Board of Directors'', is renumbered as 
proposed Article IV. Sections 3.1 through 3.4 are renumbered as Section 
4.1 through 4.4. Proposed Section 4.1, ``General Powers'', sets forth 
the general powers of the Board. The Association proposes to conform 
the Board's authority to delegate its powers to the delegation 
authority set forth in proposed Article VII, Section 1(c) of the NASD 
By-Laws,

[[Page 53070]]

i.e., to the fullest extent permitted by applicable law, the Restated 
Certificate of Incorporation, and these By-Laws, the Board may delegate 
any of its powers to a committee appointed under proposed Section 4.14 
or to NASD Regulation staff in a manner not inconsistent with the 
Delegation Plan.
    The Association proposes to amend Sections 4.2, ``Numbers of 
Directors'', and Section 4.3, ``Qualifications''. The Association 
proposes that the NASD Board appoint the NASD Regulation Directors from 
among the NASD Board of Governors. The NASD Regulation Board would be 
composed of between five and eight Directors, including the NASD 
Regulation President, a representative of an issuer of investment 
company shares or an affiliate of such an issuer and an insurance 
company or an affiliated NASD member, and at least one or two Public 
Directors, depending on the size of the Board. The number of Non-
Industry Directors would be equal to or greater than the number of 
Industry Directors plus the President. As noted above, the Chair of 
National Adjudicatory Council would serve simultaneous one-year terms 
on the NASD and NASD Regulation Boards. Finally, the total number of 
NASD Regulation Directors would equal the total number of Nasdaq 
Directors.
    Proposed Section 4.3(b) is a new provision requiring the Board to 
elect a Chair and Vice Chair from among its members.
    Proposed Section 4.4(a), ``Election'', which provides for the 
election of Directors, is amended to reflect the NASD's role as sole 
stockholder. As described in proposed Article VII, Section 9 of the 
NASD By-Laws, the National Nominating Committee, an NASD Board 
committee, nominates Directors for the NASD Regulation Board.
    Current Section 3.5, ``Term'', is deleted. Under the proposed rule 
change, the NASD Board would elect Directors annually; thus the Board 
would not be divided into classes. <SUP>51</SUP> As a general matter, 
NASD Regulation Directors would be appointed for three one-year terms 
that coincide with their terms on the NASD Board. However, the NASD 
Board would retain flexibility in this regard and could appoint 
individuals to serve where they are best qualified or best able to 
serve. Thus, for example, an individual who has served one year on the 
NASD Regulation Board could be appointed to Nasdaq Board, or could 
serve on the NASD Board alone.
---------------------------------------------------------------------------

    \51\ See Section 211(b) of the General Corporation Law of the 
State of Delaware.
---------------------------------------------------------------------------

    Current Section 3.7, ``Removal'', is renumbered as proposed Section 
4.6. Proposed Section 4.6 clarifies that a Director may be removed from 
office only by a majority vote of the NASD Board.
    Proposed Section 4.7, ``Disqualification'', and proposed Section 
4.8, ``Filling of Vacancies'', are new. Current Sections 3.8 through 
3.11 (``Quorum and Voting'', ``Regulation'', ``Meetings'', and ``Notice 
of Meetings'', respectively) are renumbered as proposed Sections 4.9 
through 4.12. Current Section 3.12, ``Conflicts of Interest'', is 
renumbered as proposed Section 4.14. Current Section 3.13, ``Committees 
of the Board of Directors'', is renumbered as proposed Section 4.13 and 
retitled ``Committees''. Current Section 3.14, ``Action Without 
Meeting'', is renumbered as proposed Section 4.15.
    Proposed Sections 4.7, ``Disqualification'', 4.8, ``Filling of 
Vacancies'', 4.9, ``Quorum and Voting'', and 4.14, ``Contracts and 
Transactions Involving Directors'', which set forth provisions for 
disqualification, filling of vacancies, quorums, and conflicts of 
interest, are designed to parallel proposed Article VII, Sections 6 
through 8, and proposed Article XV, Section 4 of the NASD By-Laws. 
<SUP>52</SUP>
---------------------------------------------------------------------------

    \52\ There is one difference between the conflicts of interest 
provision for the NASD and the conflicts of interest provisions for 
the subsidiaries. The proposed By-Laws for NASD Regulation and 
Nasdaq provide that a transaction also is not void or voidable if 
the material facts pertaining to the Director's or officer's 
relationship or interest and the contract or transaction are 
disclosed or are known to the stockholder, i.e., the NASD, and the 
contract or transaction is approved in good faith by vote of the 
stockholder. See proposed Article IV, Section 4.14 in both the NASD 
Regulation and Nasdaq By-Laws.
---------------------------------------------------------------------------

    There are no substantive changes in proposed Section 4.10, 
``Regulation'', proposed Section 4.11, ``Meetings'', or proposed 
Section 4.15, ``Action Without Meeting''.
    In proposed Section 4.12, ``Notice of Meeting; Waiver of Notice'', 
the Association proposes to increase the amount of time required for 
mail notice of a meeting from two to seven days, to clarify that any of 
the permissible forms of notice described may be used for any meeting 
of the Board, and to add a subsection that provides that any meeting of 
the Board is a legal meeting without any prior notice if all Directors 
are present. <SUP>53</SUP>
---------------------------------------------------------------------------

    \53\ A Director is still permitted, pursuant to Section 12.3(b), 
to attend a meeting for the express purpose of objecting, at the 
beginning of a meeting, to the transaction of any business because 
the meeting is not lawfully called or convened.
---------------------------------------------------------------------------

    Proposed Section 4.13 ``Committees'', (current Section 3.13 as 
renumbered) sets forth new provisions regarding committees. Proposed 
Section 4.13(a) authorizes the Board to appoint committees. Proposed 
Section 4.13(b) describes how the Board may delegate authority to such 
committees. In accordance with the functions and responsibilities set 
forth in the Delegation Plan, the Board may delegate its authority to 
any duly appointed committee. Any action by such committee is subject 
to review, ratification, or rejection by the Board. In addition, such 
delegations must be in conformance with applicable law, the Restated 
Certificate of Incorporation, these By-Laws, and the Delegation Plan. 
These limitations previously were set forth in the Delegation Plan. 
Proposed Section 4.13(b) further clarifies that, with respect to other 
matters, the Board may delegate its powers and authority to act on 
behalf of the Board in managing the business and affairs of NASD 
Regulation only to committees consisting solely of one or more 
Directors, and that any such delegation must be not inconsistent with 
the Delegation Plan.
    Proposed Sections 4.13(f) and (g) authorize the NASD Regulation 
Board to appoint an Executive Committee and a Finance Committee. 
<SUP>54</SUP> Proposed Section 4.13(h) mirrors Article IX, Section 2 of 
the NASD By-Laws.
---------------------------------------------------------------------------

    \54\ The by-laws of each subsidiary would continue to authorize 
its board to appoint executive and finance committees, but the 
Association does not anticipate that the subsidiary boards will find 
it necessary to continue to appoint such committees.
---------------------------------------------------------------------------

    Proposed Section 4.16, ``Communication of Views Regarding Contested 
Election or Nomination'', which concerns communication of views during 
a contested election or nomination, parallels Article VII, Section 11 
of the NASD By-Laws.
Proposed Article V. National Adjudicatory Council
    Proposed Article V is a new article that requires the NASD 
Regulation Board to appoint a National Adjudicatory Council. The 
adjudicatory functions of the National Business Conduct Committee would 
be transferred to the National Adjudicatory Council, and the authority 
to appoint a National Business Conduct Committee would be deleted from 
the Delegation Plan. The National Adjudicatory Council would operate 
much as the National Business Conduct Committee currently operates 
under the Delegation Plan. However, in order to ensure that there is 
adequate time for the NASD Regulation and NASD Boards to consider 
adjudicatory decisions of the National Adjudicatory Council, written

[[Page 53071]]

reports of National Adjudicatory Council actions would be provided to 
the Secretary of the NASD no later than 15 calendar days before 
regularly scheduled meetings of the revamped NASD Board. <SUP>55</SUP> 
Thus, the National Adjudicatory Council would have greater flexibility 
than currently exists in scheduling the National Business Conduct 
Committee's work, and could meet telephonically if needed in order to 
reduce the time demands of National Adjudicatory Council service. 
Absent exigent circumstances, however, the National Adjudicatory 
Council would schedule its adjudicatory work to provide a 15 calendar 
day review period. In addition, the National Adjudicatory Council would 
have the option of holding telephonic meetings on an as-needed basis to 
expedite NASD Regulation Board consideration of disciplinary-related 
policy matters.
---------------------------------------------------------------------------

    \55\ As stated above, revised review procedures will be set 
forth in a separate rule filing.
---------------------------------------------------------------------------

    The National Adjudicatory Council's areas of responsibility are set 
forth in proposed Section 5.1 ``Appointment and Authority''. These 
areas include disciplinary and statutory disqualification decisions and 
other miscellaneous and policy matters. The National Adjudicatory 
Council also would assume certain other review functions, including 
reviews of denials of access, denials of exemptions, limitations on 
operations, and membership proceedings. As is the case with the current 
National Business Conduct Committee, the National Adjudicatory Council 
would consider and make recommendations to the NASD Regulation Board on 
policy and rule changes relating to: (1) The business and sales 
practices of NASD members and associated persons; and (2) enforcement 
policies, including policies with respect to fines and other sanctions.
    Proposed Section 5.2, ``Number of Members and Qualifications'', 
describes the compositional requirements of the National Adjudicatory 
Council. It would be composed of 12 to 14 members, including at least 
three Public members. The number of Non-Industry members would equal or 
exceed the number of Industry members.
    Proposed Section 5.3, ``Nominations Process'', sets forth the 
nomination process for membership on the National Adjudicatory Council. 
All members of the National Adjudicatory Council would be proposed by 
the National Nominating Committee and appointed by the NASD Regulation 
Board. Beginning in 1998, the Industry members of the National 
Adjudicatory Council would be nominated pursuant to procedures that are 
similar to current procedures for the nomination of regional Industry 
Directors to the NASD Regulation Board. The regional nominating process 
for the National Adjudicatory Council is set forth in proposed Article 
VI.
    Under proposed Section 5.4, ``Term of Office'', all National 
Adjudicatory Council members would be appointed for a one-year term in 
1988. Regional nominations would be held at the end of 1998, and each 
National Adjudicatory Council member would serve a term of one or two 
years beginning in 1999, with staggered two-year terms thereafter. 
Proposed Sections 5.5 through 5.10, which set forth procedures for 
resignation, removal, disqualification, filling of vacancies, quorum 
and voting, and meetings, are derived from similar provisions in the 
NASD and NASD Regulation By-Laws.
Proposed Article VI. National Adjudicatory Council Regional Nominations 
for Industry Members
    The Association proposes to add a new Article VI, National 
Adjudicatory Council Regional Nominations for Industry Members, to the 
NASD Regulation By-Laws. The procedures are based on the procedures for 
regional nominations to the NASD Regulation Board, which are currently 
set forth in the Delegation Plan <SUP>56</SUP> and in NASD Regulation 
Board resolutions. The regional nomination process would begin in 1998 
for the 1999 National Adjudicatory Council.
---------------------------------------------------------------------------

    \56\ See current Delegation Plan II.B.
---------------------------------------------------------------------------

    The Industry members of the National Adjudicatory Council would 
represent a geographical region of the United States. Each Industry 
member initially would be nominated by a Regional Nominating Committee. 
Each Regional Nominating Committee then would present a nominee to the 
National Nominating Committee to represent such region on the National 
Adjudicatory Council. The Regional Nominating Committee would act 
essentially in an advisory capacity because only the National 
Nominating Committee could formally nominate to the NASD Regulation 
Board an Industry member for the National Adjudicatory Council. The 
NASD Regulation Board, in turn, could appoint or reject the candidates 
nominated by the National Nominating Committee.
    Proposed Article VI sets forth the following procedures for the 
regional nominating process. As previously noted, the Board would 
designate regions. Each region would have a Regional Nominating 
Committee, which would be composed of two to four members from each 
District Committee in the region. These members would be selected by 
their District Nominating Committee.<SUP>57</SUP> When the term of 
office of a National Adjudicatory Council member representing a region 
was due to expire, the Secretary of NASD Regulation would notify the 
appropriate Regional Nominating Committee, which would initiate the 
regional nominating process.
---------------------------------------------------------------------------

    \57\ See discussion of proposed Article VIII, ``District 
Committees and District Nominating Committees,'' for a description 
of how District Committee and District Nominating Committee members 
would be elected.
---------------------------------------------------------------------------

    The Regional Nominating Committee would receive from the Secretary 
of NASD Regulation a description of the firms eligible to vote in the 
region. Firms eligible to vote are those that either are headquartered 
in the region or have a branch office in the region. In making 
nominations, the Regional Nominating Committee would seek to ensure 
appropriate and fair representation of the classes and types of firms 
eligible to vote in the region. The Regional Nominating Committee could 
nominate more than one candidate so that the NASD membership in the 
region could vote on a nominee to present to the National Nominating 
Committee. (This process would work in the same manner as a contested 
nomination, which is described below.)
    Once the Regional Nominating Committee selected a nominee (or 
nominees), it would send notice of its nomination to the Executive 
Representative of each NASD member eligible to vote. The Executive 
Representative is the officer or employee of the member who casts votes 
for the member in all nominations and elections. If any person not 
nominated wished to contest a nomination, he or she would send notice 
of intent to contest to the Regional Nominating Committee or the 
Secretary of NASD Regulation within a specified period. Such person 
then would be required to submit within a specified period a written 
petition signed by at least ten percent of the members eligible to vote 
in the region supporting such person's candidacy. If support of ten 
percent of the membership was not obtained within the requisite time, 
and if the Nominating Committee nominated only one candidate, then the 
nominee of the Regional Nominating Committee would be presented to the 
National Nominating Committee.
    If the Regional Nominating Committee nominated more than one 
candidate, or

[[Page 53072]]

if a person who was not nominated obtained the necessary support, then 
contested nomination procedures would apply. Under these procedures, 
the Association would pay for two mailings of literature for each 
candidate, and the members of all NASD, Nasdaq, and NASD Regulation 
Boards, councils, and committees, and NASD, Nasdaq, and NASD Regulation 
staff, would be prohibited from expressing views on the nomination. 
However, members of the Boards, councils, and committees could express 
views if they made it clear they are acting in their individual 
capacities and disclaimed any intention to communicate in an official 
capacity. A ballot would be sent to Executive Representatives of the 
firms eligible to vote, and specified procedures, including the use of 
an independent agent to qualify returned ballots and count votes, then 
would be followed to determine the outcome of the nomination. If the 
National Nominating Committee or the NASD Board rejected a nominee of a 
Regional Nominating Committee, the Regional Nominating Committee would 
repeat the regional nomination procedures and submit another nominee to 
the National Nominating Committee.
Proposed Article VII. Officers, Agents, and Employees
    Former Article IV, ``Officers, Agents and Employees'', is set forth 
as proposed Article VII. Former Sections 4.1, 4.3, 4.4, and 4.5 are 
renumbered, respectively, as 7.1, 7.4, 7.5, and 7.6. Changes to these 
sections are made only as necessary to conform to the definitions in 
proposed Article I and other drafting conventions. The Association 
proposes to add a new Section 7.2, ``Absence of the President'', to 
provide a standard operational mechanism in the event of the 
President's inability to act, absence, or a vacancy in the position, in 
conformity with proposed Article VIII, Section 2 of the NASD By-Laws. 
In proposed Section 7.3, ``Agents and Employees'', the Association 
proposes a conforming change to clarify supervision and control of 
agents and employees.<SUP>58</SUP>
---------------------------------------------------------------------------

    \58\ See proposed NASD By-Laws Article VIII, Section 3, and 
proposed Nasdaq By-Laws Article VII, Section 7.3.
---------------------------------------------------------------------------

Proposed Article VIII. District Committees and District Nominating 
Committees
    Proposed Article VIII, ``District Committees and District 
Nominating Committees'', is a new Article. Proposed Article VIII 
authorizes the Board to designate districts and sets forth procedures 
for the members within each district to elect a District Committee and 
a District Nominating Committee. The language of proposed Article VIII 
is drawn from former Article VIII of the NASD By-Laws, which authorized 
the NASD Board to form such committees. Proposed Article VIII is 
drafted to conform to the Undertakings. Specifically, under Proposed 
Article VIII, Section 8.2, ``Composition of District Committees'', the 
role of the District Committee members is limited to serving as 
panelists in disciplinary proceedings in accordance with the Rule 9200 
Series, recommending policy and rule changes to the NASD Regulation 
Board, and selecting members of the Regional Nominating Committees in a 
manner consistent with proposed Article VI of the NASD Regulation By-
Laws.
    Election procedures for District Committees and District Nominating 
Committees currently are set forth in corporate resolutions. The 
Association proposes to add these procedures, with further 
clarifications and detail, to the By-Laws in proposed Article VIII. The 
procedures conform to the nomination procedures in proposed Article VI.
    Proposed Article VIII sets forth the following procedures for 
district elections. In May of each year, each District Nominating 
Committee would solicit candidates to fill the vacancies anticipated to 
occur on its District Committees as well as candidates to serve on the 
following year's District Nominating Committee. District Nominating 
Committee members would serve a one-year term, while District Committee 
members would serve a three-year term. The District Nominating 
Committee would receive from the Secretary of NASD Regulation a 
description of the firms eligible to vote in the district. Firms 
eligible to vote are those that either are headquartered in the 
district or have a branch office in the district. In making 
nominations, the District Nominating Committee would seek to ensure 
appropriate and fair representation of the classes and types of firms 
eligible to vote in the district. Any candidate would have to be 
employed by a member eligible to vote in the district.
    Current corporate resolutions authorize the District Nominating 
Committee to nominate one candidate for each vacancy. The Association 
proposes to authorize the District Nominating Committee to nominate 
more than one candidate per vacancy. (This process would trigger 
contested election procedures, which would work like the contested 
nomination procedures described above.)
    Once the District Nominating Committee selected its nominees, it 
would send notice of its slate to the District Committee and the 
Executive Representative of each firm eligible to vote. If a person 
employed by a member in the district was not nominated but wished to 
contest an election, he or she would send notice of intent to contest 
to the District Director or the Secretary of NASD Regulation within a 
specified period. Such person then would be required to submit within a 
specified period a written petition evidencing support for such contest 
by at least ten percent of the members eligible to vote in the 
district. If the person did not obtain ten percent support for a 
contest within the requisite period, or if the District Nominating 
Committee nominated only one candidate per vacancy, then nominees of 
the District Nominating Committee would be deemed elected, and the 
election process would be complete.
    If the District Nominating Committee nominated more than one 
candidate per vacancy, or if a person obtained the necessary support 
for a contest, then contested election procedures would apply. These 
procedures conform to the procedures for contested regional nominations 
in proposed Article VI. The candidates for District Committee 
membership receiving the largest number of votes cast in the district 
for that office would be declared elected such that the number of 
candidates declared elected equaled the number of vacancies on the 
District Committee. The candidates for District Nominating Committee 
membership receiving the largest number of votes cast in the district 
for that office would be declared elected such that the number of 
candidates declared elected equaled the number of vacancies on the 
District Nominating Committee.
Proposed Article IX. Compensation
    Proposed Article IX, ``Compensation'', is a new Article that 
parallels proposed Article X of the NASD By-Laws and also authorizes 
compensation for National Adjudicatory Council members.
Proposed Article X. Indemnification
    Current Article V, Indemnification, is renumbered as proposed 
Article X. Sections 5.1 through 5.5 are combined, amended, and 
renumbered as proposed Section 10.1, and current Section 5.6 is 
renumbered as proposed Section 10.2. The Association proposes to make 
the indemnification policies for all three corporate entities 
essentially identical. Therefore, proposed Sections 10.1 and 10.2 
conform to proposed Article VII, Sections 7.1 and 7.2 of Nasdaq By-Laws

[[Page 53073]]

and the provisions for indemnification in the NASD's Restated 
Certificate of Incorporation.
    NASD Regulation By-Laws provide for the indemnification of, and 
advancement of expenses to, persons named or threatened to be named as 
a party to any civil, administrative, or investigative proceeding 
because such person is or was a Director, officer, employee, or agent 
of the corporation. The By-Laws also provide that: (1) The right of 
indemnification is not exclusive of any other right the person may 
have; (2) the amount of indemnification is reduced by the amount the 
indemnified person collects from another source; and (3) NASD 
Regulation has the power to purchase and maintain indemnification 
insurance.
    The Association proposes to extend the indemnification provisions 
to cover National Adjudicatory Council and committee members.
    The Association also proposes to modify NASD Regulation's By-Laws 
to make indemnification and advancement of expenses to agents 
discretionary with the Board, rather than mandatory, to permit the 
Board to determine whether indemnification is appropriate under the 
particular circumstances. Indemnification of non-officer employees 
remains the presumption. However, the Association proposes to authorize 
the Board to refuse to advance expenses to an employee if: (1) The 
employee (i) acted in bad faith, or (ii) did not act in a manner that 
the employee believed to be in, or not opposed to, the best interests 
of NASD Regulation; (2) with respect to a criminal matter, the employee 
believed or had reasonable cause to believe that his or her conduct was 
unlawful; or (3) the employee breached his or her duty to NASD 
Regulation. Finally, the Association proposes to add a provision 
requiring NASD Regulation, in response to a written claim for 
indemnification or advancement, to make such payment within 60 days of 
the claim.
    While it is a common corporate practice to provide for 
discretionary indemnification of employees (as well as agents), NASD 
Regulation believes that it is essential that employees have confidence 
that they will be indemnified if they are named in any proceeding 
resulting from actions taken in good faith. At the same time, NASD 
Regulation believes it is essential that the Board have the opportunity 
to evaluate and deny advancement of expenses if it determines the 
action was not taken in good faith or if the person had reason to 
believe the action was illegal or breached a duty to the corporation.
Proposed Article XI. Capital Stock
    Current Article VI, ``Capital Stock'', is renumbered as proposed 
Article XI. The Association proposes to add a new Section 11.1, ``Sole 
Stockholder'', recognizing the NASD's status as sole stockholder. 
Current Sections 6.1 through 6.7 are renumbered as proposed Section 
11.2 through 11.8. The Association proposes certain changes only to 
conform the proposed Article to the drafting conventions and stylistic 
changes incorporated generally in the NASD By-Laws, the NASD Regulation 
By-Laws, and the Nasdaq By-Laws. There are no substantive changes to 
proposed Article XI. In proposed Section 11.8, the Association proposes 
to delete detailed provisions of Delaware law for the fixing of record 
dates, which are more useful to corporations with more than one 
stockholder, and instead provide that a record date may be fixed in 
accordance with Delaware law.
Proposed Article XII. Miscellaneous Provisions
    Current Article VII, ``Miscellaneous Provisions'', is renumbered as 
proposed Article XII. There are no substantive changes in proposed 
Article XII. Current Sections 7.1, 7.2, 7.3, 7.4, and 7.5 are proposed 
to be renumbered, respectively, as Sections 12.1, 12.2, 12.3., 12.4, 
and 12.5.
Proposed Article XIII. Amendments; Emergency By-Laws
    Current Article VIII, ``Amendments; Emergency By-Laws'', is 
renumbered as proposed Article XIII. There are no substantive changes 
in proposed Article XIII. Current Sections 8.1, 8.2, and 8.3 are 
proposed to be renumbered, respectively, as Sections 13.1, 13.2, and 
13.3.
    d. Proposed Changes to NASDAQ By-Laws: Nasdaq adopted its current 
By-Laws on October 27, 1993. The Association proposes to amend the 
Nasdaq By-Laws to conform them to changes described in the introduction 
to Section 3(a)(i) of this rule filing, to the proposed NASD and NASD 
Regulation By-Laws, where appropriate. Significant changes to Nasdaq's 
By-Laws are described below, including changes relating to the 
corporate restructuring in proposed Article IV, Sections 4.2, 4.3, 
4.13, 4.14(b); and Article V. Minor, non-substantive changes and 
changes to reflect drafting conventions are not described.
Proposed Article I. Definitions
    The Association proposes to add a new Article I, ``Definitions''. 
As noted previously, the Association proposes that the By-Laws for each 
corporate entity have a free-standing set of definitions. Therefore, 
the Association proposes to add the following definitions, which 
conform to definitions proposed for inclusion in the NASD and NASD 
Regulation By-Laws: ``Act''; ``Board''; ``broker''; ``Commission''; 
``day''; ``dealer''; ``Delaware law''; ``Delegation Plan''; 
``Director''; ``Industry Director'' or ``Industry committee member''; 
``NASD''; ``NASD Board''; ``NASD Regulation''; ``Nasdaq''; ``Nasdaq 
Listing and Hearing Review Council''; ``National Nominating 
Committee''; ``Non-Industry Director'' or ``Non-Industry committee 
member''; ``person associated with a member''; ``Public Director'' or 
``Public committee member''; and ``Rules of the Association'' or 
``Rules''.
Proposed Article II. Offices
    Current Article I, ``Offices'', is renumbered as proposed, and the 
Sections are renumbered accordingly.
Proposed Article III. Meetings of Stockholders
    Current Article II, ``Meetings of Stockholders'', is renumbered as 
proposed Article III and conformed to the changes in proposed Article 
III of the NASD Regulation By-Laws.
Proposed Article IV. Board of Directors
    Current Article III, ``Board of Directors'', is renumbered as 
proposed Article IV. The changes in proposed Article IV are designed to 
conform it, as appropriate, to proposed Article IV of the NASD 
Regulation By-Laws. Sections 3.1 through 3.4 are renumbered as Section 
4.1 through 4.4. In proposed Sections 4.2 and 4.3, provisions regarding 
the number and qualifications of Directors are amended. Under the 
proposed rule change, the Nasdaq Board would be appointed by the NASD 
Board from among its members. The Nasdaq Board would be composed of 
between five and eight individuals, including the President of Nasdaq, 
at least one Public member, and at least one issuer representative. The 
number of Non-Industry Directors would be equal to or greater than the 
combined total of Industry Directors and the President of Nasdaq.
    Like the NASD Regulation Board, members of the Nasdaq Board 
generally would be appointed for three one-year terms that coincided 
with their terms on the NASD Board. However, the NASD Board would 
retain flexibility in this regard and could appoint individuals to 
serve where they are best qualified to serve. Thus, as described above 
in the

[[Page 53074]]

corresponding section of the NASD Regulation By-Laws, current Section 
3.5, ``Term'', is deleted and the remaining sections are renumbered 
accordingly.
    Proposed Section 4.14(a), ``Conflicts of Interest; Contracts and 
Transactions Involving Directors'', is identical to the corresponding 
provision in the NASD Regulation By-Laws, except that there is no 
cross-reference to the Rules of the Association because the Association 
does not have a specific disqualification standard for Nasdaq 
proceedings as it has in the Rule 9160 Series for NASD Regulation 
disciplinary proceedings. Finally, proposed Section 4.16, 
``Communication of Views Regarding NASD or NASD Regulation Elections or 
Nomination'', is a new section that holds Nasdaq, Nasdaq's Board and 
its committees, the Nasdaq Listing and Hearing Review Council, and 
Nasdaq staff to the same standards proposed for NASD and NASD 
Regulation with respect to contested elections or 
nominations.<SUP>59</SUP>
---------------------------------------------------------------------------

    \59\ See proposed Article VII, Sections 11 and 12 of the NASD 
By-Laws and proposed Article IV, Section 4.16 of the NASD Regulation 
By-Laws.
---------------------------------------------------------------------------

Proposed Article V. Nasdaq Listing and Hearing Review Council
    Proposed Article V, ``Nasdaq Listing and Hearing Review Council'', 
is a new article that requires the Nasdaq Board to appoint a Listing 
Council. The responsibilities of the Nasdaq Listing and Hearing Review 
Committee are transferred to the Listing Council, and the provision of 
the Delegation Plan authorizing the appointment of the Committee is 
deleted. Proposed Section 5.1, ``Appointment and Authority'', sets 
forth the responsibilities of the Listing Council. The Listing Council 
generally would operate much as the Nasdaq Listing and Hearing Review 
Committee currently operates under the Delegation Plan.<SUP>60</SUP> As 
is the case with the current Nasdaq Listing and Hearing Review 
Committee, the Listing Council would be authorized to make 
recommendations to the Nasdaq Board on listing-related rule amendments.
---------------------------------------------------------------------------

    \60\ Procedures for NASD Board review of Listing Council 
decisions will be proposed in a separate rule filing.
---------------------------------------------------------------------------

    Under proposed Section 5.2, ``Number of Members and 
Qualifications'', the Listing Council would be composed of at least 
eight and not more than 11 members, of which no more than 50 percent 
could be directly engaged in market-making activity or employed by a 
member firm whose revenues from market-making activity exceed ten 
percent of its total revenue. The Listing Council also would include at 
least three Non-Industry members, and a quorum for the transaction of 
business at Listing Council meetings would include at least one of the 
Non-Industry members. Under proposed Sections 5.3, ``Nomination 
Process'', and 5.4, ``Term of Office'', the members of the Listing 
Council would be nominated by the National Nominating Committee and 
appointed by the Nasdaq Board and serve for a term of two years. 
Sections 5.5 through 5.10 mirror the administrative provisions for the 
National Adjudicatory Council in proposed Article VI, Sections 5.5 
through 5.10 of the NASD Regulation By-Laws.
Proposed Article VI. Compensation
    Proposed Article VI, ``Compensation'', is a new Article that 
conforms with proposed Article X of the NASD By-Laws and proposed 
Article IX of the NASD Regulation By-Laws. Proposed Article VI also 
authorizes compensation of Listing Council members.
Proposed Article VII. Officers, Agents and Employees
    Current Article IV, ``Officers, Agents and Employees'', is 
renumbered as proposed Article VII, and the Sections are renumbered 
accordingly. Only one substantive change is proposed to Article VII. 
Proposed Section 7.3 (current Section 4.3), ``Subordinate Officers, 
Agents, or Employees'', includes a provision that clarifies that agents 
and employees of Nasdaq are under the supervision and control of the 
officers of Nasdaq, unless the Nasdaq Board, by resolution, provides 
that an agent or employee shall be under its supervision and 
control.<SUP>61</SUP>
---------------------------------------------------------------------------

    \61\ See proposed Article VIII, Section 3 of the NASD By-Laws 
and proposed Article VII, Section 7.3 of the NASD Regulation By-
Laws.
---------------------------------------------------------------------------

Proposed Article VIII. Indemnification
    Current Article V, ``Indemnification'', is renumbered as proposed 
Article VIII, and the Sections are renumbered accordingly. Proposed 
Article VIII conforms to the provisions for indemnification in the 
NASD's Restated Certificate of Incorporation and proposed Article X of 
the NASD Regulation By-Laws. As noted above, the Association proposes 
to make the indemnification policies for all three corporate entities 
identical. Proposed Section 8.1, ``Nasdaq Listing and Hearing Review 
Council and Committee Members'', also provides for indemnification of 
Listing Council and committee members.
Proposed Article IX. Capital Stock
    Current Article VI, ``Capital Stock'', is renumbered as proposed 
Article IX. The Association proposes changes to conform to those set 
forth for proposed Article XI of the NASD Regulation By-Laws.
Proposed Article X. Miscellaneous Provisions
    Current Article VII, ``Miscellaneous Provisions'', is renumbered as 
proposed Article X, and the sections are renumbered accordingly. There 
are no substantive changes.
Proposed Article XI. Amendments; Emergency By-Laws
    Current Article VIII, ``Amendments; Emergency By-Laws'', is 
renumbered as proposed Article XI, and the sections are renumbered 
accordingly. There are no substantive changes.
    e. Proposed Changes to the Delegation Plan and Restated 
Certificates of Incorporation. The Association proposes to amend the 
Delegation Plan to delete provisions added to the By-Laws of the NASD, 
NASD Regulation, and Nasdaq.<SUP>62</SUP> Specifically, in Section 
I.A., the definitions of ``Industry'', ``Non-Industry'', and ``Public'' 
Governors, Directors, and committee members are deleted and instead the 
Section cross-references the By-Laws of the NASD, NASD Regulation, and 
Nasdaq, where the Association proposes to define such 
terms.<SUP>63</SUP>
---------------------------------------------------------------------------

    \62\ All references to Sections in this section ``d'' refer to 
the Delegation Plan, unless otherwise noted.
    \63\ See proposed Article I of the NASD By-Laws; proposed 
Article I of the NASD Regulation By-Laws; proposed Article I of the 
Nasdaq By-Laws.
---------------------------------------------------------------------------

    The Association proposes to add a new Section I.B.11. to the 
Delegation Plan, authorizing the NASD Board to take action ab initio; 
either the full NASD Board or the NASD Executive Committee could 
exercise this authority.<SUP>64</SUP> This authority typically would be 
exercised in two circumstances. First, when an issue was ripe for 
consideration at a regularly scheduled meeting of a subsidiary board 
but clearly warranted consideration by the NASD Board, separate 
consideration by the subsidiary board could be avoided without any loss 
of subsidiary board input because the subsidiary board members 
constitute a subset of the NASD Board. This option is not available 
under the current corporate structure, which invariably requires that 
matters within a subsidiary's sphere of delegated authority be 
considered by

[[Page 53075]]

that subsidiary's board before consideration by the NASD Board.
---------------------------------------------------------------------------

    \64\ This proposed rule change is a result of the corporate 
restructuring and was not proposed in SR-NASD-97-28.
---------------------------------------------------------------------------

    Second, should a time-sensitive issue arise between regularly 
scheduled board meetings, the issue could be resolved by the NASD 
Executive Committee in a single step. At present, the subsidiaries' 
executive committees are authorized to take initial action on such 
matters, but such action cannot be implemented without the unanimous 
written consent of the NASD Board. Obtaining such unanimous written 
consent can impede the Association's ability to respond to urgent 
matters. This time-consuming step is avoided through the creation of an 
NASD Executive Committee that could convene telephonically on an as-
needed basis to address time-sensitive matters.
    The Association further proposes to delete Sections I.C., I.D., 
II.B., II.D., III.B., and part of III.D., which address the composition 
of the Boards, elections, terms of office, vacancies, disqualification 
due to change in classification, and the composition and authority of 
certain committees because the Association proposes to include revised 
provisions in the appropriate By-Laws.<SUP>65</SUP> With respect to 
committees, the Association proposes to include in the appropriate By-
Laws or in the Delegation Plan the compositional requirements for 
specified committees as provided in the Undertakings. If the committee 
consists solely of Directors or Governors, the Association proposes to 
include provisions describing the committee's powers and compositional 
requirements in the appropriate corporate By-Laws. If the committee 
consists of Directors or Governors as well as other members, the 
Association proposes to include provisions describing the committee's 
powers and compositional requirements in the Delegation Plan. Thus, the 
Association proposes to add provisions regarding the powers and 
composition of the Market Regulation Committee and the National 
Arbitration and Mediation Committee as proposed Section II.C. of the 
Delegation Plan.
---------------------------------------------------------------------------

    \65\ See proposed Article VII, Sections 4, 5, 6, 7, 9, and 10 of 
the NASD By-Laws; proposed Article IV, Sections 4.2, 4.3, 4.4, 4.7, 
4.8 and 4.13 of the NASD Regulation By-Laws; proposed Article IV, 
Sections 4.2., 4.3, 4.4, 4.7, 4.8 and 4.13 of the Nasdaq By-Laws.
---------------------------------------------------------------------------

    The Association proposes to amend Section II.A.1.f. to specify that 
NASD Regulation will establish procedures to consider requests by 
members, associated persons, and members of the public that NASD 
Regulation initiate formal disciplinary action. This provision was 
discussed in SR-NASD-97-28 in connection with the discussion of the 
deletion of former Rule 8120.
    The Association proposes to amend Section II.C., which sets forth 
certain NASD Regulation Board review procedures, by deleting specific 
procedures that are now set forth in the Rule 9000 Series.
    The Association also proposes to clarify that both NASD Regulation 
and Nasdaq are responsible for operating Stockwatch. Therefore, new 
Sections II.A.1.s. and III.A.1.o. are added, and the section pertaining 
to Stockwatch is renumbered as Section IV of the Delegation Plan.
    With respect to committee procedures, the Association proposes to 
require that a quorum for the transaction of business by the Quality of 
Markets Committee, the National Arbitration and Mediation Committee, 
and the Market Regulation Committee consist of a majority of such 
committee, including not less than 50 percent of its Non-Industry 
committee members. However, if at least 50 percent of the Non-Industry 
committee members are present at or have filed a waiver of attendance 
for a meeting after receiving an agenda prior to such meeting, the 
requirement that not less than 50 percent of the Non-Industry committee 
members be present to constitute the quorum would be waived. The 
Association believes a waiver is appropriate because these committees 
generally act only in an advisory capacity.
    Finally, the Association proposes to add a new petition for 
reconsideration procedure to the Delegation Plan.<SUP>66</SUP> Under 
the proposed rule change, if the NASD Regulation or NASD Board took 
action on a rule change relating to the business and sales practices 
that was materially inconsistent with the recommendation of the 
National Adjudicatory Council, the NASD Regulation or NASD Board would 
be required to notify the National Adjudicatory Council within one 
calendar day. After receipt of such notice, the National Adjudicatory 
Council would be allowed two calendar days in which to determine, by 
majority vote, whether to petition the NASD Board for reconsideration. 
The petition would have to be submitted in writing and accompanied by a 
written statement explaining in detail why the National Adjudicatory 
Council believed that the NASD Regulation or NASD Board's action should 
be set aside. Upon receipt of a timely petition for reconsideration and 
accompanying statement, the NASD Executive Committee would have three 
calendar days in which to convene and take action on the petition. If 
the NASD Executive Committee granted reconsideration, the matter would 
be added to the agenda of the next regularly scheduled meeting of the 
NASD Board. If the Executive Committee denied reconsideration, the NASD 
Regulation or NASD Board's previous action on the rule would be final, 
and the necessary rule filings would be made with the SEC. The same 
procedures would apply if the Nasdaq or NASD Board took action on a 
listing-related rule change that was materially inconsistent with the 
recommendation of the Listing Council.
---------------------------------------------------------------------------

    \66\ See proposed II.B.2. and III.B.3. This proposed rule change 
is a result of the corporate restructuring and was not proposed in 
SR-NASD-97-28.
---------------------------------------------------------------------------

    With respect to the certificates of incorporation, the Association 
proposes to amend Article Eighth of the NASD Restated Certificate of 
Incorporation to conform it to the structural changes to the NASD Board 
previously described. Only conforming changes are proposed to the NASD 
Regulation and Nasdaq Certificates of Incorporation.
2. Statutory Basis
    The NASD believes the proposed rule change is consistent with 
Section 15A(b)(4) of the Act in that it assures a fair representation 
of its members in the selection of its directors and administration of 
its affairs and provides that one or more directors shall be 
representatives of issuers and investors and not be associated with a 
member of the association, a broker, or a dealer.

B. Self-Regulatory Organization's Statement on Burden on Competition

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

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

    The NASD has neither solicited nor received written comments.

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

    Within 35 days of the publication of this notice in the Federal 
Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:

[[Page 53076]]

    (A) By order approve the 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. In addition to the general comments 
concerning the Association's proposal, the Commission requests 
particular comments addressing whether the proposal would result in any 
burdens on competition and whether the proposal would promote 
efficiency, competition and capital formation. The Commission also 
seeks comment on whether the proposal, given the unique nature of the 
Association as a self-regulatory organization, adequately promotes the 
goals of the Act.
    Persons making written submissions should file six copies thereof 
with the Secretary, Securities and Exchange Commission, 450 Fifth 
Street, N.W., Washington, D.C. 20549. 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. Sec. 552, will 
be available for inspection and copying at the Commission's Public 
Reference Room. Copies of such filing will also be available for 
inspection and copying at the principal office of the Association. 
Comments also may be submitted electronically at the following E-mail 
address: <a href="/cdn-cgi/l/email-protection#2654534a430b45494b4b434852556655434508414950"><span class="__cf_email__" data-cfemail="c0b2b5aca5eda3afadada5aeb4b380b3a5a3eea7afb6">[email protected]</span></a>. File Number SR-NASD-97-71 should be 
included on the subject line if E-mail is used to submit a comment 
letter. Electronically submitted comment letters will be posted on the 
Commission's Internet web site (http://www.sec.gov).
    All submissions should refer to File No. SR-NASD-97-71 and should 
be submitted by October 31, 1997.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.<SUP>67</SUP>
---------------------------------------------------------------------------

    \67\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.

Attachment A

    Additions are italicized;
    Deletions are [bracketed].
    The By-Laws of the NASD, NASD Regulation and Nasdaq are compared to 
the versions temporarily approved in SR-NASD-96-20, Amendment No. 5; 
Securities Exchange Act Release No. 34-38644 (May 15, 1997), 62 FR 
43571, (May 22, 1997).
    The Delegation Plan is compared to the version temporarily approved 
in SR-NASD-96-29, Amendment No. 5; Securities Exchange Act Release No. 
38909 (August 7, 1997), 62 FR 43571 (August 14, 1997).
    The Revised Certificates of Incorporation of the NASD, NASD 
Regulation and Nasdaq are compared to those filed with the Secretary of 
State for the State of Delaware on September 11, 1996, January 25, 1996 
and December 21, 1993, respectively.
* * * * *
By-Laws of the National Association of Securities Dealers, Inc.
Article I
Definitions
    When used in these By-Laws, [and any rules of the Corporation,] 
unless the context otherwise requires, the term:
    (a) ``Act'' means the Securities Exchange Act of 1934, as amended;
    (b) ``bank'' means (1) a banking institution organized under the 
laws of the United States, (2) a member bank of the Federal Reserve 
System, (3) any other banking institution, whether incorporated or not, 
doing business under the laws of any State or of the United States, a 
substantial portion of the business of which consists of receiving 
deposits or exercising fiduciary powers similar to those permitted to 
national banks under the authority of the Comptroller of the Currency 
pursuant to the first section of Public Law 87-722 (12 U.S.C. 
Sec. 92a), and which is supervised and examined by a State or Federal 
authority having supervision over banks, and which is not operated for 
the purpose of evading the provisions of the Act, and (4) a receiver, 
conservator, or other liquidating agent of any institution or firm 
included in clauses (1), (2), or (3) of this subsection;
    (c) ``Board'' means the Board of Governors of the [Corporation.] 
NASD;
    [(d) ``Boards'' means the Board of Governors of the Corporation and 
the Boards of Directors of The Nasdaq Stock Market, Inc. and NASD 
Regulation, Inc.;]
    [(e)](d) ``branch office'' means an office defined as a branch 
office in [NASD Rule 3010] the Rules of the Association;
    [(f)](e) ``broker'' means any individual, corporation, partnership, 
association, joint stock company, business trust, unincorporated 
organization, or other legal entity engaged in the business of 
effecting transactions in securities for the account of others, but 
does not include a bank;
    [(g)](f) ``Commission'' means the Securities and Exchange 
Commission;
    [(h) ``Corporation'' means the National Association of Securities 
Dealers, Inc.;]
    [(i) ``Corporations'' means the National Association of Securities 
Dealers, Inc. (``NASD''), and its subsidiaries, The Nasdaq Stock 
Market, Inc. (``Nasdaq'') and NASD Regulation, Inc. (``NASD 
Regulation'');]
    (g) ``day'' means calendar day;
    [(j)](h) ``dealer'' means any individual, corporation, partnership, 
association, joint stock company, business trust, unincorporated 
organization, or other legal entity engaged in the business of buying 
and selling securities for [his] such individual's or entity's own 
account, through a broker or otherwise, but does not include a bank, or 
any person insofar as [he] such person buys or sells securities for 
[his] such person's own account, either individually or in some 
fiduciary capacity, but not as part of a regular business;
    [(k) ``delegation] (i) ``Delegation Plan'' means the ``Plan of 
Allocation and Delegation of Functions by NASD to Subsidiaries'' as 
approved by the Commission, and as amended from time to time;
    (j) ``district'' means a district established by the NASD 
Regulation Board pursuant to the NASD Regulation By-Laws;
    [(l)](k) ``government securities broker'' shall have the same 
meaning as in Section 3(a)(43) of the Act except that it shall not 
include financial institutions as defined in Section 3(a)(46) of the 
Act;
    [(m)](l) ``government securities dealer'' shall have the same 
meaning as in Section 3(a)(44) of the Act except that it shall not 
include financial institutions as defined in Section 3(a)(46) of the 
Act;
    [(n)](m) ``Governor'' means a member of the Board[.];
    (n) ``Industry Director'' means a Director of the NASD Regulation 
Board or Nasdaq Board (excluding the Presidents) who: (1) Is or has 
served in the prior three years as an officer, director, or employee of 
a broker or dealer, excluding an outside director or a director not 
engaged in the day-to-day management of a broker or dealer; (2) is an 
officer, director, (excluding an outside director) or employee of an 
entity that owns more than ten percent of the equity of a broker or 
dealer, and the broker or dealer accounts for more than five percent of 
the gross revenues received by the consolidated entity; (3)

[[Page 53077]]

owns more than five percent of the equity securities of any broker or 
dealer, whose investments in brokers or dealers exceed ten percent of 
his or her net worth, or whose ownership interest otherwise permits him 
or her to be engaged in the day-to-day management of a broker or 
dealer; (4) provides professional services to brokers or dealers, and 
such services constitute 20 percent or more of the professional 
revenues received by the Director or 20 percent or more of the gross 
revenues received by the Director's firm or partnership; (5) provides 
professional services to a director, officer, or employee of a broker, 
dealer, or corporation that owns 50 percent or more of the voting stock 
of a broker or dealer, and such services relate to the director's, 
officer's, or employee's professional capacity and constitute 20 
percent or more of the professional revenues received by the Director 
or 20 percent or more of the gross revenues received by the Director's 
firm or partnership; or (6) has a consulting or employment relationship 
with or provides professional services to the NASD, NASD Regulation, or 
Nasdaq or has had any such relationship or provided any such services 
at any time within the prior three years;
    (o) ``Industry Governor'' or ``Industry committee member'' means a 
Governor (excluding the Chief Executive Officer and Chief Operating 
Officer of the NASD and the Presidents of NASD Regulation and Nasdaq) 
or committee member who: (1) is or has served in the prior three years 
as an officer, director, or employee of a broker or dealer, excluding 
an outside director or a director not engaged in the day-to-day 
management of a broker or dealer; (2) is an officer, director, 
(excluding an outside director) or employee of an entity that owns more 
than ten percent of the equity of a broker or dealer, and the broker or 
dealer accounts for more than five percent of the gross revenues 
received by the consolidated entity; (3) owns more than five percent of 
the equity securities of any broker or dealer, whose investments in 
brokers or dealers exceed ten percent of his or her net worth, or whose 
ownership interest otherwise permits him or her to be engaged in the 
day-to-day management of a broker or dealer; (4) provides professional 
services to brokers or dealers, and such services constitute 20 percent 
or more of the professional revenues received by the Governor or 
committee member or 20 percent or more of the gross revenues received 
by the Governor's or committee member's firm or partnership; (5) 
provides professional services to a director, officer, or employee of a 
broker, dealer, or corporation that owns 50 percent or more of the 
voting stock of a broker or dealer, and such services relate to the 
director's, officer's, or employee's professional capacity and 
constitute 20 percent or more of the professional revenues received by 
the Governor or committee member or 20 percent or more of the gross 
revenues received by the Governor's or committee member's firm or 
partnership; or (6) has a consulting or employment relationship with or 
provides professional services to the NASD, NASD Regulation, or Nasdaq 
or has had any such relationship or provided any such services at any 
time within the prior three years;
    [(o)](p) ``investment banking or securities business'' means the 
business, carried on by a broker, dealer, or municipal securities 
dealer (other than a bank or department or division of a bank), or 
government securities broker or dealer, of underwriting or distributing 
issues of securities, or of purchasing securities and offering the same 
for sale as a dealer, or of purchasing and selling securities upon the 
order and for the account of others;
    [(p)](q) ``member'' means any broker or dealer admitted to 
membership in the [Corporation] NASD;
    [(q)](r) ``municipal securities'' means securities which are direct 
obligations of, or obligations guaranteed as to principal or interest 
by, a State or any political subdivision thereof, or any agency or 
instrumentality of a State or any political subdivision thereof, or any 
municipal corporate instrumentality of one or more States, or any 
security which is an industrial development bond as defined by Section 
3(a)(29) of the Act;
    [(r)](s) ``municipal securities broker'' means a broker, except a 
bank or department or division of a bank, engaged in the business of 
effecting transactions in municipal securities for the account of 
others;
    [(s)](t) ``municipal securities dealer'' means any person, except a 
bank or department or division of a bank, engaged in the business of 
buying and selling municipal securities for [his] such person's own 
account, through a broker or otherwise, but does not include any person 
insofar as [he] such person buys or sells securities for [his] such 
person's own account either individually or in some fiduciary capacity, 
but not as a part of a regular business;
    (u) ``NASD'' means the National Association of Securities Dealers, 
Inc.;
    (v) ``Nasdaq'' means The Nasdaq Stock Market, Inc.;
    (w) ``Nasdaq Board'' means the Board of Directors of Nasdaq;
    (x) ``Nasdaq Listing and Hearing Review Council'' means a body 
appointed pursuant to Article V of the Nasdaq By-Laws;
    (y) ``NASD Regulation'' means NASD Regulation, Inc.;
    (z) ``NASD Regulation Board'' means the Board of Directors of NASD 
Regulation;
    (aa) ``National Adjudicatory Council'' means a body appointed 
pursuant to Article V of the NASD Regulation By-Laws;
    (bb) ``National Nominating Committee'' means the National 
Nominating Committee appointed pursuant to Article VII, Section 9 of 
these By-Laws;
    (cc) ``Non-Industry Director'' means a Director of the NASD 
Regulation Board or Nasdaq Board (excluding the Presidents of NASD 
Regulation and Nasdaq) who is: (1) A Public Director; (2) an officer or 
employee of an issuer of securities listed on Nasdaq or traded in the 
over-the-counter market; or (3) any other individual who would not be 
an Industry Director;
    (dd) ``Non-Industry Governor'' or ``Non-Industry committee member'' 
means a Governor (excluding the Chief Executive Officer and Chief 
Operating Officer of the NASD and the Presidents of NASD Regulation and 
Nasdaq) or committee member who is: (1) A Public Governor or committee 
member; (2) an officer or employee of an issuer of securities listed on 
Nasdaq or traded in the over-the-counter market; or (3) any other 
individual who would not be an Industry Governor or committee member;
    [(t)](ee) ``person associated with a member'' or ``associated 
person of a member'' means: (1) [Every] a natural person registered 
under the Rules of the Association; or (2) a sole proprietor, partner, 
officer, director, or branch manager of [any] a member, or [any] a 
natural person occupying a similar status or performing similar 
functions, or [any] a natural person engaged in the investment banking 
or securities business who is directly or indirectly controlling or 
controlled by [such] a member, whether or not any such person is 
registered or exempt from registration with the [Corporation] NASD 
[pursuant to] under these By-Laws or the Rules of the Association;
    (ff) ``Public Director'' means a Director of the NASD Regulation 
Board or Nasdaq Board who has no material business relationship with a 
broker or dealer or the NASD, NASD Regulation, or Nasdaq;

[[Page 53078]]

    (gg) ``Public Governor'' or ``Public committee member'' means a 
Governor or committee member who has no material business relationship 
with a broker or dealer or the NASD, NASD Regulation, or Nasdaq;
    [(u)](hh) ``registered broker, dealer, municipal securities broker 
or dealer, or government securities broker or dealer'' means any 
broker, dealer, municipal securities broker or dealer, or government 
securities broker or dealer which is registered with the Commission 
under the Act; and
    [(v) ``rules of the Corporation'' means all rules of the 
Corporation (which rules may be referred to as ``NASD Rules''), 
Certificate of Incorporation, By-Laws, Rules of the Association, any 
other rules, and any interpretations thereunder.]
    (ii) ``Rules of the Association'' or ``Rules'' means the numbered 
rules set forth in the NASD Manual beginning with the Rule 0100 Series, 
as adopted by the Board pursuant to these By-Laws, as hereafter amended 
or supplemented.

Article II

Offices

Location

    Sec. 1. The address of the registered office of the NASD in the 
State of Delaware and the name of the registered agent at such address 
shall be: The Corporation Trust Company, 1209 Orange Street, 
Wilmington, Delaware 19801. The NASD also may have offices at such 
other places both within and without the State of Delaware as the Board 
may from time to time designate or the business of the NASD may 
require.

Change of Location

    Sec. 2. In the manner permitted by law, the Board or the registered 
agent may change the address of the NASD's registered office in the 
State of Delaware and the Board may make, revoke, or change the 
designation of the registered agent.
Article [II] III
Qualifications of Members and Associated Persons
Persons Eligible to [become] Become Members and Associated Persons of 
Members
    Sec. 1. (a) Any registered broker, dealer, municipal securities 
broker or dealer, or government securities broker or dealer authorized 
to transact, and whose regular course of business consists in actually 
transacting, any branch of the investment banking or securities 
business in the United States, under the laws of the United States, 
shall be eligible for membership in the [Corporation] NASD, except such 
registered brokers, dealers, or municipal securities brokers or 
dealers, or government securities brokers or dealers which are excluded 
under the provisions of [Sections 3 (a) or (b) of this Article] Section 
3.
    (b) Any person shall be eligible to become an associated person of 
a member, except such persons who are excluded under the provisions of 
Section 3[(b) of this Article].
Authority of Board to Adopt Qualification Requirements
    Sec. 2. (a) The Board [of Governors] shall have authority to adopt 
rules and regulations applicable to applicants for membership, members, 
and persons associated with applicants or members establishing 
specified and appropriate standards with respect to the training, 
experience, competence, and such other qualifications as the Board [of 
Governors] finds necessary or desirable, and in the case of an 
applicant for membership or a member, standards of financial 
responsibility and operational capability.
    (b) In establishing and applying such standards, the Board [of 
Governors] may classify members and persons associated with such 
members, taking into account relevant matters, including the nature, 
extent, and type of business being conducted and of securities sold, 
dealt in, or otherwise handled. The Board [of Governors] may specify 
that all or any portion of such standards shall be applicable to any 
such class and may require the persons in any such class to be 
registered with the [Corporation] NASD.
    (c) The Board [of Governors] may from time to time make changes in 
such rules, regulations, and standards as it deems necessary or 
appropriate.
Ineligibility of Certain Persons for Membership or Association
    Sec. 3. (a) No registered broker, dealer, municipal securities 
broker or dealer, or government securities broker or dealer shall be 
admitted to membership, and no member shall be continued in membership, 
if such broker, dealer, municipal securities broker or dealer, 
government securities broker or dealer, or member fails or ceases to 
satisfy the qualification requirements established under Section 2 [of 
this Article], if applicable, or if such broker, dealer, municipal 
securities broker or dealer, government securities broker or dealer, or 
member is or becomes subject to a disqualification under Section 4 [of 
this Article], or if such member fails to comply with the requirement 
that all forms filed pursuant to these By-Laws be filed via electronic 
process or such other process as the [Corporation] NASD may prescribe.
    (b) No person shall become associated with a member, continue to be 
associated with a member, or transfer association to another member, if 
such person fails or ceases to satisfy the qualification requirements 
established under Section 2 [of this Article], if applicable, or if 
such person is or becomes subject to a disqualification under Section 4 
[of this Article]; and no broker, dealer, municipal securities broker 
or dealer, or government securities broker or dealer shall be admitted 
to membership, and no member shall be continued in membership, if any 
person associated with it is ineligible to be an associated person 
under this subsection.
    (c) If it deems appropriate, the Board [of Governors], upon notice 
and opportunity for a hearing, may cancel the membership of a member if 
it becomes ineligible for continuance in membership under subsection 
(a) [hereof], may suspend or bar a person [for] from continuing to be 
associated with any member if such person is or becomes ineligible for 
association under subsection (b) [hereof], and may cancel the 
membership of any member who continues to be associated with any such 
ineligible person.
    (d) Any [broker, dealer, municipal securities dealer, or government 
securities broker or dealer which is ineligible for admission into 
membership, or any member which] member that is ineligible for 
continuance in membership[,] may file with the Board [of Governors] an 
application requesting relief from the ineligibility pursuant to 
[procedures adopted by the Board of Governors and contained in the 
Corporation's Procedural Rules. The Board of Governors] the Rules of 
the Association. A member may file such application on its own behalf 
and on behalf of a current or prospective associated person. The Board 
may, in its discretion, approve the [admission] continuance in 
membership, and may also approve the association or continuance of [an 
applicant or member, or the] association of any person, if the Board 
determines that such approval is consistent with the public interest 
and the protection of investors. Any approval hereunder may be granted 
unconditionally or on such terms and conditions as the Board considers 
necessary or appropriate. In the exercise of the authority granted 
hereunder, the Board [of Governors]

[[Page 53079]]

may[: (1)] Conduct such inquiry or investigation into the relevant 
facts and circumstances as it, in its discretion, considers necessary 
to its determination, which, in addition to the background and 
circumstances giving rise to the failure to qualify or 
disqualification, may include the proposed or present business of [an 
applicant for membership or of] a member and the conditions of 
association of any current or prospective associated person 
[prospective or presently associated person, among other matters; (2) 
permit, in limited types of situations, a membership or association 
with a member pending completion of its inquiry or investigation, and 
its final determination, based upon a consideration of relevant 
factors, and may classify situations taking into account the status of 
brokers, dealers, municipal securities brokers and dealers and 
government securities brokers and dealers as applicants or existing 
members and of persons as prospective or presently associated persons 
of members; the type of disqualification or failure to qualify; whether 
a member or associated person has been the subject of a previous 
approval and the terms and conditions thereof; and any other relevant 
factors; and (3) delegate any of its functions and authority under this 
subsection (d) to appropriate committees of the Corporation or to 
Corporation staff members].
    (e) An application filed under subsection (d) [hereof] shall not 
foreclose any action which the Board [of Governors] is authorized to 
take under subsection (c) [hereof] until approval has been granted.
    (f) Approval by the Board [of Governors] of an application made 
under subsection (d) shall be subject to whatever further action the 
Commission may take pursuant to authority granted to the Commission 
under the Act.
    (g) The Board may delegate its authority under this Section in a 
manner not inconsistent with the Delegation Plan.
Definition of Disqualification
    Sec. 4. A person is subject to a ``disqualification'' with respect 
to membership, or association with a member, if such person:
    (a) Has been and is expelled or suspended from membership or 
participation in, or barred or suspended from being associated with a 
member of, any self-regulatory organization, foreign equivalent of a 
self-regulatory organization, foreign or international securities 
exchange, contract market designated pursuant to Section 5 of the 
Commodity Exchange Act, or foreign equivalent of a contract market 
designated pursuant to any substantially equivalent foreign statute or 
regulation, or futures association registered under Section 17 of the 
Commodity Exchange Act or a foreign equivalent of a futures association 
designated pursuant to any substantially equivalent foreign statute or 
regulation, or has been and is denied trading privileges on any such 
contract market or foreign equivalent;
    (b) Is subject to--
    (1) An order of the Commission, other appropriate regulatory 
agency, or foreign financial regulatory authority:
    (i) Denying, suspending for a period not exceeding 12 months, or 
revoking [his] such person's registration as a broker, dealer, 
municipal securities dealer, government securities broker, or 
government securities dealer, or limiting [his] such person's 
activities as a foreign person performing a function substantially 
equivalent to any of the above; or
    (ii) Barring or suspending for a period not exceeding 12 months 
[his] such person from being associated with a broker, dealer, 
municipal securities dealer, government securities broker, government 
securities dealer, or foreign person performing a function 
substantially equivalent to any of the above;
    (2) An order of the Commodity Futures Trading Commission denying, 
suspending, or revoking [his] such person's registration under the 
Commodity Exchange Act (7 U.S.C. Sec. 1 et seq.); or
    (3) An order by a foreign financial regulatory authority denying, 
suspending, or revoking the person's authority to engage in 
transactions in contracts of sale of a commodity for future delivery or 
other instruments traded on or subject to the rules of a contract 
market, board of trade, or foreign equivalent thereof;
    (c) By [his] such person's conduct while associated with a broker, 
dealer, municipal securities dealer, government securities broker, or 
government securities dealer, or while associated with an entity or 
person required to be registered under the Commodity Exchange Act, has 
been found to be a cause of any effective suspension, expulsion, or 
order of the character described in [subsections] subsection (a) or (b) 
of this Section;
    (d) By [his] such person's conduct while associated with any 
broker, dealer, municipal securities dealer, government securities 
broker, government securities dealer, or any other entity engaged in 
transactions in securities, or while associated with an entity engaged 
in transactions in contracts of sale of a commodity for future delivery 
or other instruments traded on or subject to the rules of a contract 
market, board of trade, or foreign equivalent thereof, has been found 
to be a cause of any effective suspension, expulsion, or order by a 
foreign or international securities exchange or foreign financial 
regulatory authority empowered by a foreign government to administer or 
enforce its laws relating to financial transactions as described in 
subsection (a) or (b) of this Section;
    (e) Has associated with him or her any person who is known, or in 
the exercise of reasonable care should be known, to him or her to be a 
person described in [subsections] subsection (a), (b), (c), or (d) of 
this Section;
    (f) Has willfully made or caused to be made in any application for 
membership in a self-regulatory organization, or to become associated 
with a member of a self-regulatory organization, or in any report 
required to be filed with a self-regulatory organization, or in any 
proceeding before a self-regulatory organization, any statement which 
was at the time, and in light of the circumstances under which it was 
made, false or misleading with respect to any material fact, or has 
omitted to state in any such application, report, or proceeding any 
material fact which is required to be stated therein;
    (g)(1) Has been convicted within ten years preceding the filing of 
any application for membership in the [Corporation] NASD, or to become 
associated with a member of the [Corporation] NASD, or at any time 
thereafter, of any felony or misdemeanor or of a substantially 
equivalent crime by a foreign court of competent jurisdiction which:
    (i) Involves the purchase or sale of any security, the taking of a 
false oath, the making of a false report, bribery, perjury, burglary, 
any substantially equivalent activity however denominated by the laws 
of the relevant foreign government, or conspiracy to commit any such 
offense;
    (ii) Arises out of the conduct of the business of a broker, dealer, 
municipal securities dealer, government securities broker, government 
securities dealer, investment adviser, bank, insurance company, 
fiduciary, transfer agent, foreign person performing a function 
substantially equivalent to any of the above, or any entity or person 
required to be registered under the Commodity Exchange Act or any 
substantially equivalent foreign statute or regulation;
    (iii) Involves the larceny, theft, robbery, extortion, forgery,

[[Page 53080]]

counterfeiting, fraudulent concealment, embezzlement, fraudulent 
conversion, or misappropriation of funds or securities, or 
substantially equivalent activity however denominated by the laws of 
the relevant foreign government; or
    (iv) Involves the violation of Sections 152, 1341, 1342, or 1343 or 
Chapters 25 or 47 of Title 18, United States Code, or a violation of a 
substantially equivalent foreign statute;
    (2) Has been convicted within ten years preceding the filing of any 
application for membership in the [Corporation] NASD, or to become 
associated with a member of the [Corporation] NASD, or at any time 
thereafter of any other felony;
    (h) Is permanently or temporarily enjoined by order, judgment, or 
decree of any court of competent jurisdiction from acting as an 
investment adviser, underwriter, broker, dealer, municipal securities 
dealer, government securities broker, government securities dealer, 
transfer agent, foreign person performing a function substantially 
equivalent to any of the above, entity or person required to be 
registered under the Commodity Exchange Act, or any substantially 
equivalent foreign statute or regulation, or as an affiliated person or 
employee of any investment company, bank, insurance company, foreign 
entity substantially equivalent to any of the above, or entity or 
person required to be registered under the Commodity Exchange Act or 
any substantially equivalent foreign statute or regulation, or from 
engaging in or continuing any conduct or practice in connection with 
any such activity, or in connection with the purchase or sale of any 
security;
    (i) Has been found by a foreign financial regulatory authority to 
have--
    (1) Made or caused to be made in any application for registration 
or report required to be filed with a foreign financial regulatory 
authority, or in any proceeding before a foreign financial regulatory 
authority with respect to registration, any statement that was at the 
time and in the light of the circumstances under which it was made 
false or misleading with respect to any material fact, or has omitted 
to state in any application or report to the foreign financial 
regulatory authority any material fact that is required to be stated 
therein;
    (2) Violated any foreign statute or regulation regarding 
transactions in securities, or contracts of sale of a commodity for 
future delivery, traded on or subject to the rules of a contract market 
or any board of trade; or
    (3) Aided, abetted, counseled, commanded, induced, or procured the 
violation by any person of any provision of any statutory provisions 
enacted by a foreign government, or rules or regulations thereunder, 
empowering a foreign financial regulatory authority regarding 
transactions in securities, or contracts of sale of a commodity for 
future delivery, traded or subject to the rules of a contract market or 
any board of trade, or has been found, by a foreign financial 
regulatory authority, to have failed reasonably to supervise, with a 
view to preventing violations of such statutory provisions, rules, and 
regulations, another person who commits such a violation, if such other 
person is subject to [his] such person's supervision.
Article [III] IV
Membership
Application for Membership
    Sec. 1. (a) Application for membership in the [Corporation] NASD, 
properly signed by the applicant, shall be made to the [Corporation] 
NASD via electronic process or such other process as the [Corporation] 
NASD may prescribe, on the form to be prescribed by the [Corporation] 
NASD, and shall contain:
    (1) An [acceptance of and an agreement to abide by, comply with, 
and adhere to, all the provisions, conditions, and covenants of the 
Restated Certificate of Incorporation, the By-Laws] agreement to comply 
with the federal securities laws, the rules and regulations [of the 
Corporation as they are or may from time to time be adopted, changed or 
amended,] thereunder, the rules of the Municipal Securities Rulemaking 
Board and the Treasury Department, the By-Laws of the NASD, NASD 
Regulation, and Nasdaq, the Rules of the Association, and all rulings, 
orders, directions, and decisions [of,] issued and sanctions imposed 
[by, the Board of Governors or any duly authorized committee, and the 
provisions of the federal securities laws, including the rules and 
regulations adopted thereunder, including the rules of the Municipal 
Securities Rulemaking Board and the Treasury Department, provided, 
however, that such an agreement shall not be construed as a waiver by 
the applicant of any right to appeal as provided in the Act] under the 
Rules of the Association;
    (2) An agreement to pay such dues, assessments, and other charges 
in the manner and amount as [shall from time to time be fixed by the 
Board of Governors pursuant to these By-Laws] from time to time shall 
be fixed pursuant to the NASD By-Laws, Schedules to the NASD By-Laws, 
and the Rules of the Association; and
    [(3) An agreement that none of the Corporations, or any officer, 
employee, or member of the Board or committees of the Corporations, 
shall be liable, except for willful malfeasance, to the applicant or to 
any member of the Corporation or to any other person, for any action 
taken by such officer or member of the Boards or of any committee, in 
his official capacity, or by any employee of the Corporations while 
acting within the scope of his employment or under instruction of any 
officer, Board, or committee of the Corporations, in connection with 
the administration or enforcement of any of the provisions of the rules 
of the Corporation as they are or may from time to time be adopted, or 
amended, any ruling, order, directive, decision of, or penalty imposed 
by, the Boards or any duly authorized committee thereof, or the 
provisions of the federal securities laws, including the rules and 
regulations adopted thereunder, and the rules of the Municipal 
Securities Rulemaking Board and the Treasury Department; and]
    [(4)] (3) Such other reasonable information with respect to the 
applicant as the [Corporation] NASD may require.
    (b) Any application for membership received by the [Corporation] 
NASD shall be processed in the manner set forth in the [Procedural] 
Rules of the [Corporation] Association.
    (c) Each applicant and member shall ensure that its membership 
application with the [Corporation] NASD is kept current at all times by 
supplementary amendments via electronic process or such other process 
as the [Corporation] NASD may prescribe to the original application. 
Such amendments to the application shall be filed with the 
[Corporation] NASD not later than [thirty (30) calendar] 30 days after 
learning of the facts or circumstances giving rise to the amendment.
Similarity of Membership Names
    Sec. 2. (a) No person or firm shall be admitted to or continued in 
membership in the [Corporation] NASD having a name [which] that is 
identical to the name of another member appearing on the membership 
roll of the [Corporation] NASD or a name so similar to any such name as 
to tend to confuse or mislead.
    (b) No member may change its name without prior approval of the 
[Corporation] NASD.

[[Page 53081]]

Executive Representative
    Sec. 3. Each member shall appoint and certify to the Secretary of 
the [Corporation] NASD one ``executive representative'' who shall 
represent, vote, and act for the member in all the affairs of the 
[Corporation] NASD, except that other executives of a member may also 
hold office in the [Corporation] NASD, serve on the Board [of 
Governors] or committees [of the Corporation] appointed under Article 
IX, Section 1 or otherwise take part in the affairs of the 
[Corporation] NASD. A member may change its executive representative 
upon giving notice thereof via electronic process or such other process 
as the [Corporation] NASD may prescribe to the Secretary, or may, when 
necessary, appoint, by notice via electronic process to the Secretary, 
a substitute for its executive representative. An executive 
representative of a member or a substitute shall be a member of senior 
management and registered principal of the member.
Membership Roll
    Sec. 4. The Secretary of the [Corporation] NASD shall keep a 
currently accurate and complete membership roll, containing the name 
and address of each member, and the name and address of the executive 
representative of each member. In any case where a membership has been 
terminated, such fact shall be recorded together with the date on which 
the membership ceased. The membership roll of the [Corporation] NASD 
shall at all times be available to all members of the [Corporation] 
NASD, to all governmental authorities, and to the general public.
Resignation of Members
    Sec. 5. Membership in the [Association] NASD may be voluntarily 
terminated only by formal resignation. Resignations of members must be 
filed via electronic process or such other process as the [Corporation] 
NASD may prescribe and addressed to the [Corporation] NASD. Any member 
may resign from the [Corporation] NASD at any time. Such resignation 
shall not take effect until [thirty (30) calendar] 30 days after 
receipt thereof by the [Corporation] NASD and until all indebtedness 
due the [Corporation] NASD from such member shall have been paid in 
full and so long as any complaint or action is pending against the 
member under the [Procedural] Rules of the Association. The 
[Corporation] NASD, however, may in its discretion declare a 
resignation effective at any time.
Retention of Jurisdiction
    Sec. 6. A resigned member or a member that has had its membership 
canceled or revoked shall continue to be subject to the filing of a 
complaint under the [Procedural] Rules of the Association based upon 
conduct which commenced prior to the effective date of the member's 
resignation from the [Corporation] NASD or the cancellation or 
revocation of its membership. Any such complaint, however, shall be 
filed within two [(2)] years after the effective date of resignation, 
cancellation, or revocation.
Transfer and Termination of Membership
    Sec. 7. (a) Except as provided hereinafter, no member of the 
[Corporation] NASD may transfer its membership or any right arising 
therefrom and the membership of a corporation, partnership, or any 
other business organization which is a member of the [Corporation] NASD 
shall terminate upon its liquidation, dissolution, or winding up, and 
the membership of a sole proprietor which is a member shall terminate 
at death, provided that all obligations of membership under the By-Laws 
and the [other rules] Rules of the [Corporation] Association have been 
fulfilled.
    (b) The consolidation, reorganization, merger, change of name, or 
similar change in any corporate member shall not terminate the 
membership of such corporate member provided that the member or 
surviving organization, if any, shall be deemed a successor to the 
business of the corporate member, and the member or the surviving 
organization shall continue in the investment banking and securities 
business, and shall possess the qualifications for membership in the 
[Corporation] NASD. The death, change of name, withdrawal of any 
partner, the addition of any new partner, reorganization, 
consolidation, or any change in the legal structure of a partnership 
member shall not terminate the membership of such partnership member 
provided that the member or surviving organization, if any, shall be 
deemed a successor to the business of the partnership member, and the 
member or surviving organization shall continue in the investment 
banking and securities business and shall possess the qualifications 
for membership in the [Corporation] NASD. If the business of any 
predecessor member is to be carried on by an organization deemed to be 
a successor organization by the [Corporation] NASD, the membership of 
such predecessor member shall be extended to the successor organization 
subject to the notice and application requirements of the Rules of the 
Association and the right of the NASD to place restrictions on the 
successor organization pursuant to the Rules of the Association; 
otherwise, any surviving organization shall be required to satisfy all 
of the membership application requirements of [the] these By-Laws and 
the Rules of the Association.
Registration of Branch Offices
    Sec. 8. (a) Each branch office of a member of the [Corporation] 
NASD shall be registered with and listed upon the membership roll of 
the [Corporation] NASD, and shall pay such dues, assessments, and other 
charges as shall be fixed from time to time by the Board [of Governors] 
pursuant to Article [V of the By-Laws] VI.
    (b) Each member of the [Corporation] NASD shall promptly advise the 
[Corporation] NASD via electronic process or such other process as the 
[Corporation] NASD may prescribe of the opening, closing, relocation, 
change in designated supervisor, or change in designated activities of 
any branch office of such member not later than [thirty (30) calendar] 
30 days after the effective date of such change.
Article [IV] V
Registered Representatives and Associated Persons
Qualification Requirements
    Sec. 1. No member shall permit any person associated with [such] 
the member to engage in the investment banking or securities business 
unless the member determines that such person [has complied with the 
applicable provisions under Article II of the By-Laws] satisfies the 
qualification requirements established under Article III, Section 2 and 
is not subject to a disqualification under Article III, Section 4.
Application for Registration
    Sec. 2. (a) Application by any person for registration with the 
[Corporation] NASD, properly signed by the applicant, shall be made to 
the [Corporation] NASD via electronic process or such other process as 
the [Corporation] NASD may prescribe, on the form to be prescribed by 
the [Corporation] NASD and shall contain:
    (1) [An acceptance of and] An agreement to comply with the [all the 
provisions of the rules of the Corporation as they are or may from

[[Page 53082]]

time to time be adopted or amended,] federal securities laws, the rules 
and regulations thereunder, the rules of the Municipal Securities 
Rulemaking Board and the Treasury Department, the By-Laws of the NASD, 
NASD Regulation, and Nasdaq, the Rules of the Association, and all 
rulings, orders, directions, and decisions [of, and penalties imposed 
by, the Board of Governors or any duly authorized committee, and the 
provisions of the federal securities laws, including the rules and 
regulations adopted thereunder, and the rules of the Municipal 
Securities Rulemaking Board and the Treasury Department, provided, 
however, that such an agreement shall not be construed as a waiver by 
the applicant of any right to appeal as provided in the Act;] issued 
and sanctions imposed under the Rules of the Association; and 
    [(2) An agreement that none of the Corporations, or any officer, 
employee, or member of the Boards or committees of the Corporation, 
shall be liable except for willful malfeasance, to the applicant or to 
any member of the Corporation or to any other person, for any action 
taken by such officer, member of the Boards or of any committee in his 
official capacity, or by any employee of the Corporation while acting 
within the scope of his employment, or under instruction of any 
officer, Board, or committee of the Corporations, in connection with 
the administration or enforcement of any of the provisions of the By-
Laws, any rules of the Corporation as they are or may from time to time 
be adopted or amended, any ruling, order, direction, decision of, or 
penalty imposed by the Boards or any duly authorized committee thereof, 
and the provisions of the federal securities laws, including the rules 
and regulations adopted thereunder including the rules of the Municipal 
Securities Rulemaking Board and the rules of the Treasury Department; 
and]
    [(3)] (2) Such other reasonable information with respect to the 
applicant as the [Corporation] NASD may require.
    (b) The [Corporation] NASD shall not approve an application for 
registration of any person who is not eligible to be an associated 
person of a member under the provisions of Article III, Section 3[(b) 
of Article II of these By-Laws].
    (c) Every application for registration filed with the [Corporation] 
NASD shall be kept current at all times by supplementary amendments via 
electronic process or such other process as the [Corporation] NASD may 
prescribe to the original application. Such amendment to the 
application shall be filed with the [Corporation] NASD not later than 
[thirty (30) calendar] 30 days [of] after learning of the facts or 
circumstances giving rise to the amendment. If such amendment involves 
a statutory disqualification as defined in Section 3(a)(39) and Section 
15(b)(4) of the Act, such amendment shall be filed not later than ten 
[(10) calendar] days after such disqualification occurs.
Notification by Member to [Corporation] the NASD and Associated Person 
of Termination; Amendments to Notification
    Sec. 3. (a) Following the termination of the association with a 
member of a person who is registered with it, such member shall, not 
later than [thirty (30) calendar] 30 days after such termination, give 
notice of the termination of such association to the [Corporation] NASD 
via electronic process or such other process as the [Corporation] NASD 
may prescribe on a form designated by the [Corporation] NASD, and 
concurrently shall provide to the person whose association has been 
terminated a copy of said notice as filed with the [Corporation] NASD. 
A member [which] that does not submit such notification[,] and provide 
a copy to the person whose association has been terminated, within the 
time period prescribed, shall be assessed a late filing fee as 
specified by the [Corporation] NASD. Termination of registration of 
such person associated with a member shall not take effect so long as 
any complaint or action under the [rules] Rules of the [Corporation] 
Association is pending against a member and to which complaint or 
action such person associated with a member is also a respondent, or so 
long as any complaint or action is pending against such person 
individually under the [rules] Rules of the [Corporation. The 
Corporation] Association. The NASD, however, may in its discretion 
declare the termination effective at any time.
    (b) The member shall notify the [Corporation] NASD via electronic 
process or such other process as the [Corporation] NASD may prescribe 
by means of an amendment to the notice filed pursuant to subsection 
[paragraph] (a) [above] in the event that the member learns of facts or 
circumstances causing any information set forth in said notice to 
become inaccurate or incomplete. Such amendment shall be filed with the 
[Corporation] NASD via electronic process or such other process as the 
[Corporation] NASD may prescribe and a copy provided to the person 
whose association with the member has been terminated not later than 
[thirty (30) calendar] 30 days after the member learns of the facts or 
circumstances giving rise to the amendment.
Retention of Jurisdiction
    Sec. 4. A person whose association with a member has been 
terminated and is no longer associated with any member of the 
[Corporation] NASD or a person whose registration has been revoked or 
canceled shall continue to be subject to the filing of a complaint 
under the [rules] Rules of the [Corporation] Association based upon 
conduct which commenced prior to the termination [or], revocation, or 
cancellation or upon such person's failure, while subject to the 
[Corporation's] NASD's jurisdiction as provided herein, to provide 
information requested by the [Corporation] NASD pursuant to [NASD Rule 
8210] the Rules of the Association, but any such complaint shall be 
filed within:
    (a) Two [(2)] years after the effective date of termination of 
registration pursuant to Section 3 [above], provided, however that any 
amendment to a notice of termination filed pursuant to Section 3(b) 
that is filed within two years of the original notice which discloses 
that such person may have engaged in conduct actionable under any 
applicable statute, rule, or regulation shall operate to recommence the 
running of the two-year period under this [paragraph] subsection;
    (b) Two [(2)] years after the effective date of revocation or 
cancellation of registration pursuant to [NASD Rule 8320] the Rules of 
the Association; or
    (c) in the case of an unregistered person, within two [(2)] years 
after the date upon which such person ceased to be associated with the 
member.
Article [V] VI
Dues, Assessments, and Other Charges
Power of [Corporation] the NASD to Fix and Levy Assessments
    Sec. 1. The [Corporation] NASD shall prepare an estimate of the 
funds necessary to defray reasonable expenses of administration in 
carrying on the work of the [Corporation] NASD each fiscal year, and on 
the basis of such estimate, shall fix and levy the amount of admission 
fees, dues, assessments, and other charges to be paid by members of the 
[Corporation] NASD and issuers and any other persons using any facility 
or system which the [Corporation] NASD, NASD Regulation, or Nasdaq 
operates or controls. Fees, dues, assessments, and other charges shall 
be called and payable as determined by the [Corporation] NASD

[[Page 53083]]

from time to time; provided, however, that such admission fees, dues, 
assessments, and other charges shall be equitably allocated among 
members and issuers and any other persons using any facility or system 
which the [Corporation] NASD operates or controls. The [Corporation] 
NASD may from time to time make such changes or adjustments in such 
fees, dues, assessments, and other charges as it deems necessary or 
appropriate to assure equitable allocation of dues among members. In 
the event of termination of membership or the extension of any 
membership to a successor organization during any fiscal year for which 
an assessment has been levied and become payable, the [Corporation] 
NASD may make such adjustment in the fees, dues, assessments, or other 
charges payable by any such member or successor organization or 
organizations during such fiscal years as it deems fair and appropriate 
in the circumstances.
Reports of Members
    Sec. 2. Each member, issuer, or other person shall promptly furnish 
all information or reports requested by the [Corporation] NASD in 
connection with the determination of the amount of admission fees, 
dues, assessments, or other charges.
Suspension or Cancellation of Membership or Registration
    Sec. 3. The [Corporation] NASD after [fifteen (15)] 15 days notice 
in writing, may suspend or cancel the membership of any member or the 
registration of any person in arrears in the payment of any fees, dues, 
assessments, or other charges or for failure to furnish any information 
or reports requested pursuant to Section 2 [of this Article], or for 
failure to comply with an award of arbitrators properly rendered 
pursuant to [Section 41] the Rules of the [Code of Arbitration 
Procedure] Association, where a timely motion to vacate or modify such 
award has not been made pursuant to applicable law or where such a 
motion has been denied, or for failure to comply with a written and 
executed settlement agreement obtained in connection with an 
arbitration or mediation submitted for disposition pursuant to the 
[procedures specified by the Corporation] Rules of the Association.
Reinstatement of Membership or Registration
    Sec. 4. Any membership or registration suspended or canceled under 
this Article may be reinstated by the [Corporation] NASD upon such 
terms and conditions as it shall deem just; provided, however, that any 
applicant for reinstatement of membership or registration shall possess 
the qualifications required for membership or registration in the 
[Corporation] NASD.

Delegation

    Sec. 5. The NASD may delegate its authority under this Article in a 
manner not inconsistent with the Delegation Plan.
Article [VI] VII
Board of Governors
    Powers and Authority of Board
    Sec. 1. (a) The Board [of Governors] shall be the governing body of 
the [Corporation] NASD and, except as otherwise provided by applicable 
law, the Restated Certificate of Incorporation, or these By-Laws, shall 
be vested with all powers necessary for the management and 
administration of the affairs of the [Corporation] NASD and the 
promotion of the [Corporation's] NASD's welfare, objects, and purposes. 
In the exercise of such powers, the Board [of Governors] shall have the 
authority to:
    [(1)](i) Adopt for submission to the membership, as hereinafter 
provided, such By-Laws and changes or additions thereto as it deems 
necessary or appropriate;
    [(2)](ii) Adopt such other [rules] Rules of the [Corporation] 
Association and changes or additions thereto as it deems necessary or 
appropriate, provided, however, that the Board may at its option submit 
to the membership any such adoption, change, or addition to such 
[rules] Rules;
    [(3)] (iii) make such regulations, issue such orders, resolutions, 
exemptions, interpretations, including interpretations of these By-Laws 
and the [rules] Rules of the [Corporation] Association, and directions, 
and make such decisions as it deems necessary or appropriate;
    [(4)] (iv) Prescribe [a code of arbitration procedure providing] 
rules for the required or voluntary arbitration of controversies 
between members and between members and customers or others as it shall 
deem necessary or appropriate;
    [(5)] (v) Establish rules and procedures to be followed by members 
in connection with the distribution of securities issued by members and 
affiliates thereof;
    [(6)] (vi) Require all over-the-counter transactions in securities 
between members, other than transactions in exempted securities as 
defined in Section 3(a)(12) of the Act, to be cleared and settled 
through the facilities of a clearing agency registered with the 
Commission pursuant to the Act, which clears and settles such over-the-
counter transactions in securities;
    [(7)] (vii) Organize and operate automated systems to provide 
qualified subscribers with securities information and automated 
services. The systems may be organized and operated by a division or 
subsidiary company of the [Corporation] NASD or by one or more 
independent firms under contract with the [Corporation] NASD as the 
Board [of Governors] may deem necessary or appropriate. The Board [of 
Governors] may adopt rules for such automated systems, establish 
reasonable qualifications and classifications for members and other 
subscribers, provide qualification standards for securities included in 
such systems, require members to report promptly information in 
connection with securities included in such systems, and establish 
charges to be collected from subscribers and others;
    [(8)] (viii) Require the prompt reporting by members of such 
original and supplementary trade data as the Board deems appropriate. 
Such reporting requirements may be administered by the [Corporation] 
NASD, a division or subsidiary thereof, or a clearing agency registered 
under the Act; and
    [(9)] (ix) Engage in any activities or conduct necessary or 
appropriate to carry out the [Corporation's] NASD's purposes under its 
Restated Certificate of Incorporation and the federal securities laws.
    (b) In the event of the refusal, failure, neglect, or inability of 
any [member of the Board of Governors] Governor to discharge [his] such 
Governor's duties, or for any cause affecting the best interests of the 
[Corporation] NASD the sufficiency of which the Board [of Governors] 
shall be the sole judge, the Board shall have the power, by the 
affirmative vote of two-thirds of the Governors then in office, to 
remove such [member] Governor and declare [his] such Governor's 
position vacant and that such position shall be filled in accordance 
with the provisions of Section [6] 7 [of this Article].
    (c) To the fullest extent permitted by applicable law, the Restated 
Certificate of Incorporation [and applicable law, the Corporation], and 
these By-Laws, the NASD may delegate any power of the [Corporation or 
the Board of Governors to any person or entity, including a subsidiary 
of the Corporation; provided that such delegation is] NASD or the Board 
to a committee appointed pursuant to Article IX, Section 1, the

[[Page 53084]]

NASD Regulation Board, the Nasdaq Board, or NASD staff in a manner not 
inconsistent with the Delegation Plan.
Authority to Cancel or Suspend for Failure to Submit Required 
Information
    Sec. 2. (a) The Board [of Governors] shall have authority, upon 
notice and opportunity for a hearing, to cancel or suspend the 
membership of any member or suspend the association of any person 
associated with a member for failure to file, or to submit on request, 
any report, document, or other information required to be filed with or 
requested by the [Corporation] NASD pursuant to these By-Laws or the 
Rules of the Association.
    (b) Any membership or association suspended or canceled pursuant to 
this Section may be reinstated by the NASD pursuant to the Rules of the 
Association.
    [(b)] (c) The Board [of Governors] is authorized to delegate [the 
authority hereinabove granted to the Chief Executive Officer of the 
Corporation; provided, however, that the Executive Committee of the 
Board of Governors shall be notified in writing of any such 
contemplated action by the Chief Executive Officer] its authority under 
this Section in a manner not inconsistent with the Delegation Plan and 
otherwise in accordance with the Rules of the Association.
Authority to Take Action Under Emergency or Extraordinary Market 
Conditions
    Sec. 3. The Board [of Governors], or such person or persons as may 
be designated by the Board, in the event of an emergency or 
extraordinary market conditions, shall have the authority to take any 
action regarding[;]:
    [(1)] (a) The trading in or operation of the over-the-counter 
securities market, the operation of any automated system owned or 
operated by the [Corporations] NASD, NASD Regulation, or Nasdaq, and 
the participation in any such system of any or all persons or the 
trading therein of any or all securities; and
    [(2)] (b) The operation of any or all member firms' offices or 
systems, if, in the opinion of the Board or the person or persons 
hereby designated, such action is necessary or appropriate for the 
protection of investors or the public interest or for the orderly 
operation of the marketplace or the system.
Composition and Qualifications of the Board
    Sec. 4. (a) [The Board of Governors shall be composed of five or 
more members, the number thereof to be determined from time to time by 
the Board of Governors, and shall include at all times the Chief 
Executive Officer and such Industry, Non-Industry, and Public Governors 
as shall be determined from time to time by the Board of Governors, 
both of which determinations shall be consistent with the Delegation 
Plan and Section 15A(b)(4) of the Act. The criteria for the categories 
of Industry, Non-Industry and Public Governors, as used herein, shall 
be established by the Board of Governors from time to time, which 
criteria shall be consistent with the Delegation Plan.] The Board shall 
consist of the Chief Executive Officer and the Chief Operating Officer 
of the NASD, the Presidents of NASD Regulation and Nasdaq, the Chair of 
the National Adjudicatory Council, and no fewer than 16 and no more 
than 22 Governors elected by the members of the NASD. The Governors 
elected by the members of the NASD shall include a representative of an 
issuer of investment company shares or an affiliate of such an issuer, 
a representative of an insurance company, and a Nasdaq issuer. A 
majority of the Governors shall be Non-Industry Governors. If the Board 
consists of 21 to 23 Governors, at least five shall be Public 
Governors. If the Board consists of 24 to 27 Governors, at least six 
shall be Public Governors.
    (b) As soon as practicable[,] following the annual election [of 
members to the Board] of Governors, the Board [of Governors] shall 
elect from [the] among its members [of the Board of Governors a 
Chairman,] a Chair and such other persons having such titles as it 
shall deem necessary or advisable, to serve until the next annual 
election or until their successors are chosen and qualify. The Chair of 
the National Adjudicatory Council may not serve as Chair of the Board. 
The Chair and other persons [so] elected under this subsection shall 
have such powers and duties as may be determined from time to time by 
the Board [of Governors]. The Board [of Governors, by affirmative vote 
of], by resolution adopted by a majority of [its members] the Governors 
then in office, may remove the Chair and any [such] person elected 
under this subsection from such position at any time.
Term of Office of Governors
    Sec. 5. [Each Governor, except as otherwise provided by the 
Restated Certificate of Incorporation or these By-Laws, shall hold 
office for a term of not more than three years, such term to be fixed 
by the Board at the time of the nomination or certification of such 
Governor, or until his successor is elected and qualified, or until his 
death, resignation, disqualification, or removal. Except for the Chief 
Executive Officer, no Governor may serve more than two consecutive 
terms, provided, however, that if a Governor is appointed to fill a 
term of less than one year, such Governor may serve up to two 
consecutive terms following the expiration of such Governor's current 
term. The Chief Executive Officer of the Corporation shall serve as a 
member of the Board until his successor is selected and qualified, or 
until his death, resignation, disqualification, or removal.]
    (a) The Chief Executive Officer and the Chief Operating Officer of 
the NASD and the Presidents of NASD Regulation and Nasdaq shall serve 
as Governors until a successor is elected, or until death, resignation, 
or removal.
    (b) The Chair of the National Adjudicatory Council shall serve as a 
Governor for a term of one year, or until a successor is duly elected 
and qualified, or until death, resignation, disqualification, or 
removal. A Chair of the National Adjudicatory Council may not serve 
more than two consecutive terms as a Governor, unless a Chair of the 
National Adjudicatory Council is appointed to fill a term of less than 
one year for such office. In such case, the Chair of the National 
Adjudicatory Council may serve an initial term as a Governor and up to 
two consecutive terms as a Governor following the expiration of the 
initial term. After serving as a Chair of the National Adjudicatory 
Council, an individual may serve as a Governor elected by the members 
of the NASD.
    (c) The Governors elected by the members of the NASD shall be 
divided into three classes and hold office for a term of no more than 
three years, such term to be fixed by the Board at the time of the 
nomination or certification of such Governor, or until a successor is 
duly elected and qualified, or until death, resignation, 
disqualification, or removal. A Governor elected by the members of the 
NASD may not serve more than two consecutive terms. If a Governor is 
elected by the Board to fill a term of less than one year, the Governor 
may serve up to two consecutive terms following the expiration of the 
Governor's initial term. The term of office of Governors of the first 
class shall expire at the January 1999 Board meeting, of the second 
class one year thereafter, and of the third class two years thereafter. 
At each annual election, commencing January 1999, Governors shall be 
elected for a term of three years to replace those whose terms expire.

[[Page 53085]]

Disqualification

    Sec. 6. Notwithstanding Section 5, the term of office of a Governor 
shall terminate immediately upon a determination by the Board, by a 
majority vote of the remaining Governors, that: (a) The Governor no 
longer satisfies the classification (Industry, Non-Industry, or Public 
Governor) for which the Governor was elected; and (b) the Governor's 
continued service as such would violate the compositional requirements 
of the Board set forth in Section 4. If the term of office of a 
Governor terminates under this Section, and the remaining term of 
office of such Governor at the time of termination is not more than six 
months, during the period of vacancy the Board shall not be deemed to 
be in violation of Section 4 by virtue of such vacancy.
Filling of Vacancies
    Sec. [6.] 7. [(a) Any vacancy in the office of] If a Governor 
position becomes vacant, whether [occurring by reason] because of 
death, disability, disqualification, removal, or resignation, [other 
than a vacancy by reason of an increase in the size of the Board, shall 
be filled] the National Nominating Committee shall nominate, and the 
Board shall elect by majority vote of the remaining Governors then in 
office [and any person elected to fill such vacancy shall satisfy the 
qualifications and criteria], a person satisfying the classification 
(Industry, Non-Industry, or Public Governor) for the governorship 
[being filled] as provided in Section 4 [of this Article.] to fill such 
vacancy, except that if the remaining term of office for the vacant 
Governor position is not more than six months, no replacement shall be 
required. If the remaining term of office for the vacant Governor 
position is more than one year, the Governor elected by the Board to 
fill such position shall stand for election in the next annual election 
pursuant to this Article. [(b) Any vacancy in the office of a Governor 
occurring by reason of an increase in the size of the Board shall be 
filled by majority vote of the Board and any person elected to fill 
such vacancy shall satisfy the criteria for such newly created 
governorship as shall be established by resolution of the Board, 
provided that the filling of any such vacancy shall not be inconsistent 
with any other provisions of these By-Laws or the Delegation Plan.]
Meetings of Board; Quorum; Required Vote
    Sec. 8. Meetings of the Board shall be held at such times and 
places, upon such notice, and in accordance with such procedure as the 
Board [of Governors] in its discretion may determine. [A] At all 
meetings of the Board, unless otherwise set forth in these By-Laws or 
required by law, a quorum [of the Board of Governors] for the 
transaction of business shall consist of a majority of the [total 
number of Governors of the Corporation and any] Board, including not 
less than 50 percent of the Non-Industry Governors. Any action taken by 
a majority vote at any meeting at which a quorum is present, except as 
otherwise provided in the Restated Certificate of Incorporation or 
these By-Laws, shall constitute the action of the Board [of Governors]. 
[Members of the Board of] Governors[,] or members of any committee 
appointed by the Board [of Governors or any other committee of the 
Corporation,] under Article IX, Section 1 may participate in a meeting 
[thereof] of the Board or a committee by means of communications 
facilities that ensure all persons participating in the meeting can 
hear and speak to [each other] one another, and participation in a 
meeting pursuant to this By-Law shall constitute presence in person at 
such meeting. No [member of the Board of Governors] Governor shall vote 
by proxy at any meeting of the Board.
The National Nominating Committee
    Sec. [7. (b)] 9. (a) The National Nominating Committee shall [have 
such powers and shall perform such functions as shall be determined by 
resolution of the Board of Governors from time to time, consistent with 
the Delegation Plan] nominate: Industry, Non-Industry, and Public 
Governors for each vacant or new Governor position on the NASD Board 
for election by the membership; Industry, Non-Industry, and Public 
Directors for each vacant or new position on the NASD Regulation Board 
and the Nasdaq Board for election by the Board; Industry, Non-Industry, 
and Public members for each vacant or new position on the National 
Adjudicatory Council for appointment by the NASD Regulation Board; and 
Industry and Non-Industry members for each vacant or new position on 
the Nasdaq Listing and Hearing Review Council for appointment by the 
Nasdaq Board.
    (b) The National Nominating Committee shall consist of [six or more 
persons who shall have such qualifications, and who shall be selected 
in such manner, as shall be determined by resolution of the Board of 
Governors from time to time, which qualifications and manner of 
selection shall be consistent with the Delegation Plan] no fewer than 
six and no more than nine members. The number of Industry committee 
members shall equal or exceed the number of Non-Industry committee 
members. If the National Nominating Committee consists of six members, 
at least two shall be Public committee members. If the National 
Nominating Committee consists of seven or more members, at least three 
shall be Public committee members. No officer or employee of the 
Association shall serve as a member of the National Nominating 
Committee in any voting or non-voting capacity. No more than three of 
the National Nominating Committee members and no more than two of the 
Industry committee members shall be current members of the NASD Board.
    (c) 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.
    (d) Members of the National Nominating Committee shall be appointed 
annually by the Board and may be removed only by majority vote of the 
whole Board, after appropriate notice, for refusal, failure, neglect, 
or inability to discharge such member's duties. The NASD Regulation 
Board and the Nasdaq Board each shall propose two candidates to the 
NASD Board for appointment to the National Nominating Committee.
    (e) The Secretary of the NASD shall collect from each nominee for 
Governor such information as is reasonably necessary to serve as the 
basis for a determination of the nominee's classification as an 
Industry, Non-Industry, or Public Governor, and the Secretary shall 
certify to the National Nominating Committee each nominee's 
classification.
    (f) At all meetings of the National Nominating Committee, a quorum 
for the transaction of business shall consist of a majority of the 
National Nominating Committee, including not less than 50 percent of 
the Non-Industry committee members. In the absence of a quorum, a 
majority of the committee members present may adjourn the meeting until 
a quorum is present.

[[Page 53086]]

Procedure for Nomination of Governors
    Sec. [7.(c)] 10. [At least 90 days prior] Prior to a meeting of 
members pursuant to Article XXI for the election of Governors, the 
[Corporation] NASD shall notify the members of the [date, place, and 
time of such meeting and shall set forth in such notice the] names of 
each nominee [(a ``Nominee''), as] selected by the National Nominating 
Committee[,] for each governorship up for election, [and shall further 
provide in such notice the qualifications] the classification of 
governorship (Industry, Non-Industry, or Public Governor) for which the 
nominee is nominated, the qualifications of each nominee, and such 
other information regarding each [such Nominee] nominee as the National 
Nominating Committee deems pertinent. A person who has not been so 
nominated may be included on the ballot for the election of Governors 
if: [(1)](a) [at least 60] within 30 days [prior to the scheduled date 
for the meeting of members] after the date of such notice in 1997, or 
within 45 days after the date of such notice in 1998 and thereafter, 
such person [complies with the requirements and procedures for 
nomination set forth in the Delegation Plan and (2) the person is 
certified] presents to the Secretary of the NASD petitions in support 
of his or her nomination duly executed by three percent of the members; 
and (b) the Secretary certifies that (i) the petitions are duly 
executed by the Executive Representatives of the requisite number of 
members; and (ii) the person satisfies the classification (Industry, 
Non-Industry, or Public Governor) of the governorship to be filled, 
based on such information provided by the person as is reasonably 
necessary to make the certification. The Secretary shall not 
unreasonably withhold or delay the certification. Upon certification, 
the election shall be deemed a contested election. After the 
certification of a contested election or the expiration of time for 
contesting an election under this Section, the Secretary shall deliver 
notice of a meeting of members pursuant to Article XXI, Section 3(a).

Communication of Views

    Sec. 11. The NASD, the Board, the National Nominating Committee, a 
committee appointed pursuant to Article IX, Section 1, and NASD staff 
shall not take any position publicly or with a member or person 
associated with or employed by a member with respect to any candidate 
in a contested election or nomination held pursuant to these By-Laws or 
the NASD Regulation By-Laws. A Governor or a member of the National 
Nominating Committee or any other committee may communicate his or her 
views with respect to any candidate if such Governor or committee 
member acts solely in his or her individual capacity and disclaims any 
intention to communicate in any official capacity on behalf of the 
NASD, the NASD Board, the National Nominating Committee, or any other 
committee. Except as provided herein, any candidate and his or her 
representatives may communicate support for the candidate to a member 
or person associated with or employed by a member.

Administrative Support

    Sec. 12. The Secretary of the NASD shall provide administrative 
support to the candidates in a contested election under this Article by 
sending to NASD members eligible to vote up to two mailings of 
materials prepared by the candidates. The NASD shall pay the postage 
for the mailings. If a candidate wants such mailings sent, the 
candidate shall prepare such material on the candidate's personal 
stationery. The material shall state that it represents the opinions of 
the candidate. The candidate shall provide a copy of such material for 
each member of the NASD. A candidate nominated by the National 
Nominating Committee may identify himself or herself as such in his or 
her materials. Any candidate may send additional materials to NASD 
members at the candidate's own expense. Except as provided in this 
Article, the NASD, the Board, any committee, and NASD staff shall not 
provide any other administrative support to a candidate in a contested 
election conducted under this Article or a contested election or 
nomination conducted under the NASD Regulation By-Laws.
Election of [Board Members] Governors
    Sec. [7.(a)] 13. [The members of the Board of] Governors shall be 
elected by a plurality of the votes of the members of the [Corporation] 
NASD present in person or represented by proxy at the annual meeting of 
the [Corporation] NASD and entitled to vote thereat. The annual meeting 
of the [Corporation] NASD shall be on such date and at such place as 
the Board [of Governors] shall designate pursuant to Article XXI. Any 
Governor so elected must be nominated by the National Nominating 
Committee or certified by the Secretary [described in subsection (b) 
below or certified] pursuant to [subsection (c) below and must satisfy 
the other qualifications for Governors set forth in Section 4 of this 
Article or as established by resolution of the Board of Governors from 
time to time, which qualifications shall be consistent with the 
Delegation Plan] Section 10.

Maintenance of Compositional Requirements of the Board

    Sec. 14. Each Governor shall update the information submitted under 
Section 9(e) regarding his or her classification as an Industry, Non-
Industry, or Public Governor at least annually and upon request of the 
Secretary of the NASD, and shall report immediately to the Secretary 
any change in such classification.

Resignation

    Sec. 15. Any Governor may resign at any time either upon written 
notice of resignation to the Chair of the Board, the Chief Executive 
Officer, or the Secretary. Any such resignation shall take effect at 
the time specified therein or, if the time is not specified, upon 
receipt thereof, and the acceptance of such resignation, unless 
required by the terms thereof, shall not be necessary to make such 
resignation effective.
Article [VII] VIII
Officers, Agents, and Employees

Officers

    Sec. 1. The Board [of Governors] shall [select] elect a Chief 
Executive Officer, who shall be responsible for the management and 
administration of its affairs and shall be the official representative 
of the [Corporation] NASD in all public matters and who shall have such 
powers and duties in the management of the [Corporation] NASD as may be 
prescribed in a resolution by the Board [of Governors], and which 
powers and duties shall not be inconsistent with the Delegation Plan. 
The Board shall elect a Chief Operating Officer and Secretary, who 
shall have such powers and duties conferred by these By-Laws and such 
other powers and duties as may be prescribed in a resolution by the 
Board. The Board may provide for such other executive or administrative 
officers as it shall deem necessary or advisable, including, but not 
limited to, Executive Vice [-]President, Senior Vice[-] President, Vice 
[-]President, [Secretary,] and Treasurer of the [Corporation] NASD. All 
such officers shall have such titles, [such] powers, and duties, and 
shall be entitled to such compensation, as shall be determined from 
time to time by the Board [of Governors]. Each such officer shall hold 
office until [his] a successor is elected and qualified or until [his] 
such officer's earlier resignation or removal. Any officer may resign 
at any time upon written notice

[[Page 53087]]

to the [Corporation] NASD. [The Board of Governors may remove any 
officer, with or without cause, at any time, but such removal shall be 
without prejudice to the contractual rights of such officer, if any, 
with the Corporation. Any number of offices may be held by the same 
person. Any vacancy occurring in any office of the Corporation by 
death, resignation, removal, or otherwise may be filled for the 
unexpired portion of the term by the Board of Governors at any 
meeting.]
Absence of Chief Executive Officer
    Sec. 2. In the case of the absence or inability to act of the 
[President] Chief Executive Officer of the [Corporation] NASD, or in 
the case of a vacancy in such office, the Board [of Governors] may 
appoint its [Chairman] Chair or such other person as it may designate 
to act as such officer pro tem, who shall assume all the functions and 
discharge all the duties of the [President] Chief Executive Officer.

Agents and Employees

    Sec. 3. The Board may employ or authorize the employment and 
prescribe the powers and duties of such agents and employees as it 
deems necessary or advisable. The employment and compensation of such 
agents and employees shall be at the pleasure of the Board, provided 
that such determinations are not inconsistent with the requirements of 
the Delegation Plan. Except as provided in Article IX, Section 5(d), 
agents and employees of the NASD shall be under the supervision and 
control of the officers of the NASD, unless the Board provides by 
resolution that an agent or employee shall be under the supervision and 
control of the Board.
Employment of Counsel
    Sec. [3.] 4. The Board [of Governors] may retain or authorize the 
employment of counsel, with such powers, titles, duties, and authority 
as it shall deem necessary or advisable.
[Administrative Staff
    Sec. 4. The Board of Governors may employ or authorize the 
employment and prescribe the powers and duties of such an 
administrative staff as it deems necessary or advisable. The employment 
and compensation of such administrative staff of the Corporation shall 
be at the pleasure of the Board of Governors, provided that such 
determinations are not inconsistent with the requirements of the 
Delegation Plan.]

Delegation of Duties of Officers

    Sec. 5. The Board may delegate the duties and powers of any officer 
of the NASD to any other officer or to any Governor for a specified 
period of time and for any reason that the Board may deem sufficient.

Resignation and Removal of Officers

    Sec. 6. (a) Any officer may resign at any time upon written notice 
of resignation to the Board, the Chief Executive Officer, or the 
Secretary. Any such resignation shall take effect upon receipt of such 
notice or at any later time specified therein. The acceptance of a 
resignation shall not be necessary to make the resignation effective.
    (b) Any officer of the NASD may be removed, with or without cause, 
by resolution adopted by a majority of the Governors then in office at 
any regular or special meeting of the Board or by a written consent 
signed by all of the Governors then in office. Such removal shall be 
without prejudice to the contractual rights of the affected officer, if 
any, with the NASD.

Bond

    Sec. 7. The NASD may secure the fidelity of any or all of its 
officers, agents, or employees by bond or otherwise.
Article [VIII] IX
Committees

Appointment

    Sec. 1. [The] Subject to Article VII, Section 1(c), the Board may 
appoint such committees or subcommittees as it deems necessary or 
desirable, and it shall fix their powers, duties, and terms of office[; 
provided that such determinations are not inconsistent with 
requirements of the Delegation Plan]. Any such committee or 
subcommittee consisting solely of one or more Governors, to the extent 
provided by these By-Laws or by resolution of the Board, shall have and 
may exercise all powers and authority of the Board in the management of 
the business and affairs of the [Corporation] NASD.

Maintenance of Compositional Requirements of Committees

    Sec. 2. Upon request of the Secretary of the NASD, each prospective 
committee member who is not a Governor shall provide to the Secretary 
such information as is reasonably necessary to serve as the basis for a 
determination of the prospective committee member's classification as 
an Industry, Non-Industry, or Public committee member. The Secretary 
shall certify to the Board each prospective committee member's 
classification. Each committee member shall update the information 
submitted under this Section at least annually and upon request of the 
Secretary of the NASD, and shall report immediately to the Secretary 
any change in such classification.
Removal of Committee Member
    Sec. [2] 3. [Any] A member of [any] a committee or subcommittee 
appointed pursuant to this Article [VIII] may be removed from such 
committee or subcommittee only by a majority vote of the whole Board, 
after appropriate notice, for refusal, failure, neglect, or inability 
to discharge [his] such member's duties [or for any cause the 
sufficiency of which shall be decided by the Board].
[Resolution of the Board of Governors
Interpretations and Explanations
    The Executive Committee be and hereby is authorized and directed to 
consider and make recommendations to the Board of Governors with 
respect to such interpretative questions, having to do with the 
Certificate of Incorporation, By-Laws, Rules of Fair Practice and Code 
of Procedure of the Association, as may from time to time be submitted 
to the Committee by the Board of Governors or the President.
    Where a decision is required as to which reasonable men, equally 
well informed, might well not differ, the ruling shall be deemed to be 
an explanation. Where a decision is required where reasonable men, 
equally well informed, might well differ, the ruling shall be deemed to 
be an interpretation.
    Where in the judgment of the President and upon advice of Counsel, 
any question involves an answer clearly in the nature of an 
explanation, such question may be answered in the office of the 
President.
    Where in the judgment of the President and upon advice of Counsel, 
any question involves an answer in the nature of an interpretation, the 
President shall present such question to the Executive Committee.
    The President may, after consultation with and upon advice of 
Counsel, give an office opinion. Such office opinion shall state that 
it reflects only the opinion of the office of the President and it is 
provisional and subject to the approval of the Board of Governors.
    District Committees, District Business Conduct Committees, Counsel 
or staff thereof, are hereby directed not to issue any interpretations 
of the Certificate of Incorporation, By-Laws, Rules of Fair

[[Page 53088]]

Practice or Code of Procedure, either in oral or written form without 
presentation of the question to the President and in such case, if the 
questions presented appear to be an interpretation with the meaning of 
this resolution the matter shall be presented in writing to the 
Executive Committee.]

Executive Committee

    Sec. 4. (a) The Board may appoint an Executive Committee, which 
shall, to the fullest extent permitted by the General Corporation Law 
of the State of Delaware and other applicable law, have and be 
permitted to exercise all the powers and authority of the Board in the 
management of the business and affairs of the NASD between meetings of 
the Board, and which may authorize the seal of the NASD to be affixed 
to all papers that may require it.
    (b) The Executive Committee shall consist of no fewer than five and 
no more than nine Governors. The Executive Committee shall include the 
Chief Executive Officer of the NASD, at least one Director of NASD 
Regulation, at least one Director of Nasdaq, and at least two Governors 
who are not Directors of NASD Regulation or Nasdaq. The number of 
Directors of the NASD Regulation Board and the number of Directors of 
the Nasdaq Board serving on the Executive Committee shall be equal at 
all times. The Executive Committee shall have a percentage of Non-
Industry committee members at least as great as the percentage of Non-
Industry Governors on the whole Board and a percentage of Public 
committee members at least as great as the percentage of Public 
Governors on the whole Board.
    (c) An Executive Committee member shall hold office for a term of 
one year.
    (d) At all meetings of the Executive Committee, a quorum for the 
transaction of business shall consist of a majority of the Executive 
Committee, including not less than 50 percent of the Non-Industry 
committee members. In the absence of a quorum, a majority of the 
committee members present may adjourn the meeting until a quorum is 
present.

Audit Committee

    Sec. 5. (a) The Board shall appoint an Audit Committee. The Audit 
Committee shall consist of four or five Governors, none of whom shall 
be officers or employees of the Association. A majority of the Audit 
Committee members shall be Non-Industry Governors. The Audit Committee 
shall include two Public Governors. A Public Governor shall serve as 
Chair of the Committee. An Audit Committee member shall hold office for 
a term of one year.
    (b) The Audit Committee shall perform the following functions: (i) 
ensure the existence of adequate controls and the integrity of the 
financial reporting process of the NASD; (ii) recommend to the NASD 
Board, and monitor the independence and performance of, the certified 
public accountants retained as outside auditors by the NASD; and (iii) 
direct and oversee all the activities of the NASD's internal review 
function, including but not limited to management's responses to the 
internal review function.
    (c) No member of the Audit Committee shall participate in the 
consideration or decision of any matter relating to a particular NASD 
member, company, or individual if such Audit Committee member has a 
material interest in, or a professional, business, or personal 
relationship with, that member, company, or individual, or if such 
participation shall create an appearance of impropriety. An Audit 
Committee member shall consult with the General Counsel of the NASD to 
determine if recusal is necessary. If a member of the Audit Committee 
is recused from consideration of a matter, any decision on the matter 
shall be by a vote of a majority of the remaining members of the Audit 
Committee.
    (d) The Audit Committee shall have exclusive authority to: (i) hire 
or terminate the Director of Internal Review; (ii) determine the 
compensation of the Director of Internal Review; and (iii) determine 
the budget for the Office of Internal Review. The Office of Internal 
Review and the Director of Internal Review shall report directly to the 
Audit Committee. The Audit Committee may, in its discretion, direct 
that the Office of Internal Review also report to senior management of 
the NASD on matters the Audit Committee deems appropriate and may 
request that senior NASD management perform such operational oversight 
as necessary and proper, consistent with preservation of the 
independence of the internal review function.
    (e) At all meetings of the Audit Committee, a quorum for the 
transaction of business shall consist of a majority of the Audit 
Committee, including not less than 50 percent of the Non-Industry 
committee members. In the absence of a quorum, a majority of the 
committee members present may adjourn the meeting until a quorum is 
present.

Finance Committee

    Sec. 6(a) The Board may appoint a Finance Committee. The Finance 
Committee shall advise the Board with respect to the oversight of the 
financial operations and conditions of the NASD, including 
recommendations for the NASD's annual operating and capital budgets and 
proposed changes to the rates and fees charged by NASD.
    (b) The Finance Committee shall consist of four or more Governors. 
The Chief Executive Officer of the NASD shall be a member of the 
Finance Committee. The number of Non-Industry committee members shall 
equal or exceed the number of Industry committee members plus the Chief 
Executive Officer of the NASD. A Finance Committee member shall hold 
office for a term of one year.
    (c) At all meetings of the Finance Committee, a quorum for the 
transaction of business shall consist of a majority of the Finance 
Committee, including not less than 50 percent of the Non-Industry 
committee members. In the absence of a quorum, a majority of the 
committee members present may adjourn the meeting until a quorum is 
present.

Article X

Compensation of Board and Committee Members

    [Article VII, Sec. 5.] Sec. 1. The Board may provide for reasonable 
compensation of the [Chairman] Chair of the Board, the Governors, and 
the members of any committee [of the Board from the Corporation]. The 
Board may also provide for reimbursement of reasonable expenses 
incurred by such persons in connection with the business of the 
[Corporation] NASD.
Article [IX] XI
Rules
    Sec. 1. To promote and enforce just and equitable principles of 
trade and business, to maintain high standards of commercial honor and 
integrity among members of the [Corporation] NASD, to prevent 
fraudulent and manipulative acts and practices, to provide safeguards 
against unreasonable profits or unreasonable rates of commissions or 
other charges, to protect investors and the public interest, to 
collaborate with governmental and other agencies in the promotion of 
fair practices and the elimination of fraud, and in general to carry 
out the purposes of the [Corporation] NASD and of the Act, the Board 
[of Governors] is hereby authorized to adopt such [Rules of Fair 
Practice] rules for the members and persons associated with members, 
and

[[Page 53089]]

such amendments thereto as it may, from time to time, deem necessary or 
appropriate. If any such [Rules] rules or amendments thereto are 
approved by the Commission as provided in the Act, they shall become 
effective Rules of the Association as of such date as the Board [of 
Governors] may prescribe. The Board [of Governors] is hereby 
authorized, subject to the provisions of the By-Laws and the Act, to 
administer, enforce, suspend, or cancel any Rules of [Fair Practice] 
the Association adopted hereunder.
Article [X] XII
Disciplinary Proceedings
    Sec. 1. The Board [of Governors] shall have authority to establish 
procedures relating to disciplinary proceedings involving members and 
their associated persons.
    Sec. 2. Except as otherwise permitted under these By-Laws or the 
Act, in any disciplinary proceeding [before the Corporation] under the 
Rules of the Association, any member or person associated with a member 
shall be given the opportunity to have a hearing at which [he] such 
member or person associated with a member shall be entitled to be heard 
in person [and/or by counsel] or by counsel or by a representative as 
provided in the Rules of the Association. Such persons may present any 
relevant material in accordance with the Rules of the Association. In 
any such proceeding against a member or against a person associated 
with a member to determine whether the member [and/or] or the person 
associated with a member shall be disciplined:
    (a) Specific charges shall be brought;
    (b) Such member or person associated with a member shall be 
notified of and be given an opportunity to defend against such charges;
    (c) A record shall be kept; and
    (d) Any determination shall include a statement setting forth:
    [(1)] (i) Any act or practice, in which such member or person 
associated with a member may be found to have engaged or which such 
member or person associated with a member may be found to have omitted;
    [(2)] (ii) The rule, regulation, or statutory provision of which 
any such act or practice, or omission to act, is deemed to be in 
violation;
    [(3)] (iii) The basis upon which any findings are made; and
    [(4)] (iv) The [penalty] sanction imposed.
Article [XI] XIII
Powers of Board to [Prescribe] Impose Sanctions
    Sec. 1. The Board is hereby authorized to [prescribe] impose 
appropriate sanctions applicable to members, including censure, fine, 
suspension, or expulsion from membership, suspension or bar from being 
associated with all members, limitation of activities, functions, and 
operations of a member, or any other fitting sanction, and to 
[prescribe] impose appropriate sanctions applicable to persons 
associated with members, including censure, fine, suspension or barring 
a person associated with a member from being associated with all 
members, limitation of activities, functions, and operations of a 
person associated with a member, or any other fitting sanction, for:
    (a) Breach by a member or a person associated with a member of any 
covenant with the [Corporation] NASD or its members;
    (b) Violation by a member or a person associated with a member of 
any of the terms, conditions, covenants, and provisions of the [rules 
of the Corporation] By-Laws of the NASD, NASD Regulation, or Nasdaq, 
the Rules of the Association, or the federal securities laws, including 
the rules and regulations adopted thereunder, [and including] the rules 
of the Municipal Securities Rulemaking Board, and the rules of the 
Treasury Department;
    (c) Failure by a member or person associated with a member to: (i) 
Submit a dispute for arbitration [under the Code of Arbitration 
Procedure (``Arbitration Code'')] as required by the [Arbitration Code] 
Rules of the Association[,]; [or to fail to] (ii) appear or [to] 
produce any document in [their] the member's or person's possession or 
control as directed pursuant to [provisions of] the [Arbitration Code] 
Rules of the Association[,]; [or to fail to honor] (iii) comply with an 
award of arbitrators properly rendered pursuant to the [Arbitration 
Code] Rules of the Association, where a timely motion [has not been 
made] to vacate or modify such award has not been made pursuant to 
applicable law or where such a motion has been denied; or (iv) comply 
with a written and executed settlement agreement obtained in connection 
with an arbitration or mediation submitted for disposition pursuant to 
the Rules of the Association;
    (d) Refusal by a member or person associated with a member to abide 
by an official ruling of the Board or any committee exercising powers 
assigned by the Board with respect to any transaction which is subject 
to the Uniform Practice Code; or
    (e) Failure by a member or person associated with a member to 
adhere to any ruling, order, direction, or decision of[,] or to pay any 
[penalty,] sanction, fine, or costs[,] imposed by the Board[, or any 
committee exercising powers assigned by the Board] or any entity to 
which the Board has delegated its powers in accordance with the 
Delegation Plan.
    Sec. 2. The Board may delegate its authority under this Article in 
accordance with the Delegation Plan.
Article [XII] XIV
Uniform Practice Code
Authority to Adopt Code
    Sec. 1. The Board [of Governors] is hereby authorized to adopt a 
Uniform Practice Code and amendments, interpretations and explanations 
thereto, designed to make uniform, where practicable, custom, practice, 
usage, and trading technique in the investment banking and securities 
business with respect to such matters as trade terms, deliveries, 
payments, dividends, rights, interest, reclamations, exchange of 
confirmations, stamp taxes, claims, assignments, powers of 
substitution, computation of interest and basis prices, due-bills, 
transfer fees, ``when, as and if issued'' trading, ``when, as and if 
distributed'' trading, marking to the market, and close-out procedure, 
all to the end that the transaction of day-to-day business by members 
may be simplified and facilitated, that business disputes and 
misunderstandings, which arise from uncertainty and lack of uniformity 
in such matters, may be eliminated, and that the mechanisms of a free 
and open market may be improved and impediments thereto removed.
Administration of Code
    Sec. 2. The administration of any Uniform Practice Code, or any 
amendment thereto, adopted by the Board [of Governors] pursuant to 
Section 1 [of this Article], shall be vested in the Board [of 
Governors], and the Board is hereby granted such powers as are 
reasonably necessary to achieve its effective operation. In the 
exercise of such powers, the Board may issue explanations and 
interpretations and make binding rulings with respect to the 
applicability of the provisions of the Uniform Practice Code to 
situations in which there is no substantial disagreement as to the 
facts involved. [The] In accordance with the Delegation Plan, the Board 
may delegate to [appropriate committees such of its

[[Page 53090]]

powers,] the NASD Regulation Board and the Nasdaq Board such of the 
Board's powers hereunder as it deems necessary and appropriate to 
achieve effective administration and operation of the Uniform Practice 
Code.
Transactions Subject to Code
    Sec. 3. All over-the-counter transactions in securities by members, 
except transactions in securities which are exempted under Section 
3(a)(12) of the Act, or are municipal securities as defined in Section 
3(a)(29) of the Act, are subject to the provisions of the Uniform 
Practice Code and to the provisions of Section 2 [of this Article] 
unless exempted therefrom by the terms of the Uniform Practice Code.
Article [XIII] XV Limitation of Powers Prohibitions
    Sec. 1. Under no circumstances shall the Board [of Governors] or 
any officer, employee, or member of the [Corporation] NASD have the 
power to:
    (a) Make any donation or contribution from the funds of the 
[Corporation] NASD or to commit the [Corporation] NASD for the payment 
of any donations or contributions for political or charitable purposes; 
or
    (b) Use the name of the facilities of the [Corporation] NASD in aid 
of any political party or candidate for any public office.
Use of Name of [Corporation] the NASD by Members
    Sec. 2. No member shall use the name of the [Corporation] NASD 
except to the extent that may be [authorized by the Board of Governors] 
permitted by the Rules of the Association.
[Resolution of the Board of Governors
Limitations Upon Use of the Association Name
    Members are permitted, in conformity with Article XVI, Section 2 of 
the Association's By-Laws, and within the limitations prescribed by 
this Resolution, to indicate membership in the Association in the 
following manner:
    1. Solely as a matter of record in recognized trade directories or 
other similar types of business listings.
    2. Solely in conjunction with the identifying use of the firm name 
on letterheads, booklet covers, sales literature headings, in the 
masthead of market letters and on other similar types of circular 
material, so long as this use is exclusively for identification 
purposes, is separate and apart from the regular text of the literature 
and is always in a smaller size type and with lesser emphasis than that 
used for the firm name.
    3. The Association's name may be used in institutional or any other 
type of general print and/or electronic advertising media so long as 
such use is solely and exclusively for identifying the firm as a 
member, used only in proximity to and in conjunction with the firm 
name, carries no implied or specific indication of Association approval 
of the securities or services discussed in the advertisement, is 
separate and apart from the primary text material in the advertisement, 
and is always in a smaller size type and of lesser emphasis than that 
used for the firm name.
    4. The following language may be used on confirmation forms, ``this 
transaction (if over-the-counter) has been executed in conformity with 
the rules and regulations of the Uniform Practice Code of the National 
Association of Securities Dealers, Inc.''
    5. The name of the Association may be used on the door or entrance 
way of a member's principal office or any registered branch office in 
the following manner: ``Member, (of the) National Association of 
Securities Dealers, Inc.''
    6. Each member shall be entitled to receive upon request to the 
Association an appropriate certification of membership which may be 
displayed in the principal office or any registered branch office of 
the member. Such certification shall be and remain the property of the 
Association and shall be returned by a member upon request of the Board 
of Governors or the President of the Association.
    No member or person associated with a member shall use the name of 
the Association in a fraudulent or misleading manner in connection with 
the promotion or sale of any specific security or in connection with 
any other aspect of the member's business; or imply orally, visually or 
in writing that the Association endorses, indemnifies or guarantees any 
member's business practices, selling methods or class or type of 
securities offered.
    Any improper, fraudulent or misleading use of the Association's 
name by a member or person associated with a member shall be deemed 
conduct inconsistent with high standards of commercial honor and just 
and equitable principles of trade in violation of Article III, Section 
1 of the Association's Rules of Fair Practice.]
Unauthorized Expenditures
    Sec. 3. No officer, employee, member of the Board [of Governors] or 
of any committee[,] shall have any power to incur or contract any 
liability on behalf of the [Corporation] NASD not authorized by the 
Board [of Governors]. The Board may delegate to the Chief Executive 
Officer of the [Corporation or his delegate] NASD or the Chief 
Executive Officer's delegate[,] such authority as it deems necessary to 
contract on behalf of the [Corporation] NASD or to satisfy 
unanticipated liabilities during the period between Board meetings.
Conflicts of Interest
    Sec. 4. (a) A Governor or a member of [the Board of Governors or of 
any] a committee [of the Corporation] shall not directly or indirectly 
participate in any adjudication of the interests of any party if such 
[participation would violate the] Governor or committee member has a 
conflict of interest [provisions of the Procedural Rules of the 
Corporation] or bias, or if circumstances otherwise exist where his or 
her fairness might reasonably be questioned. In any such case, the 
Governor or committee member shall recuse himself or herself or shall 
be disqualified in accordance with the Rules of the Association.
    (b) No contract or transaction between the NASD and one or more of 
its Governors or officers, or between the NASD and any other 
corporation, partnership, association, or other organization in which 
one or more of its Governors or officers are directors or officers, or 
have a financial interest, shall be void or voidable solely for this 
reason if: (i) the material facts pertaining to such Governor's or 
officer's relationship or interest and the contract or transaction are 
disclosed or are known to the Board or the committee, and the Board or 
committee in good faith authorizes the contract or transaction by the 
affirmative vote of a majority of the disinterested Governors; or (ii) 
the material facts are disclosed or become known to the Board or 
committee after the contract or transaction is entered into, and the 
Board or committee in good faith ratifies the contract or transaction 
by the affirmative vote of a majority of the disinterested Governors. 
Only disinterested Governors may be counted in determining the presence 
of a quorum at the portion of a meeting of the Board or of a committee 
that authorizes the contract or transaction. This subsection shall not 
apply to any contract or transaction between the NASD and NASD 
Regulation or Nasdaq.
Municipal Securities
    Sec. 5. The provisions of the By-Laws conferring rulemaking 
authority upon the Board [of Governors] shall not be applicable to the 
municipal securities

[[Page 53091]]

activities of members or persons associated with members to the extent 
that the application of such authority would be inconsistent with 
Section 15B of the Act.
[Government Securities
    Sec. 6. The provisions of the By-Laws governing qualifications of 
members and persons associated with members and conferring rulemaking 
authority upon the Board of Governors shall not be applicable to the 
Government securities activities of members or persons associated with 
members to the extent that the application of such provisions or 
authority would be inconsistent with Section 15A(f) of the Act.]
Article [XIV] XVI
Procedure for Adopting Amendments to By-Laws
    Sec. 1. [Any member of the Board of Governors by resolution, any 
District Committee by resolution, or any twenty-five members of the 
Corporation by petition signed by such members,] A Governor or a 
committee appointed by the Board may propose amendments to these By-
Laws. Any 25 members of the NASD by petition signed by such members may 
propose amendments to these By-Laws. Every proposed amendment shall be 
presented in writing to the Board [of Governors], and a record shall be 
kept thereof. The [Board of Governors] Board may adopt any proposed 
amendment to these By-Laws by affirmative vote of a majority of the 
[members of the Board of] Governors then in office. The Board [of 
Governors], upon adoption of any such amendment to these By-Laws, 
except as otherwise provided in these By-Laws, shall forthwith cause a 
copy to be sent to and voted upon by each member of the [Corporation] 
NASD. If such amendment to these By-Laws is approved by a majority of 
the members voting within [thirty (30)] 30 days after the date of 
submission to the membership, and is approved by the Commission as 
provided in the Act, it shall become effective as of such date as the 
Board [of Governors] may prescribe.
Article [XV] XVII
Corporate Seal
    Sec. 1. The corporate seal shall have inscribed thereon the name of 
the [Corporation] NASD, the year of its organization and the words 
``Corporate Seal, Delaware.'' Said seal may be used by causing it or a 
facsimile thereof to be imposed or affixed or reproduced or otherwise.
Article [XVI] XVIII
Checks
    Sec. 1. All checks or demands for money and notes of the 
[Corporation] NASD shall be signed by such officer or officers or such 
other person or persons as the Board [of Governors] may from time to 
time designate.
Article [XVII] XIX
Annual Financial Statement
    Sec. 1. As soon as practicable after the end of each fiscal year, 
the Board [of Governors] shall send to each member of the [Corporation] 
NASD a reasonably itemized statement of receipts and expenditures of 
the [Corporation] NASD for such preceding fiscal year.

Article XX

Record Dates

Fixing of Date by Board

    Sec. 1. In order that the NASD may determine the members entitled 
to notice of or to vote at any meeting of members or any adjournment 
thereof, or to express consent or dissent to corporate action in 
writing without a meeting, or for the purpose of any other lawful 
action, the Board may fix, in advance, a record date, pursuant to 
Section 213 of the General Corporation Law of the State of Delaware. 
Only such members as shall be members of record on the date so fixed 
shall be entitled to notice of and to vote at such meeting or any 
adjournment thereof, or to give such consent or dissent.

Default Date

    Sec. 2. If no record date is fixed by the Board, the record date 
for determining members entitled to notice of or to vote at a meeting 
of members shall be at the close of business on the day next preceding 
the date on which notice is given, or if notice is waived, at the close 
of business on the day next preceding the day on which the meeting is 
held.

Adjournment

    Sec. 3. A determination of members of record entitled to notice of 
or to vote at a meeting of members shall apply to any adjournment of 
the meeting; provided, however, that the Board may fix a new record 
date for the adjourned meeting.

Article XXI

Meetings of Members

Annual Meeting

    Sec. 1. The annual meeting shall be on such date and at such place 
as the Board shall designate. The business of the meeting shall 
include: (a) election of the members of the Board pursuant to Article 
VII, Section 13; and (b) the proposal of business (i) by or at the 
direction of the Chairman of the Board or the Board, or (ii) by any 
member entitled to vote at the meeting who complied with the notice 
procedures set forth in Section 3 and was a member at the time such 
notice was delivered to the Secretary of the NASD.

Special Meetings

    Sec. 2. A special meeting shall be on such date and at such place 
as the Board shall designate. Only such business shall be conducted at 
a special meeting as shall have been brought before the meeting 
pursuant to Section 3(a); provided, however, that in no event shall the 
announcement to the members of an adjournment of a special meeting 
commence a new time period for the giving of notice.

Notice of Meeting; Member Business

    Sec. 3. (a) Notice of each meeting shall be written or printed; 
shall state the date, time, and place of the meeting; shall state the 
purpose or purposes for which the meeting is called; and unless it is 
the annual meeting, indicate that the notice is being issued at the 
direction of the person or persons calling the meeting. The Secretary 
of the NASD shall deliver the notice to the Executive Representative of 
each member entitled to vote not less than 30 days nor more than 60 
days before the date of an annual meeting and not less than ten days 
nor more than 60 days before the date of a special meeting. If mailed, 
the notice shall be deemed to be delivered when deposited with postage 
in the United States mail and addressed to the Executive Representative 
of the member as it appears on the records of the NASD. Such further 
notice shall be given as may be required by law. Meetings may be held 
without notice if all members entitled to vote are present (except as 
otherwise provided by law), or if notice is waived by those not 
present. Any previously scheduled meeting of the members may be 
postponed and any special meeting of the members may be canceled by 
resolution of the Board upon notice given to the members prior to the 
time previously scheduled for the meeting.
    (b) For business other than the election of Governors to be brought 
properly before an annual meeting by a member pursuant to Section 1, 
the member must have given timely notice thereof in writing to the 
Secretary of the NASD and such other business must otherwise be a 
proper matter for member action. To be timely, a member's notice shall 
be delivered to the Secretary at the NASD's principal

[[Page 53092]]

executive offices within 30 days after the date of the notice of the 
meeting. Such member's notice shall set forth a brief description of 
the business desired to be brought before the meeting, any material 
interest of the member in such business, and the reasons for conducting 
such business at the meeting. In no event shall the announcement to the 
members of an adjournment of an annual meeting commence a new time 
period for the giving of a member's notice as described above.
    (c) Except as otherwise provided by applicable law, the Restated 
Certificate of Incorporation, or these By-Laws, the chairman of the 
meeting shall have the power and duty to determine whether any 
nomination or other business proposed to be brought before the meeting 
pursuant to subsection (b) or Article VII, Section 10 was made in 
accordance with the procedures set forth herein and, if any proposed 
nomination or business is not in compliance with these By-Laws, to 
declare that such defective nomination or proposal shall be 
disregarded.

Inspector

    Sec. 4. At each meeting of the members, the polls shall be opened 
and closed, the proxies and ballots received and taken in charge, and 
all questions touching the qualification of voters and the validity of 
proxies and the acceptance or rejection of votes shall be decided by an 
inspector appointed by the Secretary of the NASD before the meeting, or 
in default thereof by the chairman of the meeting. If the inspector 
previously appointed fails to attend or refuses or is unable to serve, 
a substitute shall be appointed by the chairman of the meeting. The 
inspector shall not be a Governor, officer, or employee of the NASD or 
a director, officer, partner, or employee of an NASD subsidiary or 
member.

Conduct of Meetings

    Sec. 5. The chairman of the meeting shall be the Chief Executive 
Officer of the NASD or his or her designee. The date and time of the 
opening and closing of the polls for each matter upon which the members 
will vote at a meeting shall be announced at the meeting by the 
chairman of the meeting. The Board may adopt by resolution such rules 
and regulations for the conduct of the meeting of members as it shall 
deem appropriate. Except to the extent inconsistent with such rules and 
regulations as adopted by the Board, the chairman of the meeting shall 
have the right and authority to prescribe such rules, regulations, and 
procedures and to do all such acts as, in the judgment of the chairman 
of the meeting, are appropriate for the proper conduct of the meeting. 
Such rules, regulations, or procedures, whether adopted by the Board or 
prescribed by the chairman of the meeting, may include, without 
limitation, the following: (a) The establishment of an agenda or order 
of business for the meeting; (b) rules and procedures for maintaining 
order at the meeting and the safety of those present; (c) limitations 
on attendance at or participation in the meeting to members, their duly 
authorized and constituted proxies, or such other persons as the 
chairman of the meeting shall determine; (d) restrictions on entry to 
the meeting after the time fixed for the commencement thereof; and (e) 
limitations on the time allotted to questions or comments by 
participants. Unless and to the extent determined by the Board or the 
chairman of the meeting, meetings of members shall not be required to 
be held in accordance with the rules of parliamentary procedure.
* * * * *
By-Laws of NASD Regulation, Inc.
Article I
Definitions
    When used in these By-Laws, unless the context otherwise requires, 
the term:
    (a) ``Act'' means the Securities Exchange Act of 1934, as amended;
    (b) ``Board'' means the Board of Directors of NASD Regulation;
    (c) ``broker'' means any individual, corporation, partnership, 
association, joint stock company, business trust, unincorporated 
organization, or other legal entity engaged in the business of 
effecting transactions in securities for the account of others, but 
does not include a bank;
    (d) ``Commission'' means the Securities and Exchange Commission;
    (e) ``day'' means calendar day;
    (f) ``dealer'' means any individual, corporation, partnership, 
association, joint stock company, business trust, unincorporated 
organization, or other legal entity engaged in the business of buying 
and selling securities for such individual's or entity's own account, 
through a broker or otherwise, but does not include a bank, or any 
person insofar as such person buys or sells securities for such 
person's own account, either individually or in some fiduciary 
capacity, but not as part of a regular business;
    (g) ``Delaware law'' means the General Corporation Law of the State 
of Delaware;
    (h) ``Delegation Plan'' means the ``Plan of Allocation and 
Delegation of Functions by NASD to Subsidiaries'' as approved by the 
Commission, and as amended from time to time;
    (i) ``Director'' means a member of the Board, excluding the Chief 
Executive Officer of the NASD;
    (j) ``district'' means a district established by the Board pursuant 
to Article VIII, Section 8.1 of these By-Laws;
    (k) ``District Committee'' means a District Committee elected 
pursuant to Article VIII of these By-Laws;
    (l) ``District Director'' means an NASD Regulation staff member who 
heads a district office;
    (m) ``District Nominating Committee'' means a District Nominating 
Committee elected pursuant to Article VIII of these By-Laws;
    (n) ``district office'' means an office of NASD Regulation located 
in a district;
    (o) ``Executive Representative'' means the executive representative 
of an NASD member appointed pursuant to Article IV, Section 3 of the 
NASD By-Laws;
    (p) ``Independent Agent'' means a corporation or entity selected by 
the Secretary of NASD Regulation to assist NASD Regulation with 
nomination and election procedures under Articles VI and VIII of these 
By-Laws and the representatives of such corporation or entity;
    (q) ``Industry Director'' or ``Industry member'' means a Director 
(excluding the President) or a National Adjudicatory Council or 
committee member who (1) is or has served in the prior three years as 
an officer, director, or employee of a broker or dealer, excluding an 
outside director or a director not engaged in the day-to-day management 
of a broker or dealer; (2) is an officer, director, (excluding an 
outside director) or employee of an entity that owns more than ten 
percent of the equity of a broker or dealer, and the broker or dealer 
accounts for more than five percent of the gross revenues received by 
the consolidated entity; (3) owns more than five percent of the equity 
securities of any broker or dealer, whose investments in brokers or 
dealers exceed ten percent of his or her net worth, or whose ownership 
interest otherwise permits him or her to be engaged in the day-to-day 
management of a broker or dealer; (4) provides professional services to 
brokers or dealers, and such services constitute 20 percent or more of 
the professional revenues received by the Director or member or 20 
percent or more of the gross revenues received by the Director's or 
member's firm or partnership; (5) provides professional services to a

[[Page 53093]]

director, officer, or employee of a broker, dealer, or corporation that 
owns 50 percent or more of the voting stock of a broker or dealer, and 
such services relate to the director's, officer's, or employee's 
professional capacity and constitute 20 percent or more of the 
professional revenues received by the Director or member or 20 percent 
or more of the gross revenues received by the Director's or member's 
firm or partnership; or (6) has a consulting or employment relationship 
with or provides professional services to the NASD, NASD Regulation, or 
Nasdaq or has had any such relationship or provided any such services 
at any time within the prior three years;
    (r) ``NASD'' means the National Association of Securities Dealers, 
Inc.;
    (s) ``NASD Board'' means the NASD Board of Governors;
    (t) ``NASD member'' means any broker or dealer admitted to 
membership in the NASD;
    (u) ``NASD Regulation'' means NASD Regulation, Inc.;
    (v) ``National Adjudicatory Council'' means a body appointed 
pursuant to Article V of these By-Laws.
    (w) ``National Nominating Committee'' means the National Nominating 
Committee appointed pursuant to Article VII, Section 9 of the NASD By-
Laws;
    (x) ``Non-Industry Director'' or ``Non-Industry member'' means a 
Director (excluding the President) or a National Adjudicatory Council 
or committee member who is (1) a Public Director or Public member; (2) 
an officer or employee of an issuer of securities listed on Nasdaq or 
traded in the over-the-counter market; or (3) any other individual who 
would not be an Industry Director or Industry member;
    (y) ``person associated with a member'' or ``associated person of a 
member'' means: (1) a natural person registered under the Rules of the 
Association; or (2) a sole proprietor, partner, officer, director, or 
branch manager of a member, or a natural person occupying a similar 
status or performing similar functions, or a natural person engaged in 
the investment banking or securities business who is directly or 
indirectly controlling or controlled by a member, whether or not any 
such person is registered or exempt from registration with the NASD 
under these By-Laws or the Rules of the Association;
    (z) ``Public Director'' or ``Public member'' means a Director or 
National Adjudicatory Council or committee member who has no material 
business relationship with a broker or dealer or the NASD, NASD 
Regulation, or Nasdaq;
    (aa) ``Regional Nominating Committee'' means a Regional Nominating 
Committee that nominates to the National Nominating Committee a 
candidate for the National Adjudicatory Council to represent a 
geographical region as provided in Article VI of these By-Laws; and
    (bb) ``Rules of the Association'' or ``Rules'' means the numbered 
rules set forth in the NASD Manual beginning with the Rule 0100 Series, 
as adopted by the NASD Board pursuant to the NASD By-Laws, as hereafter 
amended or supplemented.
Article [I] II
Offices
Location
    Sec. [1.1] 2.1  The address of the registered office of [the 
Corporation] NASD Regulation in the State of Delaware and the name of 
the registered agent at such address shall be: The Corporation Trust 
Company, 1209 Orange [St.,] Street, Wilmington, [DE] Delaware 19801. 
[The Corporation may] NASD Regulation also may have offices at such 
other places both within and without the State of Delaware as the Board 
[of Directors] may from time to time designate or the business of [the 
Corporation] NASD Regulation may require.
Change of Location
    Sec. [1.2] 2.2  In the manner permitted by law, the Board [of 
Directors] or the registered agent may change the address of [the 
Corporation's] NASD Regulation's registered office in the State of 
Delaware and the Board [of Directors] may make, revoke, or change the 
designation of the registered agent.
Article [II] III
Meetings of the [Stockholders] Stockholder
[Annual Meeting
    Sec. 2.1  The annual meeting of stockholders of the Corporation for 
the election of Directors and for the transaction of such other 
business as may properly come before the meeting shall be held on such 
date, and at such time, and place, within or without the State of 
Delaware, as may be fixed, from time to time, by the Board of 
Directors.]
[Special Meetings
    Sec. 2.2  Special meetings of stockholders of the Corporation, 
unless otherwise prescribed by law, may be called at any time by the 
Chair of the Board, by the President or by order of a majority of the 
Board of Directors. Special meetings of stockholders prescribed by law 
for the election of directors shall be called by the Board of 
Directors, the President, or the Secretary. Special meetings of 
stockholders shall be held at such place within or without the State of 
Delaware as shall be designated in the notice of meeting.]
[Notice of Meetings
    Sec. 2.3(a)  Whenever stockholders are required or permitted to 
take any action at a meeting, they shall be given written notice 
stating the place, date and hour of the meeting, and, in the case of a 
special meeting, the purpose or purposes thereof. Unless otherwise 
required by law, the Certificate of Incorporation or these By-Laws, 
written notice shall be delivered or mailed at least ten but not more 
than sixty days before such meeting date to each stockholder entitled 
to vote at such meeting. If mailed, such notice shall be deposited in 
the United States mail, postage prepaid, directed to each stockholder 
at the address that appears on the records of the Corporation.]
    [(b) When a meeting of stockholders is adjourned to another time or 
place, notice need not be given of the adjourned meeting if the time 
and place thereof are announced at the meeting at which the adjournment 
is taken. At the adjourned meeting, the Corporation may transact any 
business that might have been transacted at the original meeting. If, 
however, the adjournment is for more than thirty days from the date of 
the original meeting, or if, after the adjournment, a new record date 
is set for the adjourned meeting, notice of the adjourned meeting shall 
be given to each stockholder of record entitled to vote at the meeting 
in the manner prescribed above in subsection (a).]
[Quorum
    Sec. 2.4  Except as otherwise provided by law, the Certificate of 
Incorporation or these By-Laws, at each meeting of stockholders the 
presence in person or by proxy of the holders of record of a majority 
of the outstanding shares of capital stock entitled to vote or act at 
such a meeting shall constitute a quorum for the transaction of any 
business. In the absence of a quorum, the stockholders so present may 
by majority rule, adjourn any meeting until a quorum shall be present. 
When a quorum is once present to organize a meeting, the quorum cannot 
be destroyed by the subsequent withdrawal or revocation of the proxy of 
any stockholder.]

[[Page 53094]]

[Voting
    Sec. 2.5(a)  At any meeting of stockholders, each stockholder as of 
the record date is entitled to one vote for each such share of stock 
having voting power, upon the matter in question, except as otherwise 
provided in the Certificate of Incorporation. Each stockholder entitled 
to vote at a meeting of stockholders or to express consent or dissent 
to corporate action in writing without a meeting may authorize another 
person or persons to act for him by proxy, provided that no proxy shall 
be voted or acted upon after three years from its date, unless the 
proxy provides for a longer period. A duly executed proxy shall be 
irrevocable if it states that it is irrevocable and if, and only so 
long as, it is coupled with an interest sufficient in law to support an 
irrevocable power. A stockholder may revoke any proxy that is not 
irrevocable by attending the meeting and voting in person or by filing 
an instrument in writing revoking the proxy or by delivering a proxy in 
accordance with applicable law bearing a later date to the Secretary of 
the Corporation.]
    [(b) Directors of the Corporation shall be elected by a plurality 
of the votes cast at a meeting of stockholders pursuant to Sec. 2.5 of 
these By-Laws. Corporate action other than the election of directors 
shall be authorized by a majority of the votes cast at a meeting of 
stockholders, except as otherwise required by law, the Certificate of 
Incorporation or these By-Laws.]
    [(c) Upon the demand of any stockholder entitled to vote, the 
election of directors or a vote on any other matter at a meeting of 
stockholders shall be by written ballot; otherwise, the method of 
voting and the manner in which votes are counted at such a meeting 
shall be discretionary with the presiding officer of the meeting.]
[Presiding Officer and Secretary
    Sec. 2.6  At every meeting of stockholders, the Chair, or in his/
her absence, the President, or in his/her absence, the appointee of the 
meeting, shall preside. The Secretary, or in his/her absence, the 
appointee of the presiding officer of the meeting, shall act as 
Secretary of the meeting.]
Action by Consent of [Stockholders] Stockholder
    Sec. [2.7]3.1  Any action required[,] or permitted by law to be 
taken at any meeting of the [stockholders] stockholder of [the 
Corporation] NASD Regulation may be taken without a meeting, without 
prior notice and without a vote, if a consent in writing, setting forth 
the action so taken, is signed by the [holders] holder of the 
outstanding stock [having not less than the minimum number of votes 
that would be necessary to authorize or take such action at a meeting 
at which all shares entitled to vote thereon were present and voted. 
Prompt notice of the taking of corporate action without a meeting and 
by less than unanimous written consent shall be given to those 
stockholders who have not consented in writing].
Article [III] IV
Board of Directors
General Powers
    Sec. [3.1]4.1  The property, business, and affairs of [the 
Corporation] NASD Regulation shall be managed by or under the direction 
of the Board [of Directors]. The Board [of Directors] may exercise all 
such powers of [the Corporation] NASD Regulation and have the authority 
to perform all such lawful acts as are permitted by law, the Restated 
Certificate of Incorporation [or], these By-Laws, or the Delegation 
Plan to assist the [National Association of Securities Dealers, Inc.] 
NASD in fulfilling its self-regulatory responsibilities as set forth in 
Section 15A of the [Securities Exchange Act of 1934, and] Act, and to 
support such other initiatives as the Board [of Directors] may deem 
appropriate. To the fullest extent permitted by applicable law, the 
Restated Certificate of Incorporation, and these By-Laws, the Board may 
delegate any of its powers to a committee appointed pursuant to Section 
4.13 or to NASD Regulation staff in a manner not inconsistent with the 
Delegation Plan.
Number of Directors
    Sec. [3.2]4.2  [The Board of Directors of the Corporation shall 
consist of one or more members; the exact number of directors that 
shall constitute the whole Board of Directors shall be fixed from time 
to time by resolution adopted by the whole Board of Directors. After 
fixing the number of directors constituting the whole Board of 
Directors, the Board of Directors may, by resolution adopted by the 
whole Board of Directors, from time to time change the number of 
directors constituting the whole Board of Directors; provided that such 
determination shall be consistent with the Plan of Allocation and 
Delegation of Functions by NASD to Subsidiaries (the ``Delegation 
Plan'').] The Board shall consist of no fewer than five and no more 
than eight Directors, the exact number to be determined by resolution 
adopted by the stockholder of NASD Regulation from time to time. 
Notwithstanding the preceding sentence, the number of Directors shall 
equal the number of directors on the Nasdaq Board. Any new Director 
position created as a result of an increase in the size of the Board 
shall be filled as part of the annual election conducted under Section 
4.4. 
Qualifications
    Sec. [3.3]4.3  (a)  Directors need not be stockholders of [the 
Corporation. The Board of Directors shall include at all times the 
President of the Corporation and such Industry, Non-Industry, and 
Public Governors as shall be determined from time to time by the Board 
of Directors, which determination shall be consistent with the 
Delegation Plan. The criteria for the categories of Industry, Non-
Industry, and Public Directors, as used herein, shall be established by 
the Board of Directors from time to time, which criteria shall be 
consistent with the Delegation Plan.] NASD Regulation. Only Governors 
of the NASD Board shall be eligible for election to the Board. The 
number of Non-Industry Directors shall equal or exceed the number of 
Industry Directors plus the President. The Board shall include the 
President and the National Adjudicatory Council Chair, representatives 
of an issuer of investment company shares or an affiliate of such an 
issuer, and an insurance company or an affiliated NASD member. The 
Board shall include at least one Public Director, unless the Board 
consists of eight Directors. In such case, at least two Directors shall 
be Public Directors. The Chief Executive Officer of the NASD shall be 
an ex-officio non-voting member of the Board. 
    (b) As soon as practicable, following the annual election of 
Directors, the Board shall elect from its members a Chair and a Vice 
Chair and such other persons having such titles as it shall deem 
necessary or advisable to serve until the next annual election or until 
their successors are chosen and qualify. The persons so elected shall 
have such powers and duties as may be determined from time to time by 
the Board. The Board, by resolution adopted by a majority of Directors 
then in office, may remove any such person from such position at any 
time. 
Election
    Sec. [3.4]4.4  Except as otherwise provided by law [or], these By-
Laws, or the Delegation Plan, after the first meeting of [the 
Corporation] NASD Regulation at which [directors] Directors are 
elected, [directors of the Corporation] Directors of NASD

[[Page 53095]]

Regulation shall be elected each year at the annual meeting of 
[stockholders] the stockholder, or at a special meeting called for such 
purpose in lieu of the annual meeting [, by a plurality of the votes 
cast at such meeting]. If the annual election of [directors] Directors 
is not held on the date designated [therefore,] therefor, the 
[directors] Directors shall cause such election to be held as soon 
thereafter as convenient.
[Term
    Sec. 3.5  (a)  Each Director shall hold office for a term of three 
years or until his successor is duly elected and qualified, except in 
the event of earlier termination from office by reason of death, 
resignation, removal with or without cause, or other reason.]
    [(b) The Board of Directors shall be divided into three classes.]
    [(c) The President of the Corporation shall serve as a member of 
the Board until his successor is selected and qualified, or until his 
death, resignation, or removal.]
    [(d) Except for the President, no Director may serve more than two 
consecutive terms; provided, however, that if a Director is appointed 
to fill a term of less than one year, such Director may serve up to two 
consecutive terms following the expiration of such Director's current 
term.]
    [(e) Each director chosen to fill a newly created directorship 
shall serve until the next succeeding annual meeting of stockholders.]
Resignation
    Sec. [3.6] 4.5  Any [director] Director may resign at any time 
either upon written notice of resignation to the Chair of the Board, 
the President, or the Secretary. Any such resignation shall take effect 
at the time specified therein or, if the time [be] is not specified, 
upon receipt thereof, and the acceptance of such resignation, unless 
required by the terms thereof, shall not be necessary to make such 
resignation effective.
Removal
    Sec. [3.7] 4.6  Any or all of the [directors] Directors may be 
removed from office at any time, with or without cause, [by the 
stockholders] only by a majority vote of the NASD Board.
Disqualification
    Sec. 4.7  The term of office of a Director shall terminate 
immediately upon a determination by the Board, by a majority vote of 
the remaining Directors, that: (a) the Director no longer satisfies the 
classification (Industry, Non-Industry, or Public Director) for which 
the Director was elected; and (b) the Director's continued service as 
such would violate the compositional requirements of the Board set 
forth in Section 4.3. If the term of office of a Director terminates 
under this Section, and the remaining term of office of such Director 
at the time of termination is not more than six months, during the 
period of vacancy the Board shall not be deemed to be in violation of 
Section 4.3 by virtue of such vacancy.
Filling of Vacancies
    Sec. 4.8  If a Director position becomes vacant, whether because of 
death, disability, disqualification, removal, or resignation, the 
National Nominating Committee shall nominate, and the NASD Board shall 
elect by majority vote, a person satisfying the classification 
(Industry, Non-Industry, or Public Director) for the directorship as 
provided in Section 4.3 to fill such vacancy, except that if the 
remaining term of office for the vacant Director position is not more 
than six months, no replacement shall be required.
Quorum and Voting
    Sec. [3.8]4.9(a)  At all meetings of the Board [of Directors, one-
third of the total number of directors shall constitute], unless 
otherwise set forth in these By-Laws or required by law, a quorum for 
the transaction of business shall consist of a majority of the Board, 
including not less than 50 percent of the Non-Industry Directors. In 
the absence of a quorum, a majority of the [directors] Directors 
present may adjourn the meeting until a quorum [be] is present.
    (b) [A director interested in a matter to be acted upon by the 
Board of Directors may be counted in determining the presence of a 
quorum at a meeting of the Board of Directors that determines the 
Corporation's action.]
    [(c) Subject to the restrictions of Section 3.12] Except as 
provided in Section 4.14(b), the vote of a majority of the [directors] 
Directors present at a meeting at which a quorum is present shall be 
the act of the Board [of Directors].
Regulation
    Sec. [3.9]4.10  The Board [of Directors] may adopt such rules, 
regulations, and requirements for the conduct of the business and 
management of [the Corporation,] NASD Regulation not inconsistent with 
the law, the Restated Certificate of Incorporation, these By-Laws, [or 
the rules and By-Laws of the National Association of Securities 
Dealers, Inc., as the Board of Directors may deem proper. A member of 
the Board of Directors] the Rules of the Association, or the By-Laws of 
the NASD, as the Board may deem proper. A Director shall, in the 
performance of [his or her] such Director's duties, be fully protected 
in relying in good faith upon the books of account or reports made to 
[the Corporation] NASD Regulation by any of its officers, [or] by an 
independent certified public accountant, [or] by an appraiser selected 
with reasonable care by the Board [of Directors] or any committee of 
the Board [of Directors] or by any agent of [the Corporation] NASD 
Regulation, or in relying in good faith upon other records of [the 
Corporation] NASD Regulation.
Meetings
    Sec. [3.10]4.11(a)  An annual meeting of the Board [of Directors] 
shall be held for the purpose of organization, election of officers, 
and transaction of any other business. If such meeting is held promptly 
after and at the place specified for the annual meeting of 
[stockholders] the stockholder, no notice of the annual meeting of the 
Board [of Directors] need be given. Otherwise, such annual meeting 
shall be held at such time and place as may be specified in a notice 
given in accordance with Section [3.11 of these By-Laws] 4.12.
    (b) Regular meetings of the Board [of Directors] may be held at 
such time and place, within or without the State of Delaware, as 
determined from time to time by the Board [of Directors]. After such 
determination has been made, notice shall be given in accordance with 
Section [3.11 of these By-Laws] 4.12.
    (c) Special meetings of the Board [of Directors] may be called by 
the Chair of the Board, [or] by the President, or by at least one-third 
of the [directors at that time being] Directors then in office. Notice 
of any special meeting of the Board [of Directors] shall be given to 
each [director] Director in accordance with Section [3.11 of these By-
Laws] 4.12.
    (d) [Members of the Board of Directors, or any committee designated 
by the Board of Directors,] A Director or member of any committee 
appointed by the Board may participate in a meeting of the Board [of 
Directors] or of such committee through the use of a conference 
telephone or similar communications [facilities that ensure] equipment 
by means of which all persons participating in the meeting may hear one 
another, and such participation in a meeting shall constitute presence 
in person at such meeting for all purposes.
Notice of Meetings; Waiver of Notice
    Sec. [3.11]4.12(a)  Notice of any meeting of the Board [of 
Directors] shall

[[Page 53096]]

be deemed to be duly given to a [director] Director if: (i) [if] mailed 
to the address last made known in writing to [the Corporation] NASD 
Regulation by such [director] Director as the address to which such 
notices are to be sent, at least [two] seven days before the day on 
which such [special] meeting is to be held[, or]; (ii) [if] sent to the 
[director] Director at such address by telegraph, telefax, cable, 
radio, or wireless, not later than the day before the day on which such 
meeting is to be held[,]; or (iii) [if] delivered to the [director] 
Director personally or orally, by telephone or otherwise, not later 
than the day before the day on which such [special] meeting is to be 
held. Each notice shall state the time and place of the meeting and the 
purpose(s) thereof.
    (b) Notice of any meeting of the Board [of Directors] need not be 
given to any [director] Director if waived by that [director] Director 
in writing (or by telegram, telefax, cable, radio, or wireless and 
subsequently confirmed in writing) whether before or after the holding 
of such meeting, or if such [director] Director is present at such 
meeting, subject to [Section 7.3(b) hereof] Article XII, Section 
12.3(b).
    (c) Any meeting of the Board shall be a legal meeting without any 
prior notice if all Directors then in office shall be present thereat.
Committees [of the Board of Directors]
    Sec. [3.13]4.13(a)  The Board [of Directors] may, by resolution or 
resolutions adopted by a majority of the whole Board [of Directors, 
designate], appoint one or more committees[, each committee to consist 
of one or more directors of the Corporation]. Except as herein 
provided, vacancies in membership of any committee shall be filled by 
the vote of a majority of the whole Board [of Directors]. The Board [of 
Directors] may designate one or more [directors] Directors as alternate 
members of any committee, who may replace any absent or disqualified 
member at any meeting of the committee. In the absence or 
disqualification of any member of a committee, the member or members 
thereof present at any meeting and not disqualified from voting, 
whether or not [he, she,] such member or [they] members constitute a 
quorum, may unanimously appoint another [member of the Board of 
Directors] Director to act at the meeting in the place of any such 
absent or disqualified member. Members of a committee shall hold office 
for such period as may be fixed by a resolution adopted by a majority 
of the whole Board [of Directors, subject, however, to removal, with or 
without cause, at any time by the vote of a majority of the whole Board 
of Directors]. Any member of a committee may be removed from such 
committee only after a majority vote of the whole Board, after 
appropriate notice, for refusal, failure, neglect, or inability to 
discharge such member's duties.
    (b) [Any committee, to the extent permitted by law and to the 
extent provided in the] The Board may, by resolution or resolutions 
[creating such committee, shall have and may exercise all the powers 
and authority of the Board of Directors] adopted by a majority of the 
whole Board, delegate to one or more committees the power and authority 
to act on behalf of the Board in carrying out the functions and 
authority delegated to NASD Regulation by the NASD under the Delegation 
Plan. Such delegations shall be in conformance with applicable law, the 
Restated Certificate of Incorporation, these By-Laws, and the 
Delegation Plan. Action taken by a committee pursuant to such delegated 
authority shall be subject to review, ratification, or rejection by the 
Board. In all other matters, the Board may, by resolution or 
resolutions adopted by a majority of the whole Board, delegate to one 
or more committees that consist solely of one or more Directors the 
power and authority to act on behalf of the Board in the management of 
the business and affairs of [the Corporation, and] NASD Regulation to 
the extent permitted by law and not inconsistent with the Delegation 
Plan. A committee, to the extent permitted by law and provided in the 
resolution or resolutions creating such committee, may authorize the 
seal of [the Corporation] NASD Regulation to be affixed to all papers 
that may require it.
    (c) Except as otherwise permitted by applicable law, no [such] 
committee shall have the power or authority of the Board with regard 
to: amending the Restated Certificate of Incorporation or the By-Laws 
of [the Corporation,] NASD Regulation; adopting an agreement of merger 
or consolidation; recommending to the [stockholders] stockholder the 
sale, lease, or exchange of all or substantially all [the 
Corporation's] NASD Regulation's property and assets; or recommending 
to the [stockholders] stockholder a dissolution of [the Corporation] 
NASD Regulation or a revocation of a dissolution. Unless the resolution 
of the Board [of Directors] expressly so provides, no [such] committee 
shall have the power or authority to authorize the issuance of stock.
    [(c)] (d) Each committee may adopt its own rules of procedure and 
may meet at stated times or on such notice as such committee may 
determine. Each committee shall keep regular minutes of its proceedings 
and report the same to the Board [of Directors] when required.
    [(d)] (e) Unless otherwise provided by [the Board of Directors] 
these By-Laws, a majority of [any such] a committee shall constitute a 
quorum for the transaction of business, and the vote of a majority of 
the members of such committee present at a meeting at which a quorum is 
present shall be an act of such committee.
    (f) The Board may appoint an Executive Committee, which shall, to 
the fullest extent permitted by Delaware law and other applicable law, 
have and be permitted to exercise all the powers and authority of the 
Board in the management of the business and affairs of NASD Regulation 
between meetings of the Board, and which may authorize the seal of NASD 
Regulation to be affixed to all papers that may require it. The 
Executive Committee shall consist of three or four Directors, including 
at least one Public Director. The President of NASD Regulation shall be 
a member of the Executive Committee. The number of Non-Industry 
committee members shall equal or exceed the number of Industry 
committee members plus the President. An Executive Committee member 
shall hold office for a term of one year. At all meetings of the 
Executive Committee, a quorum for the transaction of business shall 
consist of a majority of the Executive Committee, including not less 
than 50 percent of the Non-Industry committee members. In the absence 
of a quorum, a majority of the committee members present may adjourn 
the meeting until a quorum is present.
    (g) The Board may appoint a Finance Committee. The Finance 
Committee shall advise the Board with respect to the oversight of the 
financial operations and conditions of NASD Regulation, including 
recommendations for NASD Regulation's annual operating and capital 
budgets and proposed changes to the rates and fees charged by NASD 
Regulation. The Finance Committee shall consist of three or four 
Directors. The President of NASD Regulation shall serve as a member of 
the Committee. A Finance Committee member shall hold office for a term 
of one year.
    (h) Upon request of the Secretary of NASD Regulation, each 
prospective committee member who is not a Director shall provide to the 
Secretary such information as is reasonably necessary to serve as the 
basis for a determination of the prospective committee member's 
classification as an Industry, Non-Industry, or Public

[[Page 53097]]

committee member. The Secretary of NASD Regulation shall certify to the 
Board each prospective committee member's classification. Such 
committee members shall update the information submitted under this 
Section at least annually and upon request of the Secretary of NASD 
Regulation, and shall report immediately to the Secretary any change in 
such classification.
Conflicts of Interest; Contracts and Transactions Involving Directors
    Sec. [3.12] 4.14 (a)  [No member of the Board of Directors or of 
any committee of the Corporation shall] A Director or a National 
Adjudicatory Council or committee member shall not directly or 
indirectly participate in any adjudication of the interests of any 
party [that would at the same time substantially affect his interest or 
the interests of any person in whom he is directly or indirectly 
interested] if that Director or National Adjudicatory Council or 
committee member has a conflict of interest or bias, or if 
circumstances otherwise exist where his or her fairness might 
reasonably be questioned. In any such case, the [member shall 
disqualify himself or shall be disqualified by the Chairman of the 
Board or Committee] Director or National Adjudicatory Council or 
committee member shall recuse himself or herself or shall be 
disqualified in accordance with the Rules of the Association.
    (b) No contract or transaction between [the Corporation] NASD 
Regulation and one or more of its [directors] Directors or officers, or 
between [the Corporation] NASD Regulation and any other corporation, 
partnership, association, or other organization in which one or more of 
its [directors] Directors or officers are directors or officers, or 
have a financial interest, shall be void or voidable solely for this 
reason[, or solely because the director or officer is present at or 
participates in the meeting of the Board of Directors or the committee 
thereof which] if: (i) The material facts pertaining to such Director's 
or officer's relationship or interest and the contract or transaction 
are disclosed or are known to the Board or the committee, and the Board 
or committee in good faith authorizes the contract or transaction[, or 
solely because his, her, or their votes are counted for such purposes 
if: (i) The material facts pertaining to such director's or officer's 
relationship or interest and] by the affirmative vote of a majority of 
the disinterested Directors; (ii) the material facts are disclosed or 
become known to the Board or committee after the contract or 
transaction [are disclosed or are known to the Board of Directors or 
the committee, and the Board] is entered into, and the Board or 
committee in good faith [authorizes] ratifies the contract or 
transaction by the affirmative vote of a majority of the disinterested 
[directors, even though the disinterested directors be less than a 
quorum; or (ii)] Directors; or (iii) the material facts pertaining to 
the [director's] Director's or officer's relationship or interest and 
the contract or transaction are disclosed or are known to the 
[stockholders] stockholder entitled to vote thereon, and the contract 
or transaction is specifically approved in good faith by vote of the 
[stockholders; or (iii) the contract or transaction is fair as to the 
Corporation as of the time it is authorized, approved or ratified by 
the Board of Directors, a committee thereof, or the stockholders. 
Common or interested directors] stockholder. Only disinterested 
Directors may be counted in determining the presence of a quorum at the 
portion of a meeting of the Board [of Directors,] or of a committee 
that authorizes the contract or transaction. This subsection shall not 
apply to a contract or transaction between NASD Regulation and the NASD 
or Nasdaq.
Action Without Meeting
    Sec. [3.14]4.15  Any action required or permitted to be taken at 
[any] a meeting of the Board [of Directors or any] or of a committee 
[thereof] may be taken without a meeting if all Directors or all 
members of [the Board of Directors or] such committee, as the case may 
be, consent thereto in writing, and the writing or writings are filed 
with the minutes of proceedings of the Board [of Directors or such] or 
the committee.
Communication of Views Regarding Contested Election or Nomination
    Sec. 4.16  NASD Regulation, the Board, any committee, the National 
Adjudicatory Council, and NASD Regulation staff shall not take any 
position publicly or with an NASD member or person associated with or 
employed by a member with respect to any candidate in a contested 
election or nomination held pursuant to these By-Laws or the NASD By-
Laws. A Director, committee member, or National Adjudicatory Council 
member may communicate his or her views with respect to a candidate if 
such individual acts solely in his or her individual capacity and 
disclaims any intention to communicate in any official capacity on 
behalf of NASD Regulation, the Board, the National Adjudicatory 
Council, or any committee. NASD Regulation, the Board, the National 
Adjudicatory Council, any committee, and the NASD Regulation staff 
shall not provide any administrative support to any candidate in a 
contested election or nomination conducted pursuant to these By-Laws or 
the NASD By-Laws.
[Article V Indemnification
Indemnification of Directors, Officers, Employees and Agents Right to 
Indemnification
    Sec. 5.1  The corporation shall indemnify and hold harmless, to the 
fullest extent permitted by applicable law as it presently exists or 
may hereafter be amended, any person who was or is made or is 
threatened to be made a party or is otherwise involved in any action, 
suit or proceeding, whether civil, criminal, administrative or 
investigative (a ``proceeding''), by reason of the fact that he, or a 
person for whom he is the legal representative, is or was a director, 
officer, employee, or agent of the corporation or is or was serving at 
the request of the corporation as a director, officer, employee, or 
agent of another corporation or of a partnership, joint venture, trust, 
enterprise or nonprofit entity, including service with respect to 
employee benefit plans (an ``indemnitee''), against all liability and 
loss suffered and expenses (including attorneys' fees) reasonably 
incurred by such indemnitee, notwithstanding the foregoing, but subject 
to Section 5.3 hereof, the corporation shall be required to indemnify 
an indemnitee in connection with a proceeding (or part thereof) 
initiated by such indemnitee only if the initiation of such proceeding 
(or part thereof) by the indemnitee was authorized by the Board of 
Directors.]
[Payment of Expenses
    Sec. 5.2  The corporation shall pay the expenses (including 
attorneys' fees) incurred by the persons set forth in Section 5.1 in 
defending any proceeding in advance of its final disposition, provided, 
however, that the payment of expenses incurred by such person in 
advance of the final disposition of the proceeding shall be made only 
upon receipt of an undertaking by that person to repay all amounts 
advanced if it should be ultimately determined that the person is not 
entitled to be indemnified under this Article or otherwise.]
[Nonexclusivity of Rights
    Sec. 5.3  The rights conferred on any person by this Article shall 
not be exclusive of any other rights which such person may have or 
hereafter acquire under any statute, provision of the

[[Page 53098]]

Certificate of Incorporation, these By-Laws, agreement, vote of 
stockholders or disinterested directors or otherwise.]
[Other Indemnification
    Sec. 5.4  The corporation's obligation, if any, to indemnify or 
advance expenses to any person who was or is serving at its request as 
a director, officer, employee or agent of another corporation, 
partnership, joint venture, trust, enterprise or nonprofit entity shall 
be reduced by any amount such person may collect as indemnification or 
advancement from such other corporation, partnership, joint venture, 
trust, enterprise or nonprofit entity.]
[Amendment or Repeal
    Sec. 5.5  Any repeal or modification of the foregoing provisions of 
this Article shall not adversely affect any right or protection 
hereunder of any person in respect of any act or omission occurring 
prior to the time of such repeal or modification.]
[Indemnification Insurance
    Sec. 5.6  The Corporation shall have power to purchase and maintain 
insurance on behalf of any person who is or was a director, officer, 
employee or agent of the Corporation, or is or was serving at the 
request of the Corporation as a director, officer, employee or agent of 
another corporation, partnership, joint venture, trust, enterprise, or 
nonprofit entity against any liability asserted against him and 
incurred by him in any such capacity, or arising out of his status as 
such, whether or not the Corporation would have the power to indemnify 
him against such liability under the provisions of this section.]
Article V National Adjudicatory Council
Appointment and Authority
    Sec. 5.1  The Board shall appoint a National Adjudicatory Council. 
The National Adjudicatory Council may be authorized to act for the 
Board in a manner consistent with these By-Laws, the Rules of the 
Association, and the Delegation Plan with respect to an appeal or 
review of a disciplinary proceeding, a statutory disqualification 
proceeding, or a membership proceeding; a review of an offer of 
settlement, a letter of acceptance, waiver, and consent, and a minor 
rule violation plan letter; the exercise of exemptive authority; and 
such other proceedings or actions authorized by the Rules of the 
Association. The National Adjudicatory Council also shall consider and 
make recommendations to the Board on policy and rule changes relating 
to the business and sales practices of NASD members and associated 
persons and enforcement policies, including policies with respect to 
fines and other sanctions. The Board may delegate such other powers and 
duties to the National Adjudicatory Council as the Board deems 
appropriate in a manner not inconsistent with the Delegation Plan.
Number of Members and Qualifications
    Sec. 5.2 (a)  The National Adjudicatory Council shall consist of no 
fewer than 12 and no more than 14 members. The number of Non-Industry 
members, including at least three Public members, shall equal or exceed 
the number of Industry members. In 1999 and thereafter, the Industry 
members shall represent a geographic region designated by the Board 
under Article VI, Section 6.1.
    (b) As soon as practicable following the appointment of members, 
the National Adjudicatory Council shall elect a Chair and a Vice Chair 
from among its members. The Chair and Vice Chair shall have such powers 
and duties as may be determined from time to time by the National 
Adjudicatory Council. The Chair also shall serve as a Director of the 
NASD Regulation Board and a Governor of the NASD Board for a one-year 
term as provided in the By-Laws and Restated Certificate of 
Incorporation of the NASD and these By-Laws. The Board, by resolution 
adopted by a majority of Directors then in office and after notice to 
the NASD Board, may remove the Chair or Vice Chair from such position 
at any time for refusal, failure, neglect, or inability to discharge 
his or her duties.
Nomination Process
    Sec. 5.3 (a)  Each Regional Nominating Committee shall nominate an 
Industry member for consideration by the National Nominating Committee 
as provided in Article VI and subsection (b) of this Section.
    (b) The Secretary of NASD Regulation shall collect from each 
nominee for the office of member of the National Adjudicatory Council 
such information as is reasonably necessary to serve as the basis for a 
determination of the nominee's classification as an Industry, Non-
Industry, or Public member, and the Secretary shall certify to the 
National Nominating Committee each nominee's classification. After 
appointment to the National Adjudicatory Council, each member shall 
update such information at least annually and upon request of the 
Secretary, and shall report immediately to the Secretary any change in 
such classification.
Term of Office
    Sec. 5.4 (a) Except as otherwise provided in this Article, each 
National Adjudicatory Council member shall hold office for a term of 
two years or until a successor is duly appointed and qualified, except 
in the event of earlier termination from office by reason of death, 
resignation, removal, disqualification, or other reason.
    (b) In 1998, each National Adjudicatory Council member shall hold 
office for a term of one year or until a successor is duly appointed 
and qualified, except in the event of earlier termination from office 
by reason of death, resignation, removal, disqualification, or other 
reason.
    (c) Beginning in January 1999 and thereafter, the National 
Adjudicatory Council shall be divided into two classes. The term of 
office of those of the first class shall expire in January 2000, and 
the term of office of those of the second class shall expire one year 
thereafter. Beginning in January 2000, members shall be appointed for 
term of two years to replace those whose terms expire.
    (d) Beginning in 2000, no member may serve more than two 
consecutive terms, except that if a member is appointed to fill a term 
of less than one year, such member may serve up to two consecutive 
terms following the expiration of such member's initial term.
Resignation
    Sec. 5.5  A member of the National Adjudicatory Council may resign 
at any time upon written notice to the Board. Any such resignation 
shall take effect at the time specified therein, or if the time is not 
specified, upon receipt thereof, and the acceptance of such 
resignation, unless required by the terms thereof, shall not be 
necessary to make such resignation effective.
Removal
    Sec. 5.6  Any or all of the members of the National Adjudicatory 
Council may be removed from office at any time for refusal, failure, 
neglect, or inability to discharge the duties of such office by 
majority vote of the Board.
Disqualification
    Sec. 5.7  Notwithstanding Section 5.4, the term of office of a 
National Adjudicatory Council member shall terminate immediately upon a 
determination by the Board, by a majority vote, that: (a) the member no 
longer satisfies the classification (Industry, Non-Industry, or Public 
member) for which the member was elected; and (b) the member's 
continued

[[Page 53099]]

service as such would violate the compositional requirements of the 
National Adjudicatory Council set forth in Section 5.2. If the term of 
office of a National Adjudicatory Council member terminates under this 
Section, and the remaining term of office of such member at the time of 
termination is not more than six months, during the period of vacancy 
the National Adjudicatory Council shall not be deemed to be in 
violation of Section 5.2 by virtue of such vacancy.
Filling of Vacancies
    Sec. 5.8  If a position on the National Adjudicatory Council 
becomes vacant, whether because of death, disability, disqualification, 
removal, or resignation, the National Nominating Committee shall 
nominate, and the Board shall appoint a person satisfying the 
classification (Industry, Non-Industry, or Public member) for the 
position as provided in Section 5.2(a) to fill such vacancy, except 
that if the remaining term of office for the vacant position is not 
more than six months, no replacement shall be required.
Quorum and Voting
    Sec. 5.9  At all meetings of the National Adjudicatory Council, a 
quorum for the transaction of business shall consist of a majority of 
the National Adjudicatory Council, including not less than 50 percent 
of the Non-Industry members. In the absence of a quorum, a majority of 
the members present may adjourn the meeting until a quorum is present.
Meetings
    Sec. 5.10  The members of the National Adjudicatory Council may 
participate in a meeting through the use of a conference telephone or 
similar communications equipment by means of which all persons 
participating in the meeting may hear one another, and such 
participation in a meeting shall constitute presence in person at such 
meeting for all purposes.

Article VI

National Adjudicatory Council Regional Nominations for Industry Members

Establishment of Regions

    Sec. 6.1  The Board shall establish boundaries for geographical 
regions within the United States for the purpose of nominating 
candidates for membership on the National Adjudicatory Council to the 
National Nominating Committee. The Board may make changes from time to 
time in the number or boundaries of the regions as the Board deems 
necessary or appropriate in accordance with Article V, Section 5.2(a). 
The Board shall prescribe such policies and procedures as are necessary 
or appropriate to address the implementation of a new region 
configuration in the event of a change in the number or boundaries of 
the regions.

Composition

    Sec. 6.2 (a)  A Regional Nominating Committee shall be elected for 
each region designated by the Board under Section 6.1. Each District 
Nominating Committee for a district located in the region shall elect 
two District Committee members from the district to serve on the 
Regional Nominating Committee. If a region shall consist of one 
district, the District Nominating Committee for the district shall 
elect four District Committee members from the district to serve on the 
Regional Nominating Committee.
    (b) In the event of the refusal, failure, neglect, or inability of 
a member of a Regional Nominating Committee to discharge his or her 
duties, the Regional Nominating Committee may remove the member by the 
affirmative vote of two-thirds of the members of the Regional 
Nominating Committee then in office and declare the member's position 
vacant. The Regional Nominating Committee shall notify the Regional 
Nominating Committee member of his or her removal within seven days 
after the vote. The member's position shall be filled pursuant to 
Section 6.4. A member who is removed may submit a written appeal of the 
removal to the Board within 30 days after the date he or she is 
notified in writing of the removal. The Board may affirm, reverse, or 
modify the determination of the Regional Nominating Committee. A vote 
of a majority of the Directors then in office shall be required to 
reverse or modify the action of the Regional Nominating Committee.

Term of Office

    Sec. 6.3  Each regularly elected member of a Regional Nominating 
Committee shall hold office for a term of two years, or until a 
successor is elected and qualified, or until death, resignation, or 
removal. A member of a Regional Nominating Committee may not serve more 
than three consecutive terms.

Filling of Vacancies

    Sec. 6.4  In the event of a vacancy on a Regional Nominating 
Committee caused by the departure of a member prior to the expiration 
of the member's term of office, the District Nominating Committee that 
elected the member shall appoint by majority vote another member of the 
District Committee to fill the vacancy. The appointment shall be 
effective until the next regularly scheduled election occurs pursuant 
to this Article.

Meetings

    Sec. 6.5  Meetings of a Regional Nominating Committee shall be held 
at such times and places, upon such notice, and in accordance with such 
procedures as each Regional Nominating Committee in its discretion may 
determine. A quorum of a Regional Nominating Committee shall consist of 
a majority of its members, and any action taken by a majority vote at 
any meeting at which a quorum is present, except as otherwise provided 
in these By-Laws, shall constitute the action of the Committee. Action 
by a Regional Nominating Committee may be taken by mail, telephonic, or 
telegraphic vote, in which case any action taken by a majority of the 
Committee shall constitute the action of the Committee. Action taken by 
telephonic vote shall be confirmed in writing at a regular meeting of 
the Regional Nominating Committee.

Election of Officers

    Sec. 6.6  Following the annual election of members of the Regional 
Nominating Committees pursuant to this Article, each Regional 
Nominating Committee shall elect from its members a Chair and such 
other officers as it deems necessary for the proper performance of its 
duties under these By-Laws.

Expenses

    Sec. 6.7  Funds to meet the regular expenses of each Regional 
Nominating Committee shall be provided by the Board, and all such 
expenses shall be subject to the approval of the Board.

Notice to Chair

    Sec. 6.8  On or before August 1, 1998, the Secretary of NASD 
Regulation shall send a written notice to the Chair of each Regional 
Nominating Committee to initiate the process for nominating an 
individual to represent the region on the National Adjudicatory Council 
for a term of office of one or two years, as determined by the Board, 
beginning in 1999. On or before August 1, 1999, and annually 
thereafter, the Secretary of NASD Regulation shall send a written 
notice to the chair of a Regional Nominating Committee if the term of 
office of the National Adjudicatory council member representing the 
region shall expire in the next calendar year. The notice shall 
describe the

[[Page 53100]]

nomination procedures for filling the office.

Solicitation of Candidates

    Sec. 6.9  NASD Regulation staff shall provide the Regional 
Nominating Committee with a description of the NASD membership in the 
region. The Regional Nominating Committee shall identify and solicit 
candidates to nominate to the National Nominating Committee for the 
office of National Adjudicatory Council member. The Regional Nominating 
Committee Chair shall send a written notice of the upcoming nomination 
to the Executive Representative and each branch office of the NASD 
members in the region and request that such NASD members submit names 
of candidates to the Regional Nominating Committee or the Secretary of 
NASD Regulation for consideration.

Secretary's Notice to NASD Members

    Sec. 6.10  The Secretary of NASD Regulation shall send a written 
notice to NASD members in the region describing the nomination 
procedures.

Regional Nominating Committee Candidate

    Sec. 6.11  The Regional Nominating Committee shall review the 
background of the candidates and the description of the NASD membership 
provided by NASD Regulation staff and shall propose one or more 
candidates for nomination to the National Nominating Committee. In 
proposing a candidate for nomination, the Regional Nominating Committee 
shall endeavor to secure appropriate and fair representation of the 
region.

Notice of Regional Nominating Committee Candidate

    Sec. 6.12  The Regional Nominating Committee shall send to the 
Executive Representatives and branch offices of the NASD members in the 
region a written notice of the name of the candidate or candidates the 
Regional Nominating Committee proposes for nomination to the National 
Nominating Committee.

Designation of Additional Candidates

    Sec. 6.13  If an officer, director, or employee of an NASD member 
in the region is not proposed for nomination by the Regional Nominating 
Committee and wants to seek the nomination, he or she shall send a 
written notice to the Regional Nominating Committee Chair or the 
Secretary of NASD Regulation within 14 calendar days after the mailing 
date of the Regional Nominating Committee's notice under Section 6.12. 
The Regional Nominating Committee Chair or the Secretary of NASD 
Regulation shall make a written record of the time and date of the 
receipt of the officer's, director's, or employee's notice. The 
officer, director, or employee shall be designated as an ``additional 
candidate.''

List of NASD Members Eligible to Vote

    Sec. 6.14 (a)  The Secretary of NASD Regulation shall mail a list 
of all NASD members eligible to vote in the region and their Executive 
Representatives to the additional candidate immediately following 
receipt of the additional candidate's notice by the Regional Nominating 
Committee Chair or the Secretary of NASD Regulation.
    (b) An NASD member that has its principal office, one or more 
registered branch offices, or a principal office and one or more 
registered branch offices in the region shall be eligible to cast one 
vote on the nomination through the NASD member's Executive 
Representative.

Requirement for Petition Supporting Additional Candidate

    Sec. 6.15  An additional candidate shall be proposed for nomination 
if a petition signed by at least ten percent of the NASD members 
eligible to vote in the region is filed with the Regional Nominating 
Committee within 30 calendar days after the date of mailing of the list 
to the additional candidate pursuant to Section 6.14. Only an Executive 
Representative may sign a petition on behalf of an NASD member.

Uncontested Nomination

    Sec. 6.16  If the Regional Nominating Committee proposes one 
candidate for nomination and no additional candidate is proposed for 
nomination pursuant to Section 6.15, the Regional Nominating Committee 
shall nominate its candidate to the National Nominating Committee.

Notice of Contested Nomination

    Sec. 6.17  If the Regional Nominating Committee proposes more than 
one candidate for nomination, or if an additional candidate is proposed 
for nomination pursuant to Section 6.15, the Regional Nominating 
Committee shall send a written notice to the Executive Representatives 
of the NASD members eligible to vote in the region announcing the names 
of the candidates and describing contested nomination procedures.

Administrative Support

    Sec. 6.18  The Secretary of NASD Regulation shall designate a 
district office in the region to provide administrative support to all 
candidates by sending to NASD members eligible to vote in the region up 
to two mailings of materials prepared by the candidates. NASD 
Regulation shall pay the postage for the mailings. If a candidate wants 
such mailings sent, the candidate shall prepare such material on the 
candidate's personal stationery. The material shall state that it 
represents the opinion of the candidate. The candidate shall provide a 
copy of such material for each member of the NASD in the region. A 
candidate proposed for nomination by the Regional Nominating Committee 
may identify himself or herself as such in his or her materials. Any 
candidate may send additional mailings to NASD members at the 
candidate's own expense. Except as provided in this Article, NASD 
Regulation, the Board, the Regional Nominating Committee, any other 
committee, the National Adjudicatory Council, and NASD Regulation staff 
shall not provide any other administrative support to a candidate for 
the nomination under this Article or any candidate in a contested 
election conducted under Article VII of the NASD By-Laws.

Ballots

    Sec. 6.19  With the assistance of the Secretary of NASD Regulation 
and an Independent Agent, the Regional Nominating Committee shall 
prepare a ballot with the name or names of its candidate and any 
additional candidates proposed for nomination pursuant to Section 6.15. 
The ballot shall list the candidates in alphabetical order and shall 
identify the candidate or candidates proposed for nomination by the 
Regional Nominating Committee. The Regional Nominating Committee shall 
send a ballot to the Executive Representative of each NASD member 
eligible to vote in the region. Instructions on the ballot shall direct 
the Executive Representative to return the ballot to the Independent 
Agent and state that the ballot envelope must be postmarked on or 
before the return date specified on the ballot. The return date 
specified on the ballot shall be no fewer than 30 and no more than 45 
days after the date of mailing of the ballot.

Vote Qualification List

    Sec. 6.20  Eligibility to vote on a regional nomination shall be 
based on the NASD's membership records as of a date designated by the 
Secretary of NASD Regulation that is not more than 30 days before the 
date of mailing of the ballot. The Secretary of NASD Regulation shall 
prepare a list of NASD members eligible to vote in the region and their 
Executive Representatives,

[[Page 53101]]

which shall be used for vote qualification purposes, and shall provide 
the list to the candidates.

Ballots Returned As Undelivered

    Sec. 6.21  The Independent Agent shall open any ballot envelope 
returned undelivered and shall determine whether it was sent to the 
NASD member's address of record. If incorrectly addressed, the 
Independent Agent shall send a new ballot to the NASD member's address 
of record.

General Procedures for Qualification and Accounting of Ballots

    Sec. 6.22  After the voting period, on a date or dates designated 
by the Secretary of NASD Regulation, the qualification and accounting 
of ballots shall take place. The date or dates designated shall be not 
later than 14 calendar days after the return date specified on the 
ballot pursuant to Section 6.19. Candidates and their representatives 
shall be allowed to observe the qualification and accounting of 
ballots. Representation for each candidate shall be limited to two 
individuals. The Independent Agent shall bring to a specified district 
office in the region all ballots timely received. Under the direction 
of the Secretary of NASD Regulation or the Secretary's designee, the 
Independent Agent shall open and count the ballots. For ballot 
qualification purposes, the Independent Agent shall identify to the 
candidates the NASD members that timely returned ballots and inform the 
candidates of the Independent Agent's determination of whether or not a 
ballot is qualified for voting purposes. The determination shall be 
based on a comparison of ballots received against the list of NASD 
members eligible to vote in the region and their Executive 
Representatives as prepared by the Secretary of NASD Regulation under 
Section 6.20. The Secretary of NASD Regulation or the Secretary's 
designee shall make the final determination of the qualification of a 
ballot. Upon the qualification of a ballot, the Independent Agent shall 
record the vote indicated on the ballot. The candidates and their 
representatives shall not be allowed to see the vote of an NASD member.

Ballots Set Aside

    Sec. 6.23  The Independent Agent shall set aside a ballot if: (a) 
The ballot is received from an NASD member eligible to vote in the 
region and the ballot is signed by a person who is not the Executive 
Representative listed on the vote qualification list prepared under 
Section 6.20, and the Secretary of the NASD has not received proper 
notice of a change in Executive Representative pursuant to the NASD By-
Laws; or (b) two or more properly executed ballots are received from an 
NASD member eligible to vote in the region. If the Independent Agent 
determines that the ballots set aside are material to the outcome of 
the nomination, the Secretary of NASD Regulation and the Independent 
Agent shall make reasonable efforts to resolve each ballot set aside. 
With respect to a ballot not signed by an Executive Representative of 
record, the Secretary of NASD Regulation shall contact the NASD member 
to request that the NASD member send proper written notice of any 
change in Executive Representative by facsimile so that the ballot may 
be counted. With respect to multiple ballots from an NASD member, the 
Independent Agent shall contact the Executive Representative of the 
NASD member to obtain the NASD member's vote. The Secretary of NASD 
Regulation shall keep a list of NASD members that reported their ballot 
was lost or not received and that were provided with a duplicate 
ballot. The Secretary of NASD Regulation shall provide the list to the 
Independent Agent and, upon request, to the candidates.

Invalid Ballots

    Sec. 6.24  The Independent Agent shall declare a ballot invalid if 
one or more of the following conditions exists:
    (a) The ballot is not signed by the Executive Representative 
(unless Section 6.23 applies);
    (b) A vote is not indicated on the ballot; or
    (c) A vote for more than one candidate is indicated on the ballot.

Certification of Nomination

    Sec. 6.25  Under the direction of the Secretary of NASD Regulation 
or the Secretary's designee, the Independent Agent shall count the 
votes received for each candidate. The candidate receiving the largest 
number of votes cast in the region shall be declared the nominee from 
the region and the Regional Nominating Committee shall nominate such 
candidate to the National Nominating Committee. In the event of a tie, 
there shall be a run-off vote for the nomination. The Regional 
Nominating Committee shall send a written certification of the 
nomination results to the National Nominating Committee. The 
certification shall state the number of votes received by each 
candidate and the number of ballots set aside.

Rejection of Regional Nominating Committee Nominee

    Sec. 6.26  If the National Nominating Committee rejects the nominee 
of the Regional Nominating Committee, the Regional Nominating Committee 
shall repeat the nomination procedures in Section 6.9 through Section 
6.25.

Extension of Time and Additional Procedures

    Sec. 6.27  The Secretary of NASD Regulation may extend a time 
period under this Article for good cause shown. In extraordinary 
circumstances, the Secretary of NASD Regulation, with the approval of 
the Executive Committee or the Board, may adopt additional procedures 
for nominations under this Article.
Article [IV] VII
Officers, Agents, and Employees
Officers
    Sec. [4.1]7.1  The Board [of Directors] shall elect the officers of 
[the Corporation] NASD Regulation, which shall include a President, a 
Secretary, and such [for] other executive or administrative officers as 
it shall deem necessary or advisable, including, but not limited to: 
Executive Vice[-] President, Senior Vice [-]President, Vice [-
]President, General Counsel, [Secretary] and Treasurer of [the 
Corporation] NASD Regulation. All such officers shall have such titles, 
powers, and duties, and shall be entitled to such compensation, as 
shall be determined from time to time by the Board [of Directors]. The 
terms of office of such officers shall be at the pleasure of the Board 
[of Directors], which by affirmative vote of a majority of the 
[members] Board, may remove any such officer at any time. One person 
may hold the offices and perform the duties of any two or more of said 
offices, except the offices and duties of President and Vice President 
or of President and Secretary. None of the officers, except the 
President, need be [directors of the Corporation] Directors of NASD 
Regulation.

Absence of the President

    Sec. 7.2  In the case of the absence or inability to act of the 
President of NASD Regulation, or in the case of a vacancy in such 
office, the Board may appoint its Chair or such other person as it may 
designate to act as such officer pro tem, who shall assume all the 
functions and discharge all the duties of the President.

[[Page 53102]]

Agents and Employees
    Sec. [4.2]7.3  In addition to the officers, [the Corporation] NASD 
Regulation may employ such agents and employees as the Board [of 
Directors] may deem necessary or advisable, each of whom shall hold 
office for such period and exercise such authority and perform such 
duties as the Board [of Directors], the President, or any officer 
designated by the Board [of Directors,] may from time to time 
determine. [The Board of Directors at any time may appoint and remove, 
or may delegate to any principal officer the power to appoint and to 
remove, any agent or employee of the Corporation.] Agents and employees 
of NASD Regulation shall be under the supervision and control of the 
officers of the NASD Regulation, unless the Board, by resolution, 
provides that an agent or employee shall be under the supervision and 
control of the Board.
Delegation of Duties of Officers
    Sec. [4.3]7.4  The Board [of Directors] may delegate the duties and 
powers of any officer of [the Corporation] NASD Regulation to any other 
officer or to any [director] Director for a specified period of time 
and for any reason that the Board [of Directors] may deem sufficient.
Resignation and Removal of Officers
    Sec. [4.4]7.5  (a) Any officer may resign at any time upon written 
notice of resignation to the Board [of Directors], the President, or 
the Secretary. Any such resignation shall take effect upon receipt of 
such notice or at any later time specified therein. The acceptance of a 
resignation shall not be necessary to make the resignation effective.
    (b) Any officer[, agent or employee of the Corporation] of NASD 
Regulation may be removed, with or without cause, by resolution adopted 
by a majority of the [directors] Directors then in office at any 
regular or special meeting of the Board [of Directors] or by a written 
consent signed by all of the [directors] Directors then in office. Such 
removal shall be without prejudice to the contractual rights of the 
affected officer, [agent, or employee,] if any, with [the Corporation] 
NASD Regulation.

Bond

    Sec. [4.5]7.6  [The Corporation] NASD Regulation may secure the 
fidelity of any or all of its officers, agents, or employees by bond or 
otherwise.
[Compensation of Board and Committee Members
    Sec. 4.6  The Board of Directors may provide for reasonable 
compensation of the Chairman of the Board, the Directors, and the 
members of any committee of the Board or any District Committee from 
the Corporation. The Board may also provide for reimbursement of 
reasonable expenses incurred by such persons in connection with the 
business of the Corporation.]

Article VIII

District Committees and District Nominating Committees

Establishment of Districts

    Sec. 8.1  The Board shall establish boundaries for districts within 
the United States to assist NASD Regulation in administering its 
affairs in a manner that is consistent with applicable law, the 
Restated Certificate of Incorporation, these By-Laws, the Delegation 
Plan, and the Rules of the Association. The Board may make changes from 
time to time in the number or boundaries of the districts as it deems 
necessary or appropriate. The Board shall prescribe such policies and 
procedures as are necessary or appropriate to address the 
implementation of a new district configuration in the event of a change 
in the number or boundaries of the districts.

Composition of District Committees

    Sec. 8.2  (a) A district created under Section 8.1 shall elect a 
District Committee pursuant to this Article. A District Committee shall 
consist of no fewer than five and no more than 20 members, unless 
otherwise provided by resolution of the Board. Each District Committee 
member shall be employed in the office of an NASD member eligible to 
vote in the district. A District Committee shall determine the number 
of its members to be elected each year. Members of the District 
Committees shall serve as panelists in disciplinary proceedings in 
accordance with the Rules of the Association. The District Committees 
shall consider and recommend policies and rule changes to the Board. 
The District Committees shall endeavor, in such manner as they deem 
appropriate, to educate NASD members and other brokers and dealers in 
their respective districts as to the objects, purposes, and work of the 
NASD, NASD Regulation, and Nasdaq in order to foster NASD members' 
interest and cooperation.
    (b) In the event of the refusal, failure, neglect, or inability of 
a member of a District Committee to discharge his or her duties, or for 
any cause affecting the best interests of NASD Regulation, the 
sufficiency of which shall be decided by the District Committee, the 
District Committee may remove the member by the affirmative vote of 
two-thirds of the members of the District Committee then in office and 
declare the member's position vacant. The District Committee shall 
notify the District Committee member of his or her removal within seven 
days after the vote. The member's position shall be filled pursuant to 
Section 8.4. A member who is removed may submit a written appeal of the 
removal to the Board within 30 days after the date he or she is 
notified of the removal. The Board may affirm, reverse, or modify the 
determination of the District Committee. A vote of a majority of the 
Directors then in office shall be required to reverse or modify the 
action of the District Committee.

Term of Office of District Committee Members

    Sec. 8.3  Each regularly elected member of a District Committee 
shall hold office for a term of three years, or until a successor is 
elected and qualified, or until death, resignation, or removal. A 
member of a District Committee may not serve more than two consecutive 
terms.

Filling of Vacancies on District Committees

    Sec. 8.4  In the event of a vacancy on a District Committee caused 
by the departure of a Committee member prior to the expiration of the 
member's term of office, the District Committee shall appoint by 
majority vote a representative of an NASD member eligible to vote in 
the district to fill the vacancy. The appointment shall be effective 
until the next regularly scheduled election occurs. Following the 
election, the newly elected Committee member shall serve only the 
duration of the departed Committee member's term.

Meetings of District Committees

    Sec. 8.5  Meetings of a District Committee shall be held at such 
times and places, upon such notice, and in accordance with such 
procedures as each District Committee in its discretion may determine. 
A quorum of a District Committee shall consist of a majority of its 
members, and any action taken by a majority at any meeting at which a 
quorum is present, except as otherwise provided in these By-Laws, shall 
constitute the action of the Committee. Action by a District Committee 
may be taken by mail, telephonic, or telegraphic vote, in which case 
any action taken by a majority of the Committee shall

[[Page 53103]]

constitute the action of the Committee. Any action taken by telephonic 
vote shall be confirmed in writing at a regular meeting of the District 
Committee.

Election of District Officers

    Sec. 8.6  Following the annual election of members of the District 
Committees pursuant to this Article, each District Committee shall 
elect from its members a Chair and such other officers as it deems 
necessary for the proper performance of its duties under these By-Laws, 
and shall prescribe their powers and duties.

Advisory Council

    Sec. 8.7  (a) The Chairs of the District Committees, elected 
pursuant to Section 8.6, shall constitute an Advisory Council to the 
Board.
    (b) The Advisory Council shall be advised of and entitled to attend 
such meetings of the Board as the Board may designate for such Advisory 
Council's attendance, and the Board shall designate at least one such 
meeting annually. The Advisory Council shall not be entitled to vote at 
meetings of the Board.

Expenses of District Committees

    Sec. 8.8  Funds to meet the regular expenses of each District 
Committee shall be provided by the Board, and all such expenses shall 
be subject to the approval of the Board.

Composition of District Nominating Committees

    Sec. 8.9  (a) Each district created under Section 8.1 shall elect a 
District Nominating Committee pursuant to this Article. A District 
Nominating Committee shall consist of five members, unless the Board by 
resolution increases a District Nominating Committee to a larger 
number. Each member of a District Nominating Committee shall be 
employed in the office of an NASD member eligible to vote in the 
district, but shall not be a member of the District Committee. A 
District Nominating Committee shall include a majority of persons who 
previously have served on a District Committee or who are current or 
former Directors or current or former Governors of the NASD Board, and 
shall include at least one current or former Director or Governor.
    (b) In the event of the refusal, failure, neglect, or inability of 
a member of a District Nominating Committee to discharge his or her 
duties, or for any cause affecting the best interests of NASD 
Regulation, the sufficiency of which shall be decided by the District 
Nominating Committee, the District Nominating Committee may remove the 
member by the affirmative vote of two-thirds of the members of the 
District Nominating Committee then in office and declare the member's 
position vacant. The member's position shall be filled pursuant to 
Section 8.11. The District Nominating Committee shall notify the 
District Nominating Committee member of his or her removal within seven 
days after the vote. A member who is removed may submit a written 
appeal of the removal to the Board within 30 days after the date he or 
she is notified in writing of the removal. The Board may affirm, 
reverse, or modify the determination of the District Nominating 
Committee. A vote of a majority of the Directors then in office shall 
be required to reverse or modify the action of the District Nominating 
Committee.

Term of Office of District Nominating Committee Members

    Sec. 8.10  Each regularly elected member of a District Nominating 
Committee shall hold office for a term of one year, and until a 
successor is elected and qualified, or until death, resignation, or 
removal. A member of a District Nominating Committee may not serve more 
than two consecutive terms.

Filling of Vacancies for District Nominating Committees

    Sec. 8.11  In the event of a vacancy on a District Nominating 
Committee caused by the departure of a Committee member prior to the 
expiration of the member's term of office, the District Nominating 
Committee shall appoint by majority vote a representative of an NASD 
member eligible to vote in the district to fill the vacancy. The 
appointment shall be effective until the next regularly scheduled 
election occurs pursuant to this Article.

Meetings of District Nominating Committees

    Sec. 8.12  Meetings of a District Nominating Committee shall be 
held at such times and places, upon such notice, and in accordance with 
such procedures as each District Nominating Committee in its discretion 
may determine. A quorum of a District Nominating Committee shall 
consist of a majority of its members, and any action taken by a 
majority of the entire Committee at any meeting, except as otherwise 
provided in these By-Laws, shall constitute the action of the 
Committee. Action by a District Nominating Committee may be taken by 
mail, telephonic, or telegraphic vote, in which case any action taken 
by a majority of the Committee shall constitute the action of the 
Committee. Action taken by telephonic vote shall be confirmed in 
writing at a regular meeting of the District Nominating Committee.

Election of District Nominating Committee Officers

    Sec. 8.13  Following the annual election of members of the District 
Nominating Committees pursuant to this Article, each District 
Nominating Committee shall elect from its members a Chair and such 
other officers as it deems necessary for the proper performance of its 
duties under these By-Laws, and shall prescribe their powers and 
duties.

Expenses of District Nominating Committees

    Sec. 8.14  Funds to meet the regular expenses of each District 
Nominating Committee shall be provided by the Board, and all such 
expenses shall be subject to the approval of the Board.

Notice to Chair

    Sec. 8.15  On or before May 1 of each year, the Secretary of NASD 
Regulation shall send a written notice to the Chair of each District 
Nominating Committee and each District Committee identifying the 
members of the District Nominating Committee and the District Committee 
whose terms of office shall expire in the next calendar year. The 
notice shall describe election procedures for filling the offices.

Solicitation of Candidates

    Sec. 8.16  NASD Regulation staff shall provide the District 
Nominating Committee with a description of the NASD membership in the 
district. The District Nominating Committee shall identify and solicit 
candidates to nominate for the vacancies on the District Committee and 
the District Nominating Committee. The District Nominating Committee 
Chair shall send a written notice of the upcoming election to the 
Executive Representative and each branch office of the NASD members in 
the district and request that such NASD members submit names of 
candidates to the District Nominating Committee or the District 
Director for consideration.

Secretary's Notice to NASD Members

    Sec. 8.17  The Secretary of NASD Regulation shall send a written 
notice to NASD members in the district describing the election 
procedures.

[[Page 53104]]

District Nominating Committee Slate

    Sec. 8.18  (a) The District Nominating Committee shall review the 
background of proposed candidates and the description of the NASD 
membership provided by NASD Regulation staff and shall nominate a slate 
of candidates for the election. The slate shall include one or more 
candidates for each vacancy. In nominating candidates for the office of 
member of the District Committee and the office of member of the 
District Nominating Committee, the District Nominating Committee shall 
endeavor to secure appropriate and fair representation on the District 
Committee and on the District Nominating Committee of the various 
sections of the district and all classes and types of NASD members 
engaged in the investment banking or securities business within the 
district. In nominating candidates for the office of member of the 
District Nominating Committee, a District Nominating Committee shall 
assure that the composition of the District Nominating Committee meets 
the standards in Section 8.9(a).
    (b) A District Nominating Committee shall not nominate an incumbent 
member of the District Committee to succeed himself or herself unless 
the District Nominating Committee first takes appropriate action by a 
written ballot of the entire NASD membership within the district to 
ascertain that such nomination is acceptable to a majority of the NASD 
members in the district, unless the incumbent member of the District 
Committee is serving pursuant to the provisions of Section 8.4. A 
District Nominating Committee may not nominate more than two incumbent 
members of the District Nominating Committee to succeed themselves.

Certification of Nomination

    Sec. 8.19  The District Nominating Committee shall certify to the 
District Committee each candidate nominated by the District Nominating 
Committee and the office to which the candidate is nominated. Within 
five calendar days after the certification, the District Committee 
shall send to the Executive Representatives of NASD members in the 
district a copy of the certification.

Designation of Additional Candidates

    Sec. 8.20  If an officer, director, or employee of an NASD member 
who meets the qualifications of Section 8.2 is not nominated by the 
District Nominating Committee and wants to be considered for a vacancy 
on the District Committee or the District Nominating Committee, he or 
she shall send a written notice to the District Director within 14 
calendar days after the mailing date of the certification to the 
Executive Representatives pursuant to Section 8.19. The District 
Director shall make a written record of the time and date of the 
receipt of the officer's, director's, or employee's notice. The 
officer, director, or employee shall be designated as an ``additional 
candidate.''

List of NASD Members Eligible to Vote

    Sec. 8.21  (a) The Secretary of NASD Regulation shall provide a 
list of all NASD members eligible to vote in the district and their 
Executive Representatives to the additional candidate immediately 
following receipt of the additional candidate's notice by the District 
Director.
    (b) An NASD member that has its principal office, one or more 
registered branch offices, or its principal office and one or more 
registered branch offices in the district shall be eligible to cast one 
vote through the NASD member's Executive Representative for each 
vacancy to be filled in the election.

Requirement for Petition Supporting Additional Candidate

    Sec. 8.22  An additional candidate shall be nominated if a petition 
signed by at least ten percent of the NASD members eligible to vote in 
the district is filed with the District Nominating Committee within 30 
calendar days after the date of mailing of the list to the additional 
candidate pursuant to Section 8.21. Only an Executive Representative 
may sign a petition on behalf of an NASD member.

Uncontested Election

    Sec. 8.23  If the District Nominating Committee nominates one 
candidate for each vacancy and no additional candidate is nominated 
pursuant to Section 8.22, the candidates nominated by the District 
Nominating Committee shall be considered duly elected and the District 
Committee shall certify the election to the Board.

Notice of Contested Election

    Sec. 8.24  If the District Nominating Committee nominates more than 
one candidate for a vacancy, or if an additional candidate is nominated 
pursuant to Section 8.22, the election shall be considered a contested 
election. The District Committee shall send a notice to the Executive 
Representatives of the NASD members eligible to vote in the district 
announcing the names of the candidates and the office to which each 
candidate is nominated and describing contested election procedures.

Administrative Support

    Sec. 8.25  The District Office shall provide administrative support 
to all candidates by sending to NASD members eligible to vote in the 
district up to two mailings of materials prepared by the candidates. 
NASD Regulation shall pay the postage for the mailings. If a candidate 
wants such mailings sent, the candidate shall prepare such material on 
the candidate's personal stationery. The material shall state that it 
represents the opinion of the candidate. The candidate shall provide a 
copy of the material for each member of the NASD in the district. 
Candidates nominated by the District Nominating Committee may identify 
themselves as such in their materials. Any candidate may send 
additional mailings at the candidate's own expense. Except as provided 
in this Article, NASD Regulation, the Board, the Regional Nominating 
Committee, any other committee, and NASD Regulation staff shall not 
provide any other administrative support to a candidate in the 
election.

Ballots

    Sec. 8.26  With the assistance of the Secretary of NASD Regulation 
and an Independent Agent, the District Nominating Committee shall 
prepare a ballot with the names of the District Nominating Committee's 
candidates and any additional candidate nominated pursuant to Section 
8.22 and the office to which each candidate is nominated. The ballot 
shall list the candidates in alphabetical order and shall identify the 
candidates nominated by the District Nominating Committee. The District 
Nominating Committee shall send a ballot to the Executive 
Representative of each NASD member eligible to vote in the district. 
Instructions on the ballot shall direct the Executive Representative to 
return the ballot to the Independent Agent and state that the ballot 
envelope must be postmarked on or before the return date specified on 
the ballot. The return date specified on the ballot shall be no fewer 
than 30 and no more than 45 days after the date of mailing of the 
ballot.

Vote Qualification List

    Sec. 8.27  Eligibility to vote in a district election shall be 
based on the NASD's membership records as of a date selected by the 
Secretary of NASD Regulation that is not more than 30 days before the 
date of mailing of the ballot. The Secretary of NASD Regulation shall 
prepare a list of NASD members eligible

[[Page 53105]]

to vote in the district and their Executive Representatives, which 
shall be used for vote qualification purposes, and shall provide the 
list to the candidates.

Ballots Returned As Undelivered

    Sec. 8.28  The Independent Agent shall open any ballot envelope 
returned undelivered and shall determine whether it was sent to the 
NASD member's address of record. If incorrectly addressed, the 
Independent Agent shall send a new ballot to the address of record.

General Procedures for Qualification and Accounting of Ballots

    Sec. 8.29  After the voting period, on a date or dates designated 
by the Secretary of NASD Regulation, the qualification and accounting 
of ballots shall take place. The date or dates designated shall be not 
later than 14 calendar days after the return date specified on the 
ballot pursuant to Section 8.26. Candidates and their representatives 
shall be allowed to observe the qualification and accounting of 
ballots. Representation for each candidate shall be limited to two 
individuals. The Independent Agent shall bring to the district office 
all ballots timely received. Under the direction of the Secretary of 
NASD Regulation or the Secretary's designee, the Independent Agent 
shall open and count the ballots. For ballot qualification purposes, 
the Independent Agent shall identify to the candidates the NASD members 
that timely returned ballots and inform the candidates of the 
Independent Agent's determination of whether or not a ballot is 
qualified for voting purposes. The determination shall be based on a 
comparison of ballots received against the list of NASD members 
eligible to vote in the district and their Executive Representatives as 
prepared by the Secretary of NASD Regulation pursuant to Section 8.27. 
The Secretary of NASD Regulation or the Secretary's designee shall make 
the final determination of the qualification of a ballot. Upon the 
qualification of a ballot, the Independent Agent shall record the vote 
indicated on the ballot. The candidates and their representatives shall 
not be allowed to see the vote of an NASD member.

Ballots Set Aside

    Sec. 8.30  The Independent Agent shall set aside a ballot if: (a) 
The ballot is received from an NASD member eligible to vote in the 
district and the ballot is signed by a person who is not the Executive 
Representative listed on the vote qualification list prepared under 
Section 8.27, and the Secretary of the NASD has not received proper 
notice of a change in Executive Representative pursuant to the NASD By-
Laws; or (b) if two or more properly executed ballots are received from 
an NASD member eligible to vote in the district. If the Independent 
Agent determines that the ballots set aside are material to the outcome 
of the election, the Secretary of NASD Regulation and the Independent 
Agent shall make reasonable efforts to resolve each ballot set aside. 
With respect to a ballot not signed by an Executive Representative of 
record, the Secretary of NASD Regulation shall contact the NASD member 
to request that the NASD member send written notice of any change in 
Executive Representative by facsimile so that the ballot may be 
counted. With respect to multiple ballots from an NASD member, the 
Independent Agent shall contact the Executive Representative of the 
NASD member to obtain the NASD member's vote. The Secretary of NASD 
Regulation shall keep a list of NASD members that reported their ballot 
was lost or not received and that were provided with a duplicate 
ballot. The Secretary of NASD Regulation shall provide the list to the 
Independent Agent and, upon request, to the candidates.

Invalid Ballots

    Sec. 8.31  The Independent Agent shall declare a ballot invalid if 
one or more of the following conditions exist:
    (a) the ballot is not signed by the Executive Representative 
(unless Section 8.30 applies);
    (b) a vote is not indicated on the ballot; or
    (c) the ballot indicates votes for more candidates than there are 
vacancies for an office.

Certification of Election

    Sec. 8.32  Under the direction of the Secretary of NASD Regulation 
or the Secretary's designee, the Independent Agent shall count the 
votes received for each candidate in a district. The candidates for the 
office of member of the District Committee receiving the largest number 
of votes cast in the district for the office shall be declared elected 
such that the number of candidates declared elected equals the number 
of vacancies on the District Committee. The candidates for the office 
of member of the District Nominating Committee receiving the largest 
number of votes cast in the district for the office shall be declared 
elected such that the number of candidates declared elected equals the 
number of vacancies on the District Nominating Committee. In the event 
of a tie, there shall be a run-off election. Each District Committee 
shall send a written certification of the election results to the 
Board. The certification shall state the number of votes received by 
each candidate and the number of ballots set aside.

Extensions of Time and Additional Procedures

    Sec. 8.33  The Secretary of NASD Regulation may extend a time 
period under this Article for good cause shown. In extraordinary 
circumstances, the Secretary of NASD Regulation, with the approval of 
the Executive Committee or the Board, may adopt additional procedures 
for elections under this Article.

Article IX

Compensation

Compensation of Board, Council, and Committee Members

    Sec. 9.1  The Board may provide for reasonable compensation of the 
Chair of the Board, the Directors, National Adjudicatory Council 
members, and the members of any committee of the Board or any District 
Committee. The Board may also provide for reimbursement of reasonable 
expenses incurred by such persons in connection with the business of 
NASD Regulation.

Article X

Indemnification

Indemnification of Directors, Officers, Employees, Agents, National 
Adjudicatory Council and Committee Members

    Sec. 10.1  (a) NASD Regulation shall indemnify, and hold harmless, 
to the fullest extent permitted by Delaware law as it presently exists 
or may thereafter be amended, any person (and the heirs, executors, and 
administrators of such person) who, by reason of the fact that he or 
she is or was a Director, officer, or employee of NASD Regulation or a 
National Adjudicatory Council or committee member, or is or was a 
Director, officer, or employee of NASD Regulation who is or was serving 
at the request of NASD Regulation as a director, officer, employee, or 
agent of another corporation, partnership, joint venture, trust, 
enterprise, or non-profit entity, including service with respect to 
employee benefit plans, is or was a party, or is threatened to be made 
a party to:
    (i) Any threatened, pending, or completed action, suit, or 
proceeding, whether civil, criminal, administrative, or investigative 
(other than an action by or in the right of NASD Regulation)

[[Page 53106]]

against expenses (including attorneys' fees and disbursements), 
judgments, fines, and amounts paid in settlement actually and 
reasonably incurred by such person in connection with any such action, 
suit, or proceeding; or
    (ii) Any threatened, pending, or completed action or suit by or in 
the right of NASD Regulation to procure a judgment in its favor against 
expenses (including attorneys' fees and disbursements) actually and 
reasonably incurred by such person in connection with the defense or 
settlement of such action or suit.
    (b) NASD Regulation shall advance expenses (including attorneys' 
fees and disbursements) to persons described in subsection (a); 
provided, however, that the payment of expenses incurred by such person 
in advance of the final disposition of the matter shall be conditioned 
upon receipt of a written undertaking by that person to repay all 
amounts advanced if it should be ultimately determined that the person 
is not entitled to be indemnified under this Section or otherwise.
    (c) NASD Regulation may, in its discretion, indemnify and hold 
harmless, to the fullest extent permitted by Delaware law as it 
presently exists or may thereafter be amended, any person (and the 
heirs, executors, and administrators of such persons) who, by reason of 
the fact that he or she is or was an agent of NASD Regulation or is or 
was an agent of NASD Regulation who is or was serving at the request of 
NASD Regulation as a director, officer, employee, or agent of another 
corporation, partnership, trust, enterprise, or non-profit entity, 
including service with respect to employee benefit plans, was or is a 
party, or is threatened to be made a party to any action or proceeding 
described in subsection (a).
    (d) NASD Regulation may, in its discretion, pay the expenses 
(including attorneys' fees and disbursements) reasonably and actually 
incurred by an agent in defending any action, suit, or proceeding in 
advance of its final disposition; provided, however, that the payment 
of expenses incurred by such person in advance of the final disposition 
of the matter shall be conditioned upon receipt of a written 
undertaking by that person to repay all amounts advanced if it should 
be ultimately determined that the person is not entitled to be 
indemnified under this Section or otherwise.
    (e) Notwithstanding the foregoing or any other provision of these 
By-Laws, no advance shall be made by NASD Regulation to an agent or 
non-officer employee if a determination is reasonably and promptly made 
by the Board by a majority vote of those Directors who have not been 
named parties to the action, even though less than a quorum, or, if 
there are no such Directors or if such Directors so direct, by 
independent legal counsel, that, based upon the facts known to the 
Board or such counsel at the time such determination is made: (1) The 
person seeking advancement of expenses (i) Acted in bad faith, or (ii) 
did not act in a manner that he or she reasonably believed to be in or 
not opposed to the best interests of NASD Regulation; (2) with respect 
to any criminal proceeding, such person believed or had reasonable 
cause to believe that his or her conduct was unlawful; or (3) such 
person deliberately breached his or her duty to NASD Regulation.
    (f) The indemnification provided by this Section in a specific case 
shall not be deemed exclusive of any other rights to which a person 
seeking indemnification may be entitled, both as to action in his or 
her official capacity and as to action in another capacity while 
holding such office, and shall continue as to a person who has ceased 
to be a Director, officer, National Adjudicatory Council or committee 
member, employee, or agent and shall inure to the benefit of such 
person's heirs, executors, and administrators.
    (g) Notwithstanding the foregoing, but subject to subsection (j), 
NASD Regulation shall be required to indemnify any person identified in 
subsection (a) in connection with a proceeding (or part thereof) 
initiated by such person only if the initiation of such proceeding (or 
part thereof) by such person was authorized by the Board.
    (h) NASD Regulation's obligation, if any, to indemnify or advance 
expenses to any person who is or was serving at its request as a 
director, officer, employee, or agent of another corporation, 
partnership, joint venture, trust, enterprise, or non-profit entity 
shall be reduced by any amount such person may collect as 
indemnification or advancement from such other corporation, 
partnership, joint venture, trust, enterprise, or non-profit entity.
    (i) Any repeal or modification of the foregoing provisions of this 
Section shall not adversely affect any right or protection hereunder of 
any person respecting any act or omission occurring prior to the time 
of such repeal or modification.
    (j) If a claim for indemnification or advancement of expenses under 
this Article is not paid in full within 60 days after a written claim 
therefor by an indemnified person has been received by NASD Regulation, 
the indemnified person may file suit to recover the unpaid amount of 
such claim and, if successful in whole or in part, shall be entitled to 
be paid the expense of prosecuting such claim. In any such action, NASD 
Regulation shall have the burden of proving that the indemnified person 
is not entitled to the requested indemnification or advancement of 
expenses under Delaware law.
Indemnification Insurance
    Sec. 10.2  NASD Regulation shall have power to purchase and 
maintain insurance on behalf of any person who is or was a Director, 
officer, National Adjudicatory Council or committee member, employee, 
or agent of NASD Regulation, or is or was serving at the request of 
NASD Regulation as a director, officer, employee, or agent of another 
corporation, partnership, joint venture, trust, enterprise, or non-
profit entity against any liability asserted against such person and 
incurred by such person in any such capacity, or arising out of such 
person's status as such, whether or not NASD Regulation would have the 
power to indemnify such person against such liability hereunder.
Article [VI] XI
Capital Stock
Sole Stockholder
    Sec. 11.1  The NASD shall be the sole stockholder of the capital 
stock of NASD Regulation.
Certificates
    Sec. [6.1]11.2  [Each] The stockholder [in the Corporation] shall 
be entitled to a certificate or certificates in such form as shall be 
approved by the Board, certifying the number of shares of capital stock 
in [the Corporation] NASD Regulation owned by [such] the stockholder.
Signatures
    Sec. [6.2]11.3  (a) Certificates for shares of capital stock of 
[the Corporation] NASD Regulation shall be signed in the name of [the 
Corporation] NASD Regulation by two officers with one being the Chair 
of the Board, the President, or a Vice President, and the other being 
the Secretary, the Treasurer, or such other officer that may be 
authorized by the Board [of Directors]. Such certificates may be sealed 
with the corporate [Seal] seal of [the Corporation] NASD Regulation or 
a facsimile thereof.
    (b) If any such certificates are countersigned by a transfer agent 
other than [the Corporation] NASD Regulation or its employee, or by a 
registrar other

[[Page 53107]]

than [the Corporation] NASD Regulation or its employee, any other 
signature on the certificate may be a facsimile. In [case] the event 
that any officer, transfer agent, or registrar who has signed or whose 
facsimile signature has been placed upon a certificate shall [have 
ceased] cease to be such officer, transfer agent, or registrar before 
such certificate is issued, such certificate may be issued by [the 
Corporation] NASD Regulation with the same effect as if such person 
were such officer, transfer agent, or registrar at the date of issue.
Stock Ledger
    Sec. [6.3]11.4  (a) A record of all certificates for capital stock 
issued by [the Corporation] NASD Regulation shall be kept by the 
Secretary or any other officer, employee, or agent designated by the 
Board [of Directors]. Such record shall show the name and address of 
the person, firm, or corporation in which certificates for capital 
stock are registered, the number of shares represented by each such 
certificate, the date of each such certificate, and in the case of 
certificates that have been canceled, the date of cancellation thereof.
    (b) [The Corporation] NASD Regulation shall be entitled to treat 
the holder of record of shares of capital stock as shown on the stock 
ledger as the owner thereof and as the person entitled to vote such 
shares and to receive notice of meetings, and for all other purposes. 
Except as otherwise required by applicable law, [the Corporation] NASD 
Regulation shall not be bound to recognize any equitable or other claim 
to or interest in any share of capital stock on the part of any other 
person, whether or not [the Corporation] NASD Regulation shall have 
express or other notice thereof.
Transfers of Stock
    Sec. [6.4]11.5  (a) The Board [of Directors] may make such rules 
and regulations as it may deem expedient, not inconsistent with law, 
the Restated Certificate of Incorporation, or these By-Laws, concerning 
the issuance, transfer, and registration of certificates for [share] 
shares of capital stock of [the Corporation] NASD Regulation. The Board 
[of Directors] may appoint, or authorize any principal officer to 
appoint, one or more transfer agents or one or more transfer clerks and 
one or more registrars and may require all certificates for capital 
stock to bear the signature or signatures of any of them.
    (b) Transfers of capital stock shall be made on the books of [the 
Corporation] NASD Regulation only upon delivery to [the Corporation] 
NASD Regulation or its transfer agent of: (i) A written direction of 
the registered holder named in the certificate or such holder's 
attorney lawfully constituted in writing[,]; (ii) the certificate for 
the shares of capital stock being transferred[,]; and (iii) a written 
assignment of the shares of capital stock evidenced thereby.
Cancellation
    Sec. [6.5]11.6  Each certificate for capital stock surrendered to 
[the Corporation] NASD Regulation for exchange or transfer shall be 
canceled and no new certificate or certificates shall be issued in 
exchange for any existing certificate other than pursuant to [Sec. 6.6] 
Section 11.7 until such existing certificate shall have been canceled.
Lost, Stolen, Destroyed, and Mutilated Certificates
    Sec. [6.6]11.7  In the event that any certificate for shares of 
capital stock of [the Corporation] NASD Regulation shall be mutilated, 
[the Corporation] NASD Regulation shall issue a new certificate in 
place of such mutilated certificate. In [case] the event that any such 
certificate shall be lost, stolen, or destroyed [the Corporation] NASD 
Regulation may, in the discretion of the Board [of Directors] or a 
committee [designated] appointed thereby with power so to act, issue a 
new certificate for capital stock in the place of any such lost, 
stolen, or destroyed certificate. The applicant for any substituted 
certificate or certificates shall surrender any mutilated certificate 
or, in the case of any lost, stolen, or destroyed certificate, furnish 
satisfactory proof of such loss, theft, or destruction of such 
certificate and of the ownership thereof. The Board [of Directors] or 
such committee may, in its discretion, require the owner of a lost or 
destroyed certificate, or [his] such owner's representatives, to 
furnish to [the Corporation] NASD Regulation a bond with an acceptable 
surety or sureties and in such sum as [will] shall be sufficient to 
indemnify [the Corporation] NASD Regulation against any claim that may 
be made against it on account of the lost, stolen, or destroyed 
certificate or the issuance of such new certificate. A new certificate 
may be issued without requiring a bond when, in the judgment of the 
Board [of Directors], it is proper to do so.
Fixing of Record Date
    Sec. [6.7]11.8  The Board may fix a record date in accordance with 
Delaware law. [(a) In order that the Corporation may determine the 
stockholders entitled to notice of or to vote at any meeting of 
stockholders or any adjournment thereof, or to express consent or 
dissent to corporate action in writing without a meeting, or to 
exercise any rights with respect to any change, conversion or exchange 
of stock, or for the purpose of any other lawful action, the Board of 
Directors may fix, in advance, a record date, pursuant to and in 
accordance with Section 213 of the General Corporation Law of the State 
of Delaware. Only such stockholders as shall be stockholders of record 
on the date so fixed shall be entitled to notice of and to vote at such 
meeting or any adjournment thereof, or to give such consent or dissent, 
or to exercise such rights with respect to any such change, conversion 
or exchange of stock, or to participate in any such action, 
notwithstanding the transfer of any stock on the books of the 
Corporation after any record date so fixed.]
    [(b) If no record date is fixed by the Board of Directors:
    (i) The record date for determining stockholders entitled to notice 
of or to vote at a meeting of stockholders shall be at the close of 
business on the day next preceding the date on which notice is given, 
or if notice is waived, at the close of business on the day next 
preceding the day on which the meeting is held;
    (ii) The record date for determining stockholders entitled to 
express consent to corporate action in writing without a meeting, when 
no prior action by the Board of Directors is necessary, shall be at the 
close of business on the day on which the first written consent is 
expressed; and
    (iii) The record date for determining stockholders for any other 
purpose shall be at the close of business on the day on which the Board 
of Directors adopts the resolution relating thereto.]
    [(c) A determination of stockholders of record entitled to notice 
of or to vote at a meeting of stockholders shall apply to any 
adjournment of the meeting; provided, however, that the Board of 
Directors may fix a new record date for the adjourned meeting.]
Article [VII] XII
Miscellaneous Provisions
Corporate Seal
    Sec. [7.1]12.1  The seal of [the Corporation] NASD Regulation shall 
be circular in form and shall bear, in addition to any other emblem or 
device approved by the Board [of Directors], the name of [the 
Corporation] NASD Regulation, the year of its incorporation, and the 
words ``Corporate Seal'' and ``Delaware[''].'' The seal may be used by 
causing it to be affixed or impressed, or

[[Page 53108]]

a facsimile thereof may be reproduced or otherwise used in such manner 
as the Board [of Directors] may determine.
Fiscal Year
    Sec. [7.2]12.2  The fiscal year of [the Corporation] NASD 
Regulation shall begin on the [1st] first day of January in each year, 
or such other month as the Board [of Directors] may determine by 
resolution.
Waiver of Notice
    Sec. [7.3]12.3  (a) Whenever notice is required to be given by law, 
the Restated Certificate of Incorporation, or these By-Laws, a written 
waiver thereof, signed by the person or persons entitled to such 
notice, whether before or after the time stated therein, shall be 
deemed equivalent to notice. Neither the business to be transacted at, 
nor the purpose of, any regular or special meeting of the 
[stockholders, directors] stockholder, Directors, or members of a 
committee of [directors] Directors need be specified in any written 
waiver of notice.
    (b) Attendance of a person at a meeting shall constitute a waiver 
of notice of such meeting, except when the person attends a meeting for 
the express purpose of objecting, at the beginning of the meeting, to 
the transaction of any business because the meeting is not lawfully 
called or convened.
Execution of Instruments, Contracts, Etc.
    Sec. [7.4]12.4  (a) All checks, drafts, bills of exchange, notes, 
or other obligations or orders for the payment of money shall be signed 
in the name of [the Corporation] NASD Regulation by such officer or 
officers or person or persons[,] as the Board [of Directors], or a duly 
authorized committee thereof, may from time to time designate. Except 
as otherwise provided by law, the Board [of Directors], any committee 
given specific authority in the premises by the Board [of Directors], 
or any committee given authority to exercise generally the powers of 
the Board [of Directors] during intervals between meetings of the Board 
[of Directors], may authorize any officer, employee, or agent, in the 
name of and on behalf of [the Corporation] NASD Regulation, to enter 
into or execute and deliver deeds, bonds, mortgages, contracts, and 
other obligations or instruments, and such authority may be general or 
confined to specific instances.
    (b) All applications, written instruments, and papers required by 
any department of the United States Government or by any state, county, 
municipal, or other governmental authority, may be executed in the name 
of [the Corporation] NASD Regulation by any principal officer or 
subordinate officer of [the Corporation] NASD Regulation, or, to the 
extent designated for such purpose from time to time by the Board [of 
Directors], by an employee or agent of [the Corporation] NASD 
Regulation. Such designation may contain the power to substitute, in 
the discretion of the person named, one or more other persons.
Form of Records
    Sec. [7.5]12.5  Any records maintained by [the Corporation] NASD 
Regulation in the regular course of business, including its stock 
ledger, books of account, and minute books, may be kept on, or be in 
the form of, magnetic tape, computer disk, or any other information 
storage device, provided that the records so kept can be converted into 
clearly legible form within a reasonable time.
Article [VIII] XIII
Amendments; Emergency By-Laws
    By [Stockholders] Stockholder
    Sec. [8.1]13.1  These By-Laws may be altered, amended, or repealed, 
or new By-Laws may be adopted, at any meeting of [stockholders] the 
stockholder, provided that, in the case of a special meeting, notice 
that an amendment is to be considered and acted upon shall be inserted 
in the notice or waiver of notice of said meeting.
By Directors
    Sec. [8.2]13.2  To the extent permitted by the Restated Certificate 
of Incorporation, these By-Laws may be altered, amended, or repealed, 
or new By-Laws may be adopted, at any regular or special meeting of the 
Board [of Directors].
Emergency By-Laws
    Sec. [8.3]13.3  The Board [of Directors] may adopt emergency By-
Laws subject to repeal or change by action of the [stockholders] 
stockholder that shall, notwithstanding any different provision of law, 
the Restated Certificate of Incorporation, or these By-Laws, be 
operative during any emergency resulting from any nuclear or atomic 
disaster, an attack on the United States or on a locality in which [the 
Corporation] NASD Regulation conducts its business or customarily holds 
meetings of the Board [of Directors or stockholders] or stockholder, 
any catastrophe, or other emergency condition, as a result of which a 
quorum of the Board [of Directors] or a committee thereof cannot 
readily be convened for action. Such emergency By-Laws may make any 
provision that may be practicable and necessary [for] under the 
circumstances of the emergency.
* * * * *
By-Laws of the NASDAQ Stock Market, Inc.
Article I

Definitions

    When used in these By-Laws, unless the context otherwise requires, 
the term:
    (a) ``Act'' means the Securities Exchange Act of 1934, as amended;
    (b) ``Board'' means the Board of Directors of Nasdaq;
    (c) ``broker'' means any individual, corporation, partnership, 
association, joint stock company, business trust, unincorporated 
organization, or other legal entity engaged in the business of 
effecting transactions in securities for the account of others, but 
does not include a bank;
    (d) ``Commission'' means the Securities and Exchange Commission;
    (e) ``day'' means calendar day;
    (f) ``dealer'' means any individual, corporation, partnership, 
association, joint stock company, business trust, unincorporated 
organization, or other legal entity engaged in the business of buying 
and selling securities for such individual's or entity's own account, 
through a broker or otherwise, but does not include a bank, or any 
person insofar as such person buys or sells securities for such 
person's own account, either individually or in some fiduciary 
capacity, but not as part of a regular business;
    (g) ``Delaware law'' means the General Corporation Law of the State 
of Delaware;
    (h) ``Delegation Plan'' means the ``Plan of Allocation and 
Delegation of Functions by NASD to Subsidiaries'' as approved by the 
Commission, and as amended from time to time;
    (i) ``Director'' means a member of the Board, excluding the Chief 
Executive Officer of the NASD;
    (j) ``Industry Director'' or ``Industry member'' means a Director 
(excluding the President) or National Listing and Hearing Review 
Council or committee member who (1) is or has served in the prior three 
years as an officer, director, or employee of a broker or dealer, 
excluding an outside director or a director not engaged in the day-to-
day management of a broker or dealer; (2) is an officer, director, 
(excluding an outside director) or employee of an entity that owns more 
than ten percent of the equity of a broker or dealer, and the broker or 
dealer accounts for more

[[Page 53109]]

than five percent of the gross revenues received by the consolidated 
entity; (3) owns more than five percent of the equity securities of any 
broker or dealer, whose investments in brokers or dealers exceed ten 
percent of his or her net worth, or whose ownership interest otherwise 
permits him or her to be engaged in the day-to-day management of a 
broker or dealer; (4) provides professional services to brokers or 
dealers, and such services constitute 20 percent or more of the 
professional revenues received by the Director or member or 20 percent 
or more of the gross revenues received by the Director's or member's 
firm or partnership; (5) provides professional services to a director, 
officer, or employee of a broker, dealer, or corporation that owns 50 
percent or more of the voting stock of a broker or dealer, and such 
services relate to the director's, officer's, or employee's 
professional capacity and constitute 20 percent or more of the 
professional revenues received by the Director or member or 20 percent 
or more of the gross revenues received by the Director's or member's 
firm or partnership; or (6) has a consulting or employment relationship 
with or provides professional services to the NASD, NASD Regulation, or 
Nasdaq or has had any such relationship or provided any such services 
at any time within the prior three years;
    (k) ``NASD'' means the National Association of Securities Dealers, 
Inc.;
    (l) ``Nasdaq'' means The Nasdaq Stock Market, Inc.;
    (m) ``Nasdaq Listing and Hearing Review Council'' means a body 
appointed by the Board pursuant to Article V of these By-Laws;
    (n) ``NASD Board'' means the NASD Board of Governors;
    (o) ``NASD Regulation'' means NASD Regulation, Inc.;
    (p) ``National Nominating Committee'' means the National Nominating 
Committee appointed pursuant to Article VII, Section 9 of the NASD By-
Laws;
    (q) ``Non-Industry Director'' or ``Non-Industry member'' means a 
Director (excluding the President) or National Listing and Hearing 
Review Council or committee member who is (1) a Public Director or 
Public member; (2) an officer or employee of an issuer of securities 
listed on Nasdaq or traded in the over-the-counter market; or (3) any 
other individual who would not be an Industry Director or Industry 
member;
    (r) ``person associated with a member'' or ``associated person of a 
member'' means: (1) A natural person registered under the Rules of the 
Association; or (2) a sole proprietor, partner, officer, director, or 
branch manager of a member, or a natural person occupying a similar 
status or performing similar functions, or a natural person engaged in 
the investment banking or securities business who is directly or 
indirectly controlling or controlled by a member, whether or not any 
such person is registered or exempt from registration with the NASD 
under these By-Laws or the Rules of the Association;
    (s) ``Public Director'' or ``Public member'' means a Director or 
National Listing and Hearing Review Council or committee member who has 
no material business relationship with a broker or dealer or the NASD, 
NASD Regulation, or Nasdaq; and
    (t) ``Rules of the Association'' or ``Rules'' means the numbered 
rules set forth in the NASD Manual beginning with the Rule 0100 Series, 
as adopted by the NASD Board pursuant to the NASD By-Laws, as hereafter 
amended or supplemented.
Article [I] II
Offices
Location
    Sec. [1.1]2.1  The address of the registered office of [the 
Corporation] Nasdaq in the State of Delaware and the name of the 
registered agent at such address shall be: The Corporation Trust 
Company, 1209 Orange [St.,] Street, Wilmington, [DE] Delaware 19801. 
[The Corporation] Nasdaq also may [also] have offices at such other 
places both within and without the State of Delaware as the Board [of 
Directors] may from time to time designate or the business of [the 
Corporation] Nasdaq may require.
Change of Location
    Sec. [1.2]2.2  In the manner permitted by law, the Board [of 
Directors] or the registered agent may change the address of [the 
Corporation's] Nasdaq's registered office in the State of Delaware and 
the Board [of Directors] may make, revoke, or change the designation of 
the registered agent.
Article [II] III
Meetings of the [Stockholders]

Stockholder

[Annual Meeting
    Sec. 2.1  The annual meeting of stockholders of the Corporation for 
the election of Directors and for the transaction of such other 
business as may properly come before the meeting shall be held on such 
date, and at such time, and place, within or without the State of 
Delaware, as may be fixed, from time to time, by the Board of 
Directors.]
[Special Meetings
    Sec. 2.2  Special meetings of stockholders of the Corporation, 
unless otherwise prescribed by law, may be called at any time by the 
Chair of the Board, by the President or by order of a majority of the 
Board of Directors. Special meetings of stockholders prescribed by law 
for the election of directors shall be called by the Board of 
Directors, the President, or the Secretary. Special meetings of 
stockholders shall be held at such place within or without the State of 
Delaware as shall be designated in the notice of meeting.]
[Notice of Meetings
    Sec. 2.3  (a) Whenever stockholders are required or permitted to 
take any action at a meeting, they shall be given written notice 
stating the place, date and hour of the meeting, and, in the case of a 
special meeting, the purpose or purposes thereof. Unless otherwise 
required by law, the Certificate of Incorporation or these By-Laws, 
written notice shall be delivered or mailed at least ten but not more 
than sixty days before such meeting date to each stockholder entitled 
to vote at such meeting. If mailed, such notice shall be deposited in 
the United States mail, postage prepaid, directed to each stockholder 
at the address that appears on the records of the Corporation.]
    [(b) When a meeting of stockholders is adjourned to another time or 
place, notice need not be given of the adjourned meeting if the time 
and place thereof are announced at the meeting at which the adjournment 
is taken. At the adjourned meeting, the Corporation may transact any 
business which might have been transacted at the original meeting. If, 
however, the adjournment is for more than thirty days from the date of 
the original meeting, or if, after the adjournment, a new record date 
is set for the adjourned meeting, notice of the adjourned meeting shall 
be given to each stockholder of record entitled to vote at the meeting 
in the manner prescribed above in subsection (a).]
[Quorum
    Sec. 2.4  Except as otherwise provided by law, the Certificate of 
Incorporation or these By-Laws, at each meeting of stockholders the 
presence in person or by proxy of the holders of record of a majority 
of the outstanding shares of capital stock entitled to vote or act at 
such a meeting shall constitute a quorum for the transaction of any 
business. In the absence of a quorum,

[[Page 53110]]

the stockholders so present may by majority rule, adjourn any meeting 
until a quorum shall be present. When a quorum is once present to 
organize a meeting, the quorum cannot be destroyed by the subsequent 
withdrawal or revocation of the proxy of any stockholder.]
[Voting
    Sec. 2.5  (a) At any meeting of stockholders, each stockholder as 
of the record date is entitled to one vote for each such share of stock 
having voting power, upon the matter in question. Each stockholder 
entitled to vote at a meeting of stockholders or to express consent or 
dissent to corporate action in writing without a meeting may authorize 
another person or persons to act for him by proxy, provided that no 
proxy shall be voted or acted upon after three years from its date, 
unless the proxy provides for a longer period. A duly executed proxy 
shall be irrevocable if it states that it is irrevocable and if, and 
only so long as, it is coupled with an interest, whether in the stock 
itself or in the Corporation, sufficient in law to support an 
irrevocable power. A stockholder may revoke any proxy which is not 
irrevocable by attending the meeting and voting in person or by filing 
an instrument in writing revoking the proxy or by delivering a proxy in 
accordance with applicable law bearing a later date to the Secretary of 
the Corporation.]
    [(b) Directors of the Corporation shall be elected by a plurality 
of the votes cast at a meeting of stockholders pursuant to Sec. 2.5 of 
these By-Laws. Corporate action other than the election of directors 
shall be authorized by a majority of the votes cast at a meeting of 
stockholders, except as otherwise required by law, the Certificate of 
Incorporation or these By-Laws.]
    (c) Upon the demand of any stockholder entitled to vote, the 
election of directors or a vote on any other matter at a meeting of 
stockholders shall be by written ballot; otherwise, the method of 
voting and the manner in which votes are counted at such a meeting 
shall be discretionary with the presiding officer of the meeting.]
[Presiding Officer and Secretary
    Sec. 2.6  At every meeting of stockholders, the Chair, or in his/
her absence, the President, or in his/her absence, the appointee of the 
meeting, shall preside. The Secretary, or in his/her absence, the 
appointee of the presiding officer of the meeting, shall act as 
Secretary of the meeting.]
Action by Consent of Stockholder[s]
    Sec. [2.7]3.1  Any action required[,] or permitted by law to be 
taken at any meeting of the stockholder [stockholders] of [the 
Corporation] Nasdaq may be taken without a meeting, without prior 
notice and without a vote, if a consent in writing, setting forth the 
action so taken, is signed by the [holders] holder of the outstanding 
stock [having not less than the minimum number of votes that would be 
necessary to authorize or take such action at a meeting at which all 
shares entitled to vote thereon were present and voted. Prompt notice 
of the taking of corporate action without a meeting and by less than 
unanimous written consent shall be given to those stockholders who have 
not consented in writing and who would be entitled to vote thereon at a 
meeting].
Article [III] IV
Board of Directors
General Powers
    Sec. [3.1]4.1  The property, business, and affairs of [the 
Corporation] Nasdaq shall be managed by or under the direction of the 
Board [of Directors]. The Board [of Directors] may exercise all such 
powers of [the Corporation] Nasdaq and have the authority to perform 
all such lawful acts as are permitted by law, the Restated Certificate 
of Incorporation [or], these By-Laws, or the Delegation Plan for the 
organization, development, and operation of electronic data processing 
and communications facilities, including computer hardware and 
software, for the purposes of: [(i)](a) Supporting the operation, 
regulation, and surveillance of The Nasdaq Stock Market and other 
organized securities markets established for trading equity securities, 
debt securities, derivative instruments, or other financial products 
that may be developed; [(ii)](b) supporting the efficient clearance and 
settlement of securities transactions; [(iii)](c) supporting various 
elements of the national market system pursuant to Section 11A of the 
[Securities Exchange Act of 1934 (``Exchange Act'')] Act and the rules 
thereunder; [(iv)](d) assisting the [National Association of Securities 
Dealers, Inc.] NASD in fulfilling its self-regulatory responsibilities 
as set forth in Section 15A of the [Exchange] Act[,]; and [(v)](e) 
supporting such other initiatives as the Board [of Directors] may deem 
appropriate. To the fullest extent permitted by applicable law, the 
Restated Certificate of Incorporation, and these By-Laws, the Board may 
delegate any of its powers to a committee appointed pursuant to Section 
4.13 or to Nasdaq staff in a manner not inconsistent with the 
Delegation Plan.
Number of Directors
    Sec. [3.2]4.2  [The Board of Directors of the Corporation shall 
consist of one or more members; the exact number of directors which 
shall constitute the whole Board of Directors shall be fixed from time 
to time by resolution adopted by a majority of the whole Board of 
Directors. After fixing the number of directors constituting the whole 
Board of Directors, the Board of Directors may, by resolution adopted 
by a majority of the whole Board of Directors, from time to time change 
the number of directors constituting the whole Board of Directors.] The 
Board shall consist of no fewer than five and no more than eight 
Directors, the exact number to be determined by resolution adopted by 
the stockholder of Nasdaq from time to time. Notwithstanding the 
preceding sentence, the number of Directors shall equal the number of 
Directors on the NASD Regulation Board. Any new Director position 
created as a result of an increase in the size of the Board shall be 
filled as part of the annual election conducted under Section 4.4.
Qualifications
    Sec. [3.3]4.3  Directors need not be stockholders of [the 
Corporation] Nasdaq. Only Governors of the NASD Board shall be eligible 
for election to the Board. The President of Nasdaq shall be a Director. 
The number of Non-Industry Directors, including at least one Public 
Director and at least one issuer representative, shall equal or exceed 
the number of Industry Directors plus the President. The Chief 
Executive Officer of the NASD shall be an ex-officio non-voting member 
of the Board.
Election
    Sec. [3.4]4.4  Except as otherwise provided by law [or], these By-
Laws, or the Delegation Plan, after the first meeting of [the 
Corporation] Nasdaq at which [directors] Directors are elected, 
[directors of the Corporation] Directors of Nasdaq shall be elected 
each year at the annual meeting of [stockholders] the stockholder, or 
at a special meeting called for such purpose in lieu of the annual 
meeting[, by a plurality of the votes cast at such meeting]. If the 
annual election of [directors] Directors is not held on the date 
designated [therefore,] therefor, the [directors] Directors shall cause 
such election to be held as soon thereafter as convenient.

[[Page 53111]]

[Term
    Sec. 3.5  (a) Each director shall hold office for a term of three 
years or until his successor is duly elected and qualified, except in 
the event of earlier termination from office by reason of death, 
resignation, removal, with or without cause, or other reason.]
    [(b) The Board of Directors shall be divided into three classes.]
    [(c) The President of the Corporation shall serve as a member of 
the Board until his successor is selected and qualified, or until his 
death, resignation, or removal.]
    [(d) Except for the President, no Director may serve more than two 
consecutive terms; provided, however, that if a Director is appointed 
to fill a term of less than one year, such Director may serve up to two 
consecutive terms following the expiration of such Director's current 
term.]
    [(e) Each Director chosen to fill newly created directorship shall 
serve until the next succeeding annual meeting of stockholders.]
Resignation
    Sec. [3.6]4.5  Any [director] Director may resign at any time 
either upon written notice of resignation to the Chair of the Board, 
the President, or the Secretary. Any such resignation shall take effect 
at the time specified therein or, if the time [be] is not specified, 
upon receipt thereof, and the acceptance of such resignation, unless 
required by the terms thereof, shall not be necessary to make such 
resignation effective.
Removal
    Sec. [3.7]4.6  Any or all of the [directors] Directors may be 
removed from office at any time, with or without cause, only by a 
majority vote of the [stockholders] NASD Board.

Disqualification

    Sec. 4.7 The term of office of a Director shall terminate 
immediately upon a determination by the Board, by a majority vote of 
the remaining Directors, that: (a) The Director no longer satisfies the 
classification (Industry, Non-Industry, or Public Director) for which 
the Director was elected; and (b) the Director's continued service as 
such would violate the compositional requirements of the Board set 
forth in Section 4.3. If the term of office of a Director terminates 
under this Section, and the remaining term of office of such Director 
at the time of termination is not more than six months, during the 
period of vacancy the Board shall not be deemed to be in violation of 
Section 4.3 by virtue of such vacancy.

Filling of Vacancies

    Sec. 4.8  If a Director position becomes vacant, whether because of 
death, disability, disqualification, removal, or resignation, the 
National Nominating Committee shall nominate, and the NASD Board shall 
elect by majority vote, a person satisfying the classification 
(Industry, Non-Industry, or Public Director) for the directorship as 
provided in Section 4.3 to fill such vacancy, except that if the 
remaining term of office for the vacant Director position is not more 
than six months, no replacement shall be required.

Quorum and Voting

    Sec. [3.8]4.9  (a) At all meetings of the Board [of Directors, one-
third of the total number of directors shall constitute], unless 
otherwise set forth in these By-Laws or required by law, a quorum for 
the transaction of business shall consist of a majority of the Board, 
including not less than 50 percent of the Non-Industry Directors. In 
the absence of a quorum, a majority of the [directors] Directors 
present may adjourn the meeting until a quorum be present.
    (b) [A director interested in a contract or transaction may be 
counted in determining the presence of a quorum at a meeting of the 
Board of Directors which authorizes the contract or transaction.] 
Except as provided in Section 4.14(b), the vote of a majority of the 
Directors present at a meeting at which a quorum is present shall be 
the act of the Board.
    [(c) The vote of a majority of the directors present at a meeting 
at which a quorum is present shall be the act of the Board of 
Directors.]
Regulation
    Sec. [3.9]4.10  The Board [of Directors] may adopt such rules, 
regulations, and requirements for the conduct of the business and 
management of [the Corporation] Nasdaq, not inconsistent with law, the 
Restated Certificate of Incorporation, these By-Laws, [or the rules and 
By-Laws of the National Association of Securities Dealers, Inc., as the 
Board of Directors may deem proper. A member of the Board of Directors] 
the Rules of the Association, or the By-Laws of the NASD, as the Board 
may deem proper. A Director shall, in the performance of [his or her] 
such Director's duties, be fully protected in relying in good faith 
upon the books of account or reports made to [the Corporation] Nasdaq 
by any of its officers, [or] by an independent certified public 
accountant, [or] by an appraiser selected with reasonable care by the 
Board [of Directors] or any committee of the Board [of Directors] or by 
any agent of [the Corporation] Nasdaq, or in relying in good faith upon 
other records of [the Corporation] Nasdaq.
Meetings
    Sec. [3.10]4.11  (a) An annual meeting of the Board [of Directors] 
shall be held for the purpose of organization, election of officers, 
and transaction of any other business. If such meeting is held promptly 
after and at the place specified for the annual meeting of 
[stockholders] the stockholder, no notice of the annual meeting of the 
Board [of Directors] need be given. Otherwise, such annual meeting 
shall be held at such time and place as may be specified in a notice 
given in accordance with Section [3.11 of these By-Laws] 4.13.
    (b) Regular meetings of the Board [of Directors] may be held at 
such time and place, within or without the State of Delaware, as 
determined from time to time by the Board [of Directors]. After such 
determination has been made, notice shall be given in accordance with 
Section [3.11 of these By-Laws] 4.12.
    (c) Special meetings of the Board [of Directors] may be called by 
the Chair of the Board, [or] by the President, or by at least one-third 
of the [directors at that time being] Directors then in office. Notice 
of any special meeting of the Board [of Directors] shall be given to 
each [director] Director in accordance with Section [3.11 of these By-
Laws.] 4.12.
    (d) [Members of the Board of Directors, or any committee designated 
by the Board of Directors,] Directors or members of any committee 
appointed by the Board may participate in a meeting of the Board [of 
Directors] or of such committee through the use of a conference 
telephone or similar communications equipment by means of which all 
persons participating in the meeting may hear one another, and such 
participation in a meeting shall constitute presence in person at such 
meeting for all purposes.
Notice of Meetings; Waiver of Notice
    Sec. [3.11]4.12  (a) Notice of any meeting of the Board [of 
Directors] shall be deemed to be duly given to a [director (i) if 
]Director if: (i) Mailed to the address last made known in writing to 
[the Corporation] Nasdaq by such [director] Director as the address to 
which such notices are to be sent, at least [two] seven days before the 
day on which such [special] meeting is to be held[, or]; (ii) [if] sent 
to the [director] Director at such address by telegraph, telefax, 
cable, radio, or wireless, not

[[Page 53112]]

later than the day before the day on which such meeting is to be 
held[,]; or (iii) [if] delivered to the [director] Director personally 
or orally, by telephone or otherwise, not later than the day before the 
day on which such [special] meeting is to be held. Each notice shall 
state the time and place of the meeting and the purpose(s) thereof.
    (b) Notice of any meeting of the Board [of Directors] need not be 
given to any [director] Director if waived by that [director] Director 
in writing (or by telegram, telefax, cable, radio, or wireless and 
subsequently confirmed in writing) whether before or after the holding 
of such meeting, or if such [director] Director is present at such 
meeting, subject to Article IX, Section 9.3(b).
    (c) Any meeting of the Board [of Directors] shall be a legal 
meeting without any prior notice if all [directors] Directors then in 
office shall be present thereat.
Committees [of the Board of Directors]
    Sec. [3.13]4.13  (a) The Board [of Directors] may, by resolution or 
resolutions adopted by a majority of the whole Board [of Directors, 
designate], appoint one or more committees[, each committee to consist 
of one or more directors of the Corporation]. Except as herein 
provided, vacancies in membership of any committee shall be filled by 
the vote of a majority of the whole Board [of Directors]. The Board [of 
Directors] may designate one or more [directors] Directors as alternate 
members of any committee, who may replace any absent or disqualified 
member at any meeting of the committee. In the absence or 
disqualification of any member of a committee, the member or members 
thereof present at any meeting and not disqualified from voting, 
whether or not [he, she,] such member or [they] members constitute a 
quorum, may unanimously appoint another [member of the Board of 
Directors] Director to act at the meeting in the place of any such 
absent or disqualified member. Members of a committee shall hold office 
for such period as may be fixed by a resolution adopted by a majority 
of the whole Board [of Directors, subject, however, to removal, with or 
without cause, at any time by the vote of a majority of the whole Board 
of Directors]. Any member of a committee may be removed from such 
committee only after a majority vote of the whole Board, after 
appropriate notice, for refusal, failure, neglect, or inability to 
discharge such committee member's duties.
    (b) [Any committee, to the extent permitted by law and to the 
extent provided in the] The Board may, by resolution or resolutions 
[creating such committee, shall have and may exercise all the powers 
and authority of the Board of Directors] adopted by a majority of the 
whole Board, delegate to one or more committees the power and authority 
to act on behalf of the Board in carrying out the functions and 
authority delegated to Nasdaq by the NASD under the Delegation Plan. 
Such delegations shall be in conformance with applicable law, the 
Restated Certificate of Incorporation, these By-Laws, and the 
Delegation Plan. Action taken by a committee pursuant to such delegated 
authority shall be subject to review, ratification, or rejection by the 
Board. In all other matters, the Board may, by resolution or 
resolutions adopted by a majority of the whole Board, delegate to one 
or more committees that consist solely of one or more Directors the 
power and authority to act on behalf of the Board in the management of 
the business and affairs of [the Corporation,] and Nasdaq to the extent 
permitted by law and not inconsistent with the Delegation Plan. A 
committee, to the extent permitted by law and provided in the 
resolution or resolutions creating such committee, may authorize the 
seal of [the Corporation] Nasdaq to be affixed to all papers [which] 
that may require it.
    (c) Except as otherwise provided by applicable law, no [No such] 
committee shall have the power or authority of the Board with regard 
to: amending the Restated Certificate of Incorporation or the By-Laws 
of [the Corporation,] Nasdaq; adopting an agreement of merger or 
consolidation; recommending to the [stockholders] stockholder the sale, 
lease, or exchange of all or substantially all [the Corporation's] 
Nasdaq's property and assets; or recommending to the [stockholders] 
stockholder a dissolution of [the Corporation] Nasdaq or a revocation 
of a dissolution. Unless the resolution of the Board [of Directors] 
expressly so provides, no [such] committee shall have the power or 
authority to authorize the issuance of stock.
    (d) The Board may appoint an Executive Committee, which shall, to 
the fullest extent permitted by Delaware law and other applicable law, 
have and be permitted to exercise all the powers and authority of the 
Board in the management of the business and affairs of Nasdaq between 
meetings of the Board, and which may authorize the seal of Nasdaq to be 
affixed to all papers that may require it. The Executive Committee 
shall consist of three or four Directors, including at least one Public 
Director. The President of Nasdaq shall be a member of the Executive 
Committee. The number of Non-Industry committee members shall equal or 
exceed the number of Industry committee members plus the President. An 
Executive Committee member shall hold office for a term of one year. At 
all meetings of the Executive Committee, a quorum for the transaction 
of business shall consist of a majority of the Executive Committee, 
including not less than 50 percent of the Non-Industry committee 
members. In the absence of a quorum, a majority of the committee 
members present may adjourn the meeting until a quorum is present.
    (e) The Board may appoint a Finance Committee. The Finance 
Committee shall advise the Board with respect to the oversight of the 
financial operations and conditions of Nasdaq, including 
recommendations for Nasdaq's annual operating and capital budgets and 
proposed changes to the rates and fees charged by Nasdaq. The Finance 
Committee shall consist of three or four Directors. The President of 
Nasdaq shall serve as a member of the Committee. A Finance Committee 
member shall hold office for a term of one year.
    [(c)](f) Each committee may adopt its own rules of procedure and 
may meet at stated times or on such notice as such committee may 
determine. Each committee shall keep regular minutes of its proceedings 
and report the same to the Board [of Directors] when required.
    [(d)](g) Unless otherwise provided by [the Board of Directors] 
these By-Laws, a majority of [any such] a committee shall constitute a 
quorum for the transaction of business, and the vote of a majority of 
the members of such committee present at a meeting at which a quorum is 
present shall be an act of such committee.
    (h) Upon request of the Secretary of Nasdaq, each prospective 
committee member who is not a Director shall provide to the Secretary 
such information as is reasonably necessary to serve as the basis for a 
determination of the prospective committee member's classification as 
an Industry, Non-Industry, or Public committee member. The Secretary of 
Nasdaq shall certify to the Board each prospective committee member's 
classification. Such committee members shall update the information 
submitted under this Section at least annually and upon request of the 
Secretary of Nasdaq, and shall report immediately to the Secretary any 
change in such classification.

[[Page 53113]]

Conflicts of Interest; Contracts and Transactions Involving Directors
    Sec. [3.12]4.14  (a) A Director or a member of the National Listing 
and Hearing Review Council or a committee shall not directly or 
indirectly participate in any adjudication of the interests of any 
party if that Director or National Listing and Hearing Review Council 
or committee member has a conflict of interest or bias, or if 
circumstances otherwise exist where his or her fairness might 
reasonably be questioned. In any such case, the Director or National 
Listing and Hearing Review Council or committee member shall recuse 
himself or herself or shall be disqualified.
    (b) No contract or transaction between [the Corporation] Nasdaq and 
one or more of its [directors] Directors or officers, or between [the 
Corporation] Nasdaq and any other corporation, partnership, 
association, or other organization in which one or more of its 
[directors] Directors or officers are directors or officers, or have a 
financial interest, shall be void or voidable solely for this reason[, 
or solely because the director or officer is present at or participates 
in the meeting of the Board of Directors or the committee thereof 
which] if: (i) The material facts pertaining to such Director's or 
officer's relationship or interest and the contract or transaction are 
disclosed or are known to the Board or the committee, and the Board or 
committee in good faith authorizes the contract or transaction[, or 
solely because his, her, or their votes are counted for such purposes 
if: (i) The material facts pertaining to such director's or officer's 
relationship or interest and] by the affirmative vote of a majority of 
the disinterested Directors; (ii) the material facts are disclosed or 
become known to the Board or committee after the contract or 
transaction [are disclosed or are known to the Board of Directors or 
the committee, and the Board] is entered into, and the Board or 
committee in good faith [authorizes] ratifies the contract or 
transaction by the affirmative vote of a majority of the disinterested 
[directors, even though the disinterested directors be less than a 
quorum; or (ii)] Directors; or (iii) the material facts pertaining to 
the [director's] Director's or officer's relationship or interest and 
the contract or transaction are disclosed or are known to the 
[stockholders] stockholder entitled to vote thereon, and the contract 
or transaction is specifically approved in good faith by vote of the 
[stockholders; or (iii) the contract or transaction is fair as to the 
Corporation as of the time it is authorized, approved or ratified by 
the Board of Directors, a committee thereof, or the stockholders. 
Common or interested directors] stockholder. Only disinterested 
Directors may be counted in determining the presence of a quorum at the 
portion of a meeting of the Board [of Directors,] or of a committee 
that [which] authorizes the contract or transaction. This subsection 
shall not apply to a contract or transaction between Nasdaq and the 
NASD or NASD Regulation.

Communication of Views Regarding NASD or NASD Regulation Election or 
Nomination

    Sec. 4.15  Nasdaq, the Board, any committee, the Nasdaq Listing and 
Hearing Review Council, and Nasdaq staff shall not take any position 
publicly or with an NASD member or person associated with or employed 
by a member with respect to any candidate in a contested election or 
nomination held pursuant to the NASD By-Laws or the NASD Regulation By-
Laws. A Director, committee member, or Nasdaq Listing and Hearing 
Review Council member may communicate his or her views with respect to 
a candidate if such individual acts solely in his or her individual 
capacity and disclaims any intention to communicate in any official 
capacity on behalf of Nasdaq, the Board, the Nasdaq Listing and Hearing 
Review Council, or any committee. Nasdaq, the Board, the Nasdaq Listing 
and Hearing Review Council, any committee, and the Nasdaq staff shall 
not provide any administrative support to any candidate in a contested 
election or nomination conducted pursuant to the NASD By-Laws or the 
NASD Regulation By-Laws.
Action Without Meeting
    Sec. [3.14]4.16  Any action required or permitted to be taken at 
[any] a meeting of the Board [of Directors or any] or of a committee 
[thereof] may be taken without a meeting if all Directors or all 
members of [the Board of Directors or] such committee, as the case may 
be, consent thereto in writing, and the writing or writings are filed 
with the minutes of proceedings of the Board [of Directors or such 
committee] or the committee.

Article V

Nasdaq Listing and Hearing Review Council Appointment and Authority

    Sec. 5.1  The Board shall appoint a Nasdaq Listing and Hearing 
Review Council. The Nasdaq Listing and Hearing Review Council may be 
authorized to act for the Board in a manner consistent with these By-
Laws, the Rules of the Association, and the Delegation Plan with 
respect to listing decisions. The Nasdaq Listing and Hearing Review 
Council also shall consider and make recommendations to the Board on 
policy and rule changes relating to issuer listings. The Board may 
delegate such other powers and duties to the Nasdaq Listing and Hearing 
Review Council as the Board deems appropriate in a manner not 
inconsistent with the Delegation Plan.

Number of Members and Qualifications

    Sec. 5.2  (a) The Nasdaq Listing and Hearing Review Council shall 
consist of no fewer than eight and no more than 11 members, of which 
not more than 50 percent may be engaged in market-making activity or 
employed by a member whose revenues from market-making activity exceed 
ten percent of its total revenues. The Nasdaq Listing and Hearing 
Review Council shall include at least three Non-Industry members.
    (b) As soon as practicable following the appointment of members, 
the Nasdaq Listing and Hearing Review Council shall elect a Chair from 
among its members. The Chair shall have such powers and duties as may 
be determined from time to time by the Nasdaq Listing and Hearing 
Review Council. The Board, by resolution adopted by a majority of 
Directors then in office and after notice to the NASD Board, may remove 
the Chair from such position at any time for refusal, failure, neglect, 
or inability to discharge the duties of Chair.

Nomination Process

    Sec. 5.3  The Secretary of Nasdaq shall collect from each nominee 
for the office of member of the Nasdaq Listing and Hearing Review 
Council such information as is reasonably necessary to serve as the 
basis for a determination of the nominee's qualifications and 
classification as an Industry or Non-Industry member, and the Secretary 
shall certify to the National Nominating Committee each nominee's 
qualifications and classification. After appointment to the Nasdaq 
Listing and Hearing Review Council, each member shall update such 
information at least annually and upon request of the Secretary, and 
shall report immediately to the Secretary any change in such 
qualifications or classification.

Term of Office

    Sec. 5.4  (a) Except as otherwise provided in this Article, each 
Nasdaq Listing and Hearing Review Council member shall hold office for 
a term of two years or until a successor is duly

[[Page 53114]]

appointed and qualified, except in the event of earlier termination 
from office by reason of death, resignation, removal, disqualification, 
or other reason.
    (b) The Nasdaq Listing and Hearing Review Council shall be divided 
into two classes. The term of office of those of the first class shall 
expire in January 1999, and the term of office of those of the second 
class shall expire one year thereafter. Beginning in January 1999, 
members shall be appointed for a term of two years to replace those 
whose terms expire.
    (c) Beginning in 1999, no member may serve more than two 
consecutive terms, except that if a member is appointed to fill a term 
of less than one year, such member may serve up to two consecutive 
terms following the expiration of such member's initial term.

Resignation

    Sec. 5.5  A member of the Nasdaq Listing and Hearing Review Council 
may resign at any time upon written notice to the Board. Any such 
resignation shall take effect at the time specified therein, or if the 
time is not specified, upon receipt thereof, and the acceptance of such 
resignation, unless required by the terms thereof, shall not be 
necessary to make such resignation effective.

Removal

    Sec. 5.6  Any or all of the members of the Nasdaq Listing and 
Hearing Review Council may be removed from office at any time for 
refusal, failure, neglect, or inability to discharge the duties of such 
office by majority vote of the Board.

Disqualification

    Sec. 5.7  Notwithstanding Section 5.4, the term of office of a 
Nasdaq Listing and Hearing Review Council member shall terminate 
immediately upon a determination by the Board, by a majority vote, 
that: (a) The member no longer satisfies the classification (Industry 
or Non-Industry) for which the member was elected; and (b) the member's 
continued service as such would violate the compositional requirements 
of the Nasdaq Listing and Hearing Review Council set forth in Section 
5.2. If the term of office of a Nasdaq Listing and Hearing Review 
Council member terminates under this Section, and the remaining term of 
office of such member at the time of termination is not more than six 
months, during the period of vacancy the Nasdaq Listing and Hearing 
Review Council shall not be deemed to be in violation of Section 5.2 by 
virtue of such vacancy.

Filling of Vacancies

    Sec. 5.8  If a position on the Nasdaq Listing and Hearing Review 
Council becomes vacant, whether because of death, disability, 
disqualification, removal, or resignation, the National Nominating 
Committee shall nominate, and the Board shall appoint a person 
satisfying the qualifications for the position as provided in Section 
5.2(a) to fill such vacancy, except that if the remaining term of 
office for the vacant position is not more than six months, no 
replacement shall be required.

Quorum and Voting

    Sec. 5.9  At all meetings of the Nasdaq Listing and Hearing Review 
Council, unless otherwise set forth in these By-Laws, a quorum for the 
transaction of business shall consist of a majority of the Nasdaq 
Listing and Hearing Review Council, including one Non-Industry member. 
In the absence of a quorum, a majority of the members present may 
adjourn the meeting until a quorum is present.

Meetings

    Sec. 5.10  The members of the Nasdaq Listing and Hearing Review 
Council may participate in a meeting through the use of a conference 
telephone or similar communications equipment by means of which all 
person participating in the meeting may hear one another, and such 
participation in a meeting shall constitute presence in person at such 
meeting for all purposes.

Article VI

Compensation

Compensation of Board, Council, and Committee Members

    Sec. 6.1  The Board may provide for reasonable compensation of the 
Chair of the Board, the Directors, Nasdaq Listing and Hearing Review 
Council members, and the members of any committee. The Board may also 
provide for reimbursement of reasonable expenses incurred by such 
persons in connection with the business of Nasdaq.
Article [IV] VII
Officers, Agents, and Employees
Principal Officers
    Sec. [4.1]7.1  The principal officers of [the Corporation] Nasdaq 
shall be elected by the Board [of Directors] and shall include a Chair, 
a President, a Secretary, a Treasurer, and such other officers as may 
be designated by the Board [of Directors]. One person may hold the 
offices and perform the duties of any two or more of said principal 
offices, except the offices and duties of President and Vice President 
or of President and Secretary. None of the principal officers, except 
the Chair of the Board and the President, need be [directors of the 
Corporation] Directors of Nasdaq.
Election of Principal Officers; Term of Office
    Sec. [4.2]7.2  (a) The principal officers of [the Corporation] 
Nasdaq shall be elected annually by the Board [of Directors] at the 
annual meeting of the Board [of Directors] convened pursuant to Section 
[3.10(a) of these By-Laws] 4.11(a). Failure to elect any principal 
officer annually shall not dissolve [the Corporation] Nasdaq.
    (b) If the Board [of Directors] shall fail to fill any principal 
office at an annual meeting, or if any vacancy in any principal office 
shall occur, or if any principal office shall be newly created, such 
principal office may be filled at any regular or special meeting of the 
Board [of Directors].
    (c) Each principal officer shall hold office until [his or her] a 
successor is duly elected and qualified, or until [his or her earlier] 
death, resignation, or removal.
Subordinate Officers, Agents, or Employees
    Sec. [4.3]7.3  In addition to the principal officers, [the 
Corporation] Nasdaq may have one or more subordinate officers, agents, 
and employees as the Board [of Directors] may deem necessary, each of 
whom shall hold office for such period and exercise such authority and 
perform such duties as the Board [of Directors], the President, or any 
officer designated by the Board [of Directors], may from time to time 
determine. [The Board of Directors at any time may appoint and remove, 
or may delegate to any principal officer the power to appoint and to 
remove, any subordinate officer, agent, or employee of the 
Corporation.] Agents and employees of Nasdaq shall be under the 
supervision and control of the officers of Nasdaq, unless the Board, by 
resolution, provides that an agent or employee shall be under the 
supervision and control of the Board.
Delegation of Duties of Officers
    Sec. [4.4]7.4  The Board [of Directors] may delegate the duties and 
powers of any officer of [the Corporation] Nasdaq to any other officer 
or to any [director] Director for a specified period of time and for 
any reason that the Board [of Directors] may deem sufficient.

[[Page 53115]]

Resignation and Removal of Officers
    Sec. [4.5]7.5  (a) Any officer may resign at any time upon written 
notice of resignation to the Board [of Directors], the President, or 
the Secretary. Any such resignation shall take effect upon receipt of 
such notice or at any later time specified therein. The acceptance of a 
resignation shall not be necessary to make the resignation effective.
    (b) Any officer[, agent or employee of the Corporation] of Nasdaq 
may be removed, with or without cause, by resolution adopted by a 
majority of the [directors] Directors then in office at any regular or 
special meeting of the Board [of Directors] or by a written consent 
signed by all of the [directors] Directors then in office. Such removal 
shall be without prejudice to the contractual rights of the affected 
officer, [agent, or employee,] if any, with [the Corporation] Nasdaq.
Bond
    Sec. [4.6]7.6  [The Corporation] Nasdaq may secure the fidelity of 
any or all of its officers, agents, or employees by bond or otherwise.
Chair of the Board
    Sec. [4.7]7.7  The Chair of the Board shall preside at all meetings 
of the Board [of Directors] at which [he or she] the Chair is present. 
The Chair shall exercise such other powers and perform such other 
duties as may be assigned to [him or her] the Chair from time to time 
by the Board [of Directors].
President
    Sec. [4.8] 7.8  The President shall, in the absence of the Chair of 
the Board, preside at all meetings of the Board [of Directors] at which 
[he or she] the President is present. The President shall be the [chief 
executive officer of the Corporation] Chief Executive Officer of Nasdaq 
and shall have general supervision over the business and affairs of 
[the Corporation] Nasdaq. The President shall have all powers and 
duties usually incident to the office of the President, except as 
specifically limited by a resolution of the Board [of Directors]. The 
President shall exercise such other powers and perform such other 
duties as may be assigned to [him or her] the President from time to 
time by the Board [of Directors].
Vice President
    Sec. [4.9] 7.9  The Board shall elect one or more Vice Presidents. 
In the absence or disability of the President or if the office of 
President [be] becomes vacant, the Vice Presidents in the order 
determined by the Board [of Directors], or if no such determination has 
been made, in the order of their seniority, shall perform the duties 
and exercise the powers of the President, subject to the right of the 
Board [of Directors] at any time to extend or restrict such powers and 
duties or to assign them to others. Any Vice President may have such 
additional designations in [his or her] such Vice President's title as 
the Board [of Directors] may determine. The Vice Presidents shall 
generally assist the President in such manner as the President shall 
direct. Each Vice President shall exercise such other powers and 
perform such other duties as may be assigned to [him or her] such Vice 
President from time to time by the Board [of Directors] or the 
President. The term ``Vice President'' used in this Section shall 
include the positions of Executive Vice President, Senior Vice 
President, and Vice President.
Secretary
    Sec. [4.10] 7.10  The Secretary shall act as Secretary of all 
meetings of [stockholders] the stockholder and of the Board [of 
Directors] at which [he or she] the Secretary is present, shall record 
all the proceedings of all such meetings in a book to be kept for that 
purpose, shall have supervision over the giving and service of notices 
of [the Corporation] Nasdaq, and shall have supervision over the care 
and custody of the corporate records and the corporate seal of [the 
Corporation] Nasdaq. The Secretary shall be empowered to affix the 
corporate seal to documents, the execution of which on behalf of [the 
Corporation] Nasdaq under its seal, is duly authorized, and when so 
affixed, may attest the same. The Secretary shall have all powers and 
duties usually incident to the office of Secretary, except as 
specifically [listed] limited by a resolution of the Board [of 
Directors]. The Secretary shall exercise such other powers and perform 
such other duties as may be assigned to [him or her] the Secretary from 
time to time by the Board [of Directors] or the President.
Assistant Secretary
    Sec. [4.11] 7.11  In the absence of the Secretary or in the event 
of [his or her] the Secretary's inability or refusal to act, any 
Assistant Secretary, approved by the Board, shall exercise all powers 
and perform all duties of the Secretary. An Assistant Secretary shall 
also exercise such other powers and perform such other duties as may be 
assigned to [him or her] such Assistant Secretary from time to time by 
the Board [of Directors] or the Secretary.
Treasurer
    Sec. [4.12] 7.12  The Treasurer shall have general supervision over 
the care and custody of the funds and over the receipts and 
disbursements of [the Corporation] Nasdaq and shall cause the funds of 
[the Corporation] Nasdaq to be deposited in the name of [the 
Corporation] Nasdaq in such banks or other depositories as the Board 
[of Directors] may designate. The Treasurer shall have supervision over 
the care and safekeeping of the securities of [the Corporation] Nasdaq. 
The Treasurer shall have all powers and duties usually incident to the 
office of Treasurer except as specifically limited by a resolution of 
the Board [of Directors]. The Treasurer shall exercise such other 
powers and perform such other duties as may be assigned to [him] the 
Treasurer from time to time by the Board [of Directors] or the 
President.
Assistant Treasurer
    Sec. [4.13] 7.13  In the absence of the Treasurer or in the event 
of [his or her] the Treasurer's inability or refusal to act, any 
Assistant Treasurer, approved by the Board, shall exercise all powers 
and perform all duties of the Treasurer. An Assistant Treasurer shall 
also exercise such other powers and perform such other duties as may be 
assigned to [him or her] such Assistant Treasurer from time to time by 
the Board [of Directors] or the Treasurer.
Article [V] VIII
    Indemnification of Directors, Officers, Employees, [and] Agents, 
Nasdaq Listing and Hearing Review Council and Committee Members
    Sec. [5.1] 8.1  (a) [The Corporation] Nasdaq shall indemnify, and 
hold harmless, to the fullest extent permitted by Delaware law as it 
presently exists or may thereafter be amended, any person (and the 
heirs, executors, and administrators of such person) who, by reason of 
the fact that he or she is or was a [director or] Director, officer [of 
the Corporation], or employee of Nasdaq or a Nasdaq Listing and Hearing 
Review Council or committee member, or is or was a [director or] 
Director, officer, or employee of Nasdaq who is or was serving at the 
request of [the Corporation] Nasdaq as a director, officer, employee, 
or agent of another corporation, partnership, joint venture, trust [or 
other enterprise, ], enterprise, or non-profit entity, including 
service with respect to employee benefit plans, is or was a party, or 
is threatened to be made a party to:
    (i) Any threatened, pending, or completed action, suit, or 
proceeding,

[[Page 53116]]

whether civil, criminal, administrative, or investigative (other than 
an action by or in the right of [the Corporation)] Nasdaq) against 
expenses (including attorneys' fees and disbursements), judgments, 
fines, and amounts paid in settlement actually and reasonably incurred 
by such person in connection with any such action, suit, or proceeding; 
or
    (ii) Any threatened, pending, or completed action or suit by or in 
the right of [the Corporation] Nasdaq to procure a judgment in its 
favor against expenses (including attorneys' fees and disbursements) 
actually and reasonably incurred by such [persons] person in connection 
with the defense or settlement of such action or suit.
    (b) Nasdaq shall advance expenses (including attorneys' fees and 
disbursements) to persons described in subsection (a); provided, 
however, that the payment of expenses incurred by such person in 
advance of the final disposition of the matter shall be conditioned 
upon receipt of a written undertaking by that person to repay all 
amounts advanced if it should be ultimately determined that the person 
is not entitled to be indemnified under this Section or otherwise.
    [(b)](c) [The Corporation] Nasdaq may, in its discretion, indemnify 
and hold harmless, to the fullest extent permitted by Delaware law as 
it presently exists or may thereafter be amended, any person (and the 
heirs, executors, and administrators of such persons) who, by reason of 
the fact that he or she is or was an [employee or agent of the 
Corporation, or ] agent of Nasdaq or is or was an agent of Nasdaq who 
is or was serving at the request of [the Corporation] Nasdaq as a 
director, officer, employee, or agent of another corporation, 
partnership, trust [or other enterprise, ], enterprise, or non-profit 
entity, including service with respect to employee benefit plans, was 
or is a party, or is threatened to be made a party to any action or 
proceeding described [above] in subsection (a).
    [(c)](d) [The Corporation] Nasdaq may, in its discretion, pay the 
expenses (including attorneys' fees and disbursements) reasonably and 
actually incurred by an agent in defending any action, suit, or 
proceeding in advance of its final disposition[,]; provided, however, 
that the payment of expenses incurred by [a director, officer, or 
employee] such person in advance of the final disposition of the matter 
shall be conditioned upon receipt of a written undertaking by [the 
officer, director, or employee] that person to repay all amounts 
advanced if it should be ultimately determined that [such] the person 
is not entitled to be indemnified under this Section [5.1 or otherwise] 
or otherwise.
    (e) Notwithstanding the foregoing or any other provision of these 
By-Laws, no advance shall be made by Nasdaq to an agent or non-officer 
employee if a determination is reasonably and promptly made by the 
Board by a majority vote of those Directors who have not been named 
parties to the action, even though less than a quorum, or, if there are 
no such Directors or if such Directors so direct, by independent legal 
counsel, that, based upon the facts known to the Board or such counsel 
at the time such determination is made: (1) The person seeking 
advancement of expenses (i) acted in bad faith, or (ii) did not act in 
a manner that he or she reasonably believed to be in or not opposed to 
the best interests of Nasdaq; (2) with respect to any criminal 
proceeding, such person believed or had reasonable cause to believe 
that his or her conduct was unlawful; or (3) such person deliberately 
breached his or her duty to Nasdaq.
    [(d)] (f)  The indemnification provided by this [section] Section 
in a specific case shall not be deemed exclusive of any other rights to 
which a person seeking indemnification may be entitled [under any by-
law, agreement, vote of stockholders or disinterested directors or 
otherwise], both as to action in his or her official capacity and as to 
action in another capacity while holding such office, and shall 
continue as to a person who has ceased to be a [director] Director, 
officer, National Listing and Hearing Review Council or committee 
member, employee, or agent and shall inure to the benefit of [his or 
her] such person's heirs, executors, and administrators.
    (g) Notwithstanding the foregoing, but subject to subsection (j), 
Nasdaq shall be required to indemnify any person identified in 
subsection (a) in connection with a proceeding (or part thereof) 
initiated by such person only if the initiation of such proceeding (or 
part thereof) by such person was authorized by the Board.
    [(e)] (h)  [The Corporation's] Nasdaq's obligation, if any, to 
indemnify or advance expenses to any person who is or was serving at 
its request as a director, officer, employee, or agent of another 
corporation, partnership, joint venture, trust [or other], enterprise, 
or non-profit entity shall be reduced by any amount such person may 
collect as indemnification or advancement from such other corporation, 
partnership, joint venture, trust, [or other] enterprise, or non-profit 
entity.
    [(f)](i)  Any repeal or modification of the foregoing provisions of 
this Section [5.1] shall not adversely affect any right or protection 
hereunder of any person respecting any act or omission occurring prior 
to the time of such repeal or modification.
    (j) If a claim for indemnification or advancement of expenses under 
this Article is not paid in full within 60 days after a written claim 
therefor by an indemnified person has been received by Nasdaq, the 
indemnified person may file suit to recover the unpaid amount of such 
claim and, if successful in whole or in part, shall be entitled to be 
paid the expense of prosecuting such claim. In any such action, Nasdaq 
shall have the burden of proving that the indemnified person is not 
entitled to the requested indemnification or advancement of expenses 
under Delaware law.
Indemnification Insurance
    Sec. [5.2]8.2  [The Corporation] Nasdaq shall have power to 
purchase and maintain insurance on behalf of any person who is or was a 
[director] Director, officer, National Listing and Hearing Review 
Council or committee member, employee, or agent of [the Corporation] 
Nasdaq, or is or was serving at the request of [the Corporation] Nasdaq 
as a director, officer, employee, or agent of another corporation, 
partnership, joint venture, trust [or other], enterprise, or non-profit 
entity against any liability asserted against [him or her] such person 
and incurred by [him or her] such person in any such capacity, or 
arising out of [his or her] such person's status as such, whether or 
not [the Corporation] Nasdaq would have the power to indemnify [him or 
her] such person against such liability [under the provisions of this 
section] hereunder.
Article [VI] IX
Capital Stock

Sole Stockholder

    Sec. 9.1  The NASD shall be the sole stockholder of the capital 
stock of Nasdaq.
Certificates
    Sec. [6.1]9.2  [Each] The stockholder [in the Corporation] shall be 
entitled to a certificate or certificates in such form as shall be 
approved by the Board [of Directors], certifying the number of shares 
of capital stock in [the Corporation] Nasdaq owned by [such] the 
stockholder.

[[Page 53117]]

Signatures
    Sec. [6.2]9.3  (a) Certificates for shares of capital stock of [the 
Corporation] Nasdaq shall be signed in the name of [the Corporation] 
Nasdaq by two officers with one being the Chair of the Board, the 
President, or a Vice President, and the other being the Secretary, the 
Treasurer, or such other officer that may be authorized by the Board 
[of Directors]. Such certificates may be sealed with the corporate 
[Seal] seal of [the Corporation] Nasdaq or a facsimile thereof.
    (b) If any such certificates are countersigned by a transfer agent 
other than [the Corporation] Nasdaq or its employee, or by a registrar 
other than [the Corporation] Nasdaq or its employee, any other 
signature on the certificate may be a facsimile. In [case] the event 
that any officer, transfer agent, or registrar who has signed or whose 
facsimile signature has been placed upon a certificate shall [have 
ceased] cease to be such officer, transfer agent, or registrar before 
such certificate is issued, such certificate may be issued by [the 
Corporation] Nasdaq with the same effect as if such person were such 
officer, transfer agent, or registrar at the date of issue.
Stock Ledger
    Sec. [6.3]9.4  (a) A record of all certificates for capital stock 
issued by [the Corporation] Nasdaq shall be kept by the Secretary or 
any other officer, employee, or agent designated by the Board [of 
Directors]. Such record shall show the name and address of the person, 
firm, or corporation in which certificates for capital stock are 
registered, the number of shares represented by each such certificate, 
the date of each such certificate, and in the case of certificates 
which have been canceled, the date of cancellation thereof.
    (b) [The Corporation] Nasdaq shall be entitled to treat the holder 
of record of shares of capital stock as shown on the stock ledger as 
the owner thereof and as the person entitled to vote such shares and to 
receive notice of meetings, and for all other purposes. [The 
Corporation] Nasdaq shall not be bound to recognize any equitable or 
other claim to or interest in any share of capital stock on the part of 
any other person, whether or not [the Corporation] Nasdaq shall have 
express or other notice thereof.
Transfers of Stock
    Sec. [6.4]9.5  (a) The Board [of Directors] may make such rules and 
regulations as it may deem expedient, not inconsistent with law, the 
Restated Certificate of Incorporation, or these By-Laws, concerning the 
issuance, transfer, and registration of certificates for [share] shares 
of capital stock of [the Corporation] Nasdaq. The Board [of Directors] 
may appoint, or authorize any principal officer to appoint, one or more 
transfer agents or one or more transfer clerks and one or more 
registrars and may require all certificates for capital stock to bear 
the signature or signatures of any of them.
    (b) Transfers of capital stock shall be made on the books of [the 
Corporation] Nasdaq only upon delivery to [the Corporation] Nasdaq or 
its transfer agent of: (i) a written direction of the registered holder 
named in the certificate or such holder's attorney lawfully constituted 
in writing[,]; (ii) the certificate for the shares of capital stock 
being transferred[,]; and (iii) a written assignment of the shares of 
capital stock evidenced thereby.
Cancellation
    Sec. [6.5]9.6  Each certificate for capital stock surrendered to 
[the Corporation] Nasdaq for exchange or transfer shall be canceled and 
no new certificate or certificates shall be issued in exchange for any 
existing certificate other than pursuant to [Sec. 6.6. of these By-
Laws] Section 9.7 until such existing certificate shall have been 
canceled.
Lost, Stolen, Destroyed, and Mutilated Certificates
    Sec. [6.6]9.7  In the event that any certificate for shares of 
capital stock of [the Corporation] Nasdaq shall be mutilated, [the 
Corporation] Nasdaq shall issue a new certificate in place of such 
mutilated certificate. In [case] the event that any such certificate 
shall be lost, stolen, or destroyed [the Corporation], Nasdaq may, in 
the discretion of the Board [of Directors] or a committee [designated] 
appointed thereby with power so to act, issue a new certificate for 
capital stock in the place of any such lost, stolen, or destroyed 
certificate. The applicant for any substituted certificate or 
certificates shall surrender any mutilated certificate or, in the case 
of any lost, stolen, or destroyed certificate, furnish satisfactory 
proof of such loss, theft, or destruction of such certificate and of 
the ownership thereof. The Board [of Directors] or such committee may, 
in its discretion, require the owner of a lost or destroyed 
certificate, or [his] the owner's representatives, to furnish to [the 
Corporation] Nasdaq a bond with an acceptable surety or sureties and in 
such sum as will be sufficient to indemnify [the Corporation] Nasdaq 
against any claim that may be made against it on account of the lost, 
stolen, or destroyed certificate or the issuance of such new 
certificate. A new certificate may be issued without requiring a bond 
when, in the judgment of the Board [of Directors], it is proper to do 
so.
Fixing of Record [Dates] Date
    Sec. [6.7]9.8  The Board may fix a record date in accordance with 
Delaware law. [(a) In order that the Corporation may determine the 
stockholders entitled to notice of or to vote at any meeting of 
stockholders or any adjournment thereof, or to express consent or 
dissent to corporate action in writing without a meeting, or to 
exercise any rights with respect to any change, conversion or exchange 
of stock, or for the purpose of any other lawful action, the Board of 
Directors may fix, in advance, a record date, which shall not be more 
than sixty nor less than ten days before the date of any meeting of 
stockholders, nor more than sixty days prior to any other action. Only 
such stockholders as shall be stockholders of record on the date so 
fixed shall be entitled to notice of and to vote at such meeting or any 
adjournment thereof, or to give such consent or dissent, or to exercise 
such rights with respect to any such change, conversion or exchange of 
stock, or to participate in any such action, notwithstanding the 
transfer of any stock on the books of the Corporation after any record 
date so fixed.]
    [(b) If no record date is fixed by the Board of Directors:
    (i) The record date for determining stockholders entitled to notice 
of or to vote at a meeting of stockholders shall be at the close of 
business on the day next preceding the date on which notice is given, 
or if notice is waived, at the close of business on the day next 
preceding the day on which the meeting is held;
    (ii) The record date for determining stockholders entitled to 
express consent to corporate action in writing without a meeting, when 
no prior action by the Board of Directors is necessary, shall be at the 
close of business on the day on which the first written consent is 
expressed; and
    (iii) The record date for determining stockholders for any other 
purpose shall be at the close of business on the day on which the Board 
of Directors adopts the resolution relating thereto.]
    [(c) A determination of stockholders of record entitled to notice 
of or to vote at a meeting of stockholders shall apply to any 
adjournment of the meeting; provided, however, that the Board of

[[Page 53118]]

Directors may fix a new record date for the adjourned meeting.]
Article [VII] X
Miscellaneous Provisions
Corporate Seal
    Sec. [7.1]10.1  The seal of [the Corporation] Nasdaq shall be 
circular in form and shall bear, in addition to any other emblem or 
device approved by the Board [of Directors], the name of [the 
Corporation] Nasdaq, the year of its incorporation, and the words 
``Corporate Seal'' and ``Delaware[''].'' The seal may be used by 
causing it to be affixed or impressed, or a facsimile thereof may be 
reproduced or otherwise used in such manner as the Board [of Directors] 
may determine.
Fiscal Year
    Sec. [7.2]10.2  The fiscal year of [the Corporation] Nasdaq shall 
begin the 1st day of January in each year, or such other month as the 
Board [of Directors] may determine by resolution.
Waiver of Notice
    Sec. [7.3]10.3  (a) Whenever notice is required to be given by law, 
the Restated Certificate of Incorporation, or these By-Laws, a written 
waiver thereof, signed by the person or persons entitled to such 
notice, whether before or after the time stated therein, shall be 
deemed equivalent to notice. Neither the business to be transacted at, 
nor the purpose of, any regular or special meeting of the 
[stockholders, directors] stockholder, Directors, or members of a 
committee of [directors] Directors need be specified in any written 
waiver of notice.
    (b) Attendance of a person at a meeting shall constitute a waiver 
of notice of such meeting, except when the person attends a meeting for 
the express purpose of objecting, at the beginning of the meeting, to 
the transaction of any business because the meeting is not lawfully 
called or convened.
Execution of Instruments, Contracts, Etc.
    Sec. [7.4.]10.4  (a) All checks, drafts, bills of exchange, notes, 
or other obligations or orders for the payment of money shall be signed 
in the name of [the Corporation] Nasdaq by such officer or officers or 
person or persons[,] as the Board [of Directors], or a duly authorized 
committee thereof, may from time to time designate. Except as otherwise 
provided by law, the Board [of Directors], any committee given specific 
authority in the premises by the Board [of Directors], or any committee 
given authority to exercise generally the powers of the Board [of 
Directors] during intervals between meetings of the Board [of 
Directors], may authorize any officer, employee, or agent, in the name 
of and on behalf of [the Corporation] Nasdaq, to enter into or execute 
and deliver deeds, bonds, mortgages, contracts, and other obligations 
or instruments, and such authority may be general or confined to 
specific instances.
    (b) All applications, written instruments, and papers required by 
any department of the United States Government or by any state, county, 
municipal, or other governmental authority, may be executed in the name 
of [the Corporation] Nasdaq by any principal officer or subordinate 
officer of [the Corporation] Nasdaq, or, to the extent designated for 
such purpose from time to time by the Board [of Directors], by an 
employee or agent of [the Corporation] Nasdaq. Such designation may 
contain the power to substitute, in the discretion of the person named, 
one or more other persons.
Form of Records
    Sec. [7.5]10.5  Any records maintained by [the Corporation] Nasdaq 
in the regular course of business, including its stock ledger, books of 
account, and minute books, may be kept on, or be in the form of, 
magnetic tape, computer disk, or any other information storage device, 
provided that the records so kept can be converted into clearly legible 
form within a reasonable time.
Article [VIII] XI
Amendments; Emergency By-Laws
By [Stockholders] Stockholder
    Sec. [8.1]11.1  These By-Laws may be altered, amended, or repealed, 
or new By-Laws may be adopted, at any meeting of [stockholders by the 
vote of the holders of not less than a majority of the outstanding 
shares of stock entitled to vote thereat] the stockholder, provided 
that, in the case of a special meeting, notice that an amendment is to 
be considered and acted upon shall be inserted in the notice or waiver 
of notice of said meeting.
By Directors
    Sec. [8.2]11.2  To the extent permitted by the Restated Certificate 
of Incorporation, these By-Laws may be altered, amended, or repealed, 
or new By-Laws may be adopted, at any regular or special meeting of the 
Board [of Directors] by a resolution adopted by a vote of a majority of 
the whole Board [of Directors].
Emergency By-Laws
    Sec. [8.3]11.3  The Board [of Directors] may adopt emergency By-
Laws subject to repeal or change by action of the [stockholders] 
stockholder which shall, notwithstanding any different provision of 
law, the Restated Certificate of Incorporation, or these By-Laws, be 
operative during any emergency resulting from any nuclear or atomic 
disaster, an attack on the United States or on a locality in which [the 
Corporation] Nasdaq conducts its business or customarily holds meetings 
of the Board [of Directors or stockholders] or the stockholder, any 
catastrophe, or other emergency condition, as a result of which a 
quorum of the Board [of Directors] or a committee thereof cannot 
readily be convened for action. Such emergency By-Laws may make any 
provision that may be practicable and necessary [for] under the 
circumstances of the emergency.
* * * * *
Plan of Allocation and Delegation of Functions by NASD to Subsidiaries
I. NASD, Inc.
    The NASD, Inc. (referenced as ``NASD''), the Registered Section 15A 
Association, is the parent company of the wholly-owned Subsidiaries 
NASD Regulation, Inc. (referenced individually as ``[NASDR] NASD 
Regulation'') and The Nasdaq Stock Market, Inc. (referenced 
individually as ``Nasdaq'') (referenced collectively as the 
``Subsidiaries''). The term ``Association'' shall refer to the NASD and 
the Subsidiaries collectively.
    A. Governors, Directors and Committee Members The terms ``Industry 
Governors,'' ``Non-Industry Governors,'' ``Public Governors,'' 
``Industry Directors,'' ``Non-Industry Directors,'' ``Public 
Directors,'' ``Industry committee members,'' ``Non-Industry committee 
members,'' and ``Public committee members,'' as used herein, shall have 
the meanings set forth in the By-Laws of the NASD, NASD Regulation and 
Nasdaq, as applicable.
    [The following definitions are applicable to Governors of the NASD, 
Directors of the Subsidiaries, and Members of Committees of the NASD 
and the Subsidiaries.]
    [1. ``Industry'' Governors, Directors or Committee Members shall 
include (a) officers, directors and employees of brokers and dealers 
and persons who have been employed in any such capacity at any time 
within the prior three years; and (b) persons who have consulting or 
employment relationships with or provided professional services

[[Page 53119]]

to the Association and persons who have had any such relationship or 
provided any such services at any time within the prior three years.]
    [2. ``Non-industry'' Governors, Directors or Committee Members 
shall be (a) Public Governors; (b) officers and employees of issuers of 
securities listed on The Nasdaq Stock Market or traded in the over-the-
counter market; (c) persons affiliated with brokers and dealers that 
operate solely to assist the securities-related activities of the 
business of non-member affiliates (such as a broker or dealer 
established to:
    (i) Distribute an affiliate's securities which are issued on a 
continuous or regular basis, or (ii) process the limited buy and sell 
orders of the shares of employee owners of the affiliate); (d) 
employees of an entity that is affiliated with a broker or dealer that 
does not account for a material portion of the revenues of the 
consolidated entity, and who are primarily engaged in the business of 
the non-member entity; and (e) other individuals who would not be 
Industry Governors, Directors or Committee Members.]
    [3. ``Public'' Governors, Directors or Committee Members shall be 
non-industry persons who have no material business relationship with a 
broker, dealer or the Association.]
    B. Functions and Authority of the NASD--The NASD shall have 
ultimate responsibility for the rules and regulations of the 
Association and its operation and administration. As set forth below in 
Sections II.A. and III.A., the NASD has delegated certain authority and 
functions to its [subsidiaries] Subsidiaries. Actions taken pursuant to 
delegated authority, however, remain subject to review, ratification or 
rejection by the NASD Board in accordance with procedures established 
by that Board. Any function or responsibility as a registered 
securities association under the Securities Exchange Act of 1934 
(``Act''), or as set forth in the [articles of incorporation] Restated 
Certificate of Incorporation or the by-laws is hereby reserved, except 
as expressly delegated to the [subsidiaries] Subsidiaries. In addition, 
the NASD expressly retains the following authority and functions:
    1. To exercise overall responsibility for ensuring that the 
Association's statutory and self-regulatory obligations and functions 
are fulfilled.
    2. To delegate authority to the Subsidiaries to take actions on 
behalf of the NASD.
    3. To elect the Subsidiary Boards of Directors.
    4. To review the rulemaking and disciplinary decisions of the 
Subsidiaries (See Sections [II.C.] II.B. and [III.C] III.B. below).
    5. To coordinate actions of the Subsidiary Boards as necessary.
    6. To resolve any disputes between the Subsidiaries.
    7. To administer common overhead and technology of the 
Subsidiaries.
    8. To administer the Office of Internal Review as provided in 
[Section I.D.4 below] the NASD By-Laws.
    9. To manage external Association relations on major policy issues.
    10. To direct the Subsidiaries to take action necessary to 
effectuate the purposes and functions of the Association.
    11. To take action ab initio in an area of responsibility delegated 
to NASD Regulation in Section II or to Nasdaq in Section III.

[C. Board of Governors

    1. Composition: The NASD Board of Governors (``NASD Board'') shall 
be composed of at least Nine (9) and no more than Thirteen (13) 
Governors, a majority of whom shall be Non-industry (including at least 
Two (2) Public Governors). The Chief Executive Officer (``CEO'') of 
NASD shall be a Governor. In the event that the NASD Board shall 
consist of Eleven (11) or more Governors, at least Three (3) shall be 
Public Governors.]

[2. Election Procedures

     a. Commencing with the selection of Governors to take office in 
April of 1997, Governors (except the CEO of NASD) shall be elected by a 
majority vote of those members of the NASD casting ballots on a slate 
of nominees presented to the NASD membership by the National Nominating 
Committee for election by secret ballot.

b. National Nominating Committee

    (1) The National Nominating Committee shall be composed of at least 
Six (6) and not more than Nine (9) members, equally balanced between 
Industry and Non-industry Committee Members (including at least Two (2) 
Public Committee Members). In the event that the Nominating Committee 
shall consist of Seven (7) or more members at least Three (3) shall be 
Public Committee Members. If at any time there shall be an odd number 
of members of the National Nominating Committee, Non-industry Committee 
Members shall be in the majority. No officer or employee of the 
Association shall serve as a member of the National Nominating 
Committee in any voting or non-voting capacity. Two members of the 
National Nominating Committee shall be selected by each of the 
Subsidiaries and the NASD. No more than three of the Committee Members 
and no more than two of the Industry Committee Members shall be current 
members of the NASD Board or of the Board of Directors of one of the 
Subsidiaries (collectively the ``Association Boards''). Any member of 
the National Nominating Committee who is a current member of any 
Association Board shall be in his/her final year of service on any 
Association Board.
    (2) Members of the National Nominating Committee shall be appointed 
annually by the NASD Board and may be removed for cause by a majority 
vote of the NASD Board.
    (3) The National Nominating Committee shall propose to the NASD 
Board one or more nominees for each vacant or new Governor position, 
and for each Director position on the Boards of Directors of the 
Subsidiaries.]

[3. Contested Elections

    a. A candidate for the NASD Board who has not been nominated 
pursuant to Section 2.b(3) above may be nominated by petition, for the 
term of office specified by the Board for the vacant governorship, if 
the candidate presents duly executed petitions to the National 
Nominating Committee demonstrating that such candidate has the support 
of Two (2) percent of the members of the NASD.
    b. A candidate for the NASD Board may be included on the ballot 
only if the Committee certifies that the candidate's petitions are duly 
executed by the requisite number of members of the NASD and that the 
candidate meets the qualifications for the position to be filled, as 
defined in Section I.A. above.]

[4. Term of Office

    a. Each Governor shall hold office for a term of not more than 
three years, or until a successor is elected and qualified, or until 
death, disqualification, resignation, or removal. Except as provided in 
paragraphs (b) and (c), Governors may not serve more than two 
consecutive terms of office on any Association Board.
    b. The CEO of the NASD shall serve as a member of the NASD Board 
until a successor is selected and qualified, or until death, 
resignation, disqualification, or removal.
    c. Where a Governor is appointed to fill a term of less than one 
year, such Governor shall not be precluded from serving two additional 
terms of office.]

[5. Vacancies
    a. If a Governor position becomes vacant before the expiration of 
the Governor's term of office, the National Nominating Committee shall 
recommend, and the NASD Board shall

[[Page 53120]]

elect by majority vote of the remaining Governors, a person satisfying 
the criteria for a Governor position of the type (Industry, Non-
industry or Public), vacated as defined in Section I.A. above, unless 
such Governor has a remaining term of office of no more than six 
months, in which case no replacement will be required.
    b. If a Governor no longer satisfies the criteria for the category 
in which he or she was elected (Industry, Non-industry or Public) and 
has a remaining term of office of more than six months, such Governor 
shall be automatically removed from office unless the remaining members 
of the NASD Board determine otherwise by a majority vote and the 
failure to remove the Governor does not affect the proportional 
representation set forth in Section I.C.1. above.]

[D. Audit Committee

    1. The Audit Committee shall be a committee of the NASD Board and 
shall include the following functions:
    a. To ensure the existence of adequate controls and the integrity 
of the financial reporting process of the Association.
    b. To recommend to the NASD Board, and to monitor the independence 
and performance of, the certified public accountants retained as 
outside auditors by the NASD.
    c. To direct and oversee all the activities of the Association's 
internal review function, including but not limited to management's 
responses to the internal review function.]
    [2. Composition: The Audit Committee shall be composed of Four (4) 
or Five (5) members of the NASD Board, none of whom are officers or 
employees of the Association. The Committee shall include at least one 
Public Committee Member who shall serve as Chairperson of the 
Committee. The Committee shall have no more than two Industry Committee 
Members. If the Committee shall have Four (4) members it shall have not 
more than One (1) Industry Committee Member. In the event that the size 
of the NASD Board shall at any time consist of Eleven (11) or more 
members, the Audit Committee shall include Two (2) Public Committee 
Members. In addition, each Subsidiary shall designate a Public Member 
of its Board as a liaison to the Audit Committee. The Audit Committee 
may consult with that person on issues relating to the functions of the 
Subsidiary, but neither the liaison nor any officer or employee of the 
Association shall serve on the Audit Committee in any voting or non-
voting capacity.]
    [3. No member of the Audit Committee shall participate in the 
consideration or decision of any matter relating to a particular NASD 
member, company or individual if he or she has a material interest in, 
or a professional, business or personal relationship with, that member, 
company or individual or if such participation shall create an 
appearance of impropriety. Committee members shall consult with the 
General Counsel of NASD to determine if recusal is necessary. In the 
event that a member of the Committee is recused from consideration of a 
matter, any decision on the matter shall be by a vote of a majority of 
the remaining members of the Committee.]
    [4. Office of Internal Review: The Audit Committee shall have 
exclusive authority: (a) To hire or terminate the Director of Internal 
Review, (b) to determine the compensation of the Director of Internal 
Review, and (c) to determine the budget for the Office of Internal 
Review. The Office of Internal Review shall report directly to the 
Audit Committee. The Audit Committee may, in its discretion, direct 
that the Office of Internal Review also report to senior management of 
the NASD on matters it deems appropriate and may request that senior 
NASD management perform such operational oversight as necessary and 
proper, consistent with preservation of the independence of the 
internal review function.]

[E.]C. Management Compensation Committee

    1. The Management Compensation Committee shall be a Committee of 
the NASD Board and shall have the following functions: To consider and 
recommend compensation policies, programs, and practices for employees 
of the Association.
    2. Composition: The Management Compensation Committee shall [be 
composed] consist of no fewer than [Four (4)] four and no more than 
seven [or more Members of the NASD Board, equally balanced between 
Industry and Non-industry]Governors. [If at any time there shall be an 
odd number of members of the Management Compensation Committee, Non-
industry Committee Members shall be in the majority.] The number of 
Non-Industry committee members shall equal or exceed the number of 
Industry committee members. The Chief Executive Officer shall be an ex-
officio, non-voting member of the Management Compensation Committee. 
Each member shall serve a term of office of one year.
    3. Quorum: At all meetings of the Management Compensation 
Committee, a quorum for the transaction of business shall consist of a 
majority of the Management Compensation Committee, including not less 
than 50 percent of the Non-Industry committee members. In the absence 
of a quorum, a majority of the committee members present may adjourn 
the meeting until a quorum is present.

[F.] D. Access to and Status of Officers, Directors, Employees, Books, 
Records, and Premises of Subsidiaries

    Notwithstanding the delegation of authority to the Subsidiaries, as 
set forth in Sections II.A. and III.A. below, the staff, books, 
records, and premises of the Subsidiaries are the staff, books, 
records, and premises of the NASD subject to oversight pursuant to the 
[Securities Exchange Act of 1934 (``Act'')] Act, and all officers, 
directors, employees, and agents of the Subsidiaries are officers 
[and], directors, employees, and agents of the NASD for purposes of the 
Act.

II. NASD Regulation, Inc. (``[NASDR] NASD Regulation'')

    A. Delegation of Functions and Authority:
    1. Subject to Section I.B.11, [The] the NASD hereby delegates to 
[the NASDR and the NASDR] NASD Regulation and NASD Regulation assumes 
the following responsibilities and functions as a registered securities 
association:
    a. To establish and interpret rules and regulations and provide 
exemptions for NASD members including, but not limited to fees [and], 
membership requirements [and the Code of Arbitration and Mediation 
Procedure], and arbitration procedures.
    b. To determine Association policy, including developing and 
adopting necessary or appropriate rule changes, relating to the 
business and sales practices of NASD members and associated persons 
with respect to, but not limited to, (i) arbitration of disputes among 
and between NASD members, associated persons and customers, (ii) public 
and private sale or distribution of securities including underwriting 
arrangements and compensation, (iii) financial responsibility, (iv) 
qualifications for NASD membership and association with NASD members, 
(v) clearance and settlement of securities transactions and other 
financial responsibility and operational matters affecting members in 
general and securities listed on The Nasdaq Stock Market and on other 
markets operated by The Nasdaq Stock Market, (vi) NASD member 
advertising practices, (vii) administration, interpretation, and 
enforcement of Association rules, (viii) administration

[[Page 53121]]

and enforcement of Municipal Securities Rulemaking Board (``MSRB'') 
rules, the federal securities laws, and other laws, rules and 
regulations that the Association has the authority to administer or 
enforce, and (ix) standards of proof for violations and sanctions 
imposed on NASD members and associated persons in connection with 
disciplinary actions.
    c. To take necessary or appropriate action to assure compliance 
with Association policy, Association and MSRB rules, the federal 
securities laws, and other laws, rules and regulations that the 
Association has the authority to administer or enforce, through 
examination, surveillance, investigation, enforcement, disciplinary, 
and other programs.
    d. To administer programs and systems for the surveillance and 
enforcement of rules governing NASD members' conduct and trading 
activities in The Nasdaq Stock Market, other markets operated by The 
Nasdaq Stock Market, the third market for securities listed on a 
registered exchange, and the over-the-counter market.
    e. To examine and investigate NASD members and associated persons 
to determine if they have violated Association or MSRB rules, the 
federal securities laws, and other laws, rules, and regulations that 
the Association has the authority to administer, interpret, or enforce.
    f. To administer Association enforcement and disciplinary programs, 
including investigation, adjudication of cases and the imposition of 
fines and other sanctions.
    g. To administer the Association's office of professional hearing 
officers.
    h. To conduct arbitrations, mediations, and other dispute 
resolution programs.
    i. To conduct qualification examinations and continuing education 
programs.
    j. To operate the Central Registration Depository [(``CRD'')].
    k. To determine whether applicants for NASD membership have met the 
requirements for membership established by the Association.
    l. To place restrictions on the business activities of NASD members 
consistent with the public interest, the protection of investors, and 
the federal securities laws.
    m. To determine whether persons seeking to register as associated 
persons of NASD members have met such qualifications for registration 
as may be established by the Association, including whether statutorily 
disqualified persons will be permitted to associate with particular 
NASD members and the conditions of such association.
    n. To oversee all District Office activities.
    o. To establish the annual budget and business plan for [NASDR] 
NASD Regulation.
    p. To determine allocation of [NASDR] NASD Regulation resources.
    q. To establish and assess fees and other charges on NASD members, 
persons associated with NASD members, and others using the services or 
facilities of [NASDR] NASD Regulation.
    r. To manage external relations on enforcement, regulatory, and 
other policy issues with Congress, the Securities and Exchange 
Commission [(``SEC'')] (``Commission''), state regulators, other self-
regulatory organizations, business groups, and the public.
    s. To establish internal procedures for considering complaints by 
members, associated persons, and members of the public who request an 
investigation or disciplinary action by the Association.
    t. To operate Stockwatch in conjunction with Nasdaq pursuant to 
Section IV.
    2. All action taken pursuant to authority delegated pursuant to (1) 
shall be subject to the review, ratification, or rejection by the NASD 
Board in accordance with procedures established by the NASD Board.

[B. Board of Directors

    1. Subsequent to January of 1997, the NASDR Board of Directors 
(``NASDR Board'') shall be composed of at least Twenty-one (21) and no 
more than Twenty-five (25) Directors. The President of NASDR shall be a 
member of the NASDR Board and the remaining members shall be equally 
balanced between Industry and Non-industry Directors. If at any time 
there shall be an odd number of Directors, excluding the President, a 
majority of the Directors other than the President shall be Non-
industry. The NASDR Board shall include Seven (7) representatives of 
NASD members representing geographical regions defined by the NASDR 
Board, and at least Three (3) at-large industry representatives. The 
NASDR Board shall include at least Ten (10) Non-industry Directors, 
including at least Three (3) Public Directors. In the event that the 
NASDR Board shall consist of more than Twenty-two (22) Members, at 
least Four (4) shall be Public Directors. The NASDR Board shall include 
representatives of an issuer of investment company shares or an 
affiliate of such an issuer and an insurance company or an affiliated 
NASD member. The CEO of NASD shall be an ex-officio non-voting member 
of the NASDR Board.]

[2. Election Procedures

    a. The National Nominating Committee shall propose to the NASD 
Board nominees for each position on the NASDR Board.
    b. The Seven (7) Industry Members of the NASDR Board shall be 
nominated by Regional Nominating Committees for consideration by the 
National Nominating Committee. A Regional Nominating Committee shall 
consist of equal numbers of members from each district comprising the 
regions and members shall be selected by the District Committee for 
that District.
    c. Any officer, director or employee of an NASD member who has not 
otherwise been nominated by the Regional Nominating Committee may seek 
nomination if the candidate presents duly executed petitions to the 
Regional Nominating Committee for the appropriate geographical region 
demonstrating that such candidate has the support of at least ten (10) 
percent of the NASD members in that region. The Regional Nominating 
Committee shall submit the names of its nominees and of all the 
candidates presenting qualifying petitions to the members in that 
region for nomination by secret ballot. The Regional Nominating 
Committee shall nominate to the National Nominating Committee the 
candidate receiving the most votes.
    d. Terms of Office and Vacancies: The terms of office of Directors 
and the procedures for the filling of vacancies shall be the same as 
those set forth under Section I.C.4. and 5. above.]

[C]B. [NASDR] NASD Regulation Board Procedures

    [1. Disciplinary Actions--Any disciplinary decision of the 
Association, including dismissals, may be appealed or called for review 
pursuant to the Rules of the Association.]
    [2. Statutory Disqualification Decisions--Any decision of the NBCC 
with respect to statutory disqualification may be called for review 
pursuant to the Rules of the Association.]
    [3]1. Rule Filings--[Any rule change adopted by the NASDR Board 
that imposes fees or other charges on persons or entities other than 
NASD members or that the NASDR Board refers to the NASD Board because 
in the view of the NASDR Board it raises significant policy issues 
shall be reviewed and ratified by the NASD Board before becoming the 
final action of the Association.] The NASD Board shall review and 
ratify a rule change adopted by the NASD Regulation Board

[[Page 53122]]

before the rule change becomes the final action of the Association if 
the rule change: (a) Imposes fees or other charges on persons or 
entities other than NASD members; (b) raises significant policy issues 
in the view of the NASD Regulation Board, and the NASD Regulation Board 
refers the rule change to the NASD Board; or (c) is materially 
inconsistent with a recommendation of the National Adjudicatory 
Council. If the [NASDR] NASD Regulation Board does not refer a rule 
change to the NASD Board for review, the [NASDR] NASD Regulation Board 
action [will] shall become the final action of the Association unless 
called for review by any member of the NASD Board not later than the 
NASD Board [its] meeting next following the [NASDR] NASD Regulation 
Board's action [but which is 15 calendar days or more following the 
action of the [NASDR Board]. During the process of developing rule 
proposals, [NASDR] NASD Regulation staff shall consult with and seek 
the advice of Nasdaq staff before presenting any rule proposal to the 
[NASDR] NASD Regulation Board.
    [4. Notwithstanding the requirements set forth in paragraph 3 of 
this Section, the NASD Board may determine it is advisable to call or 
not call for review any rule change within the 15 calendar day period 
following the decision of the NASDR Board.]

2. Petitions for Reconsideration

    a. If the NASD Regulation Board or NASD Board takes action on a 
rule change relating to the business and sales practices of NASD 
members or associated persons or enforcement policies, including 
policies with respect to fines and other sanctions, and such action is 
materially inconsistent with the recommendation of the National 
Adjudicatory Council, the NASD Regulation Board or the NASD Board, as 
applicable, shall provide written notice of its action to the National 
Adjudicatory Council within one calendar day.
    b. Within two calendar days after receipt of such notice, the 
National Adjudicatory Council, by majority vote, may petition the NASD 
Board for reconsideration. Such petition shall be in writing and 
include a statement explaining in detail why the National Adjudicatory 
Council believes that the NASD Regulation Board's or NASD Board's 
action should be set aside.
    c. The NASD Executive Committee shall act on a timely and complete 
petition for reconsideration within three calendar days after its 
receipt. If the NASD Executive Committee grants reconsideration, the 
matter shall be added to the agenda of the next regularly scheduled 
meeting of the NASD Board. If the NASD Executive Committee denies 
reconsideration, the NASD Regulation Board's or NASD Board's previous 
action on the rule shall be final, and staff shall submit the necessary 
rule filing to the SEC.

[D.] C. Supplemental Delegation Regarding [the Formation of Committees] 
Committees

    [1. The NASDR board may designate one or more committees and 
delegate to such committees such powers and authority, as necessary and 
appropriate, to act on behalf of the NASDR Board in carrying out the 
functions and authority delegated to the NASDR by the NASD. Such 
delegations shall be in conformance with law, the charter and the by-
laws and the requirements as set forth below as part of this Plan of 
Allocation and Delegation. Any action taken by a committee pursuant to 
delegated authority shall be subject to review, ratification or 
rejection by the NASDR Board in accordance with procedures established 
by the NASDR Board.]
    [(a) National Business Conduct Committee--A National Business 
Conduct Committee may be created for the purpose of:
    (i) Hearing and deciding appeals of initial disciplinary decisions 
of the Association.
    (ii) Considering and recommending to the NASDR Board policy and 
rule changes relating to the business and sales practices of NASD 
members and associated persons.
    (iii) Considering and recommending Association enforcement 
policies, including policies with respect to fines and other 
sanctions.]
    [(b) The NBCC shall be composed of at least Eight (8) members of 
the NASDR Board equally balanced between Industry and Non-industry 
Committee Members (including at least one Public Member). If at any 
time there shall be an odd number of Committee Members, a majority of 
the Members shall be Non-industry. Each NBCC Member shall be elected to 
serve a one-year term.]

1. Market Regulation Committee

    a. The Market Regulation Committee shall advise the NASD Regulation 
Board on regulatory proposals and industry initiatives relating to 
quotations, execution, trade reporting, and trading practices; advise 
the NASD Regulation Board in its administration of programs and systems 
for the surveillance and enforcement of rules governing NASD members' 
conduct and trading activities in The Nasdaq Stock Market, other 
markets operated by The Nasdaq Stock Market, the third market for 
securities listed on a registered exchange, and the over-the-counter 
market; provide a pool of panelists for those hearing panels that the 
Chief Hearing Officer or his or her designee determines should include 
a member of the Market Regulation Committee pursuant to the Rules of 
the Association; participate in the training of hearing panelists on 
issues relating to quotations, executions, trade reporting, and trading 
practices; and review and recommend to the National Adjudicatory 
Council changes to the Association's Sanction Guidelines.
    b. The NASD Regulation Board shall appoint the Market Regulation 
Committee by resolution. The members of the Market Regulation Committee 
shall be balanced between Industry and Non-Industry committee members.
    c. At all meetings of the Market Regulation Committee, a quorum for 
the transaction of business shall consist of a majority of the Market 
Regulation Committee, including not less than 50 percent of the Non-
Industry committee members. If at least 50 percent of the Non-Industry 
committee members are (i) present at or (ii) have filed a waiver of 
attendance for a meeting after receiving an agenda prior to such 
meeting, the requirement that not less than 50 percent of the Non-
Industry committee members be present to constitute the quorum shall be 
waived.
    [2. Other Committees--With respect to any other committees that may 
be formed pursuant to this Section D for purposes other than those set 
forth in (1) above, such committee shall be created in accordance with 
the by-laws by resolution or resolutions adopted by a majority of the 
whole NASDR Board.]

2. National Arbitration and Mediation Committee

    a. The National Arbitration and Mediation Committee shall have the 
powers and authority pursuant to the Rules of the Association to advise 
the NASD Regulation Board on the development and maintenance of an 
equitable and efficient system of dispute resolution that will equally 
serve the needs of public investors and Association members, to monitor 
rules and procedures governing the conduct of dispute resolution, and 
to have such other powers and authority as is necessary to effectuate 
the purposes of the Rules of the Association.
    b. The NASD Regulation Board shall appoint the National Arbitration 
and Mediation Committee by resolution. The National Arbitration and 
Mediation Committee shall consist of no fewer than ten and no more than 
25 members. The members of the National

[[Page 53123]]

Arbitration and Mediation Committee shall be equally balanced between 
Industry and Non-Industry committee members.
    c. At all meetings of the National Arbitration and Mediation 
Committee, a quorum for the transaction of business shall consist of a 
majority of the National Arbitration and Mediation Committee, including 
not less than 50 percent of the Non-Industry committee members. If at 
least 50 percent of the Non-Industry committee members are (i) present 
at or (ii) have filed a waiver of attendance for a meeting after 
receiving an agenda prior to such meeting, the requirement that not 
less than 50 percent of the Non-Industry committee members be present 
to constitute the quorum shall be waived.

3. Operations Committee

    a. The Operations Committee shall have the following functions:
    i. to issue interpretations or rulings with respect to the Uniform 
Practice Code (``UPC'');
    ii. to advise the NASD Regulation Board and, where applicable, the 
Nasdaq Listing and Hearing Review Council, with respect to the 
clearance and settlement of securities transactions and other financial 
responsibility and operational matters that may require modifications 
to the UPC or other Rules of the Association; and
    iii. to maintain a Nasdaq Liaison Subcommittee to provide advice to 
Nasdaq staff on policy making related to the UPC and financial 
responsibility issues related to The Nasdaq Stock Market or other 
markets operated by The Nasdaq Stock Market and to issue 
interpretations or rulings with respect to the application of the UPC 
to cancellations of new issues, due bills, and similar situations that 
arise with respect to securities listed on The Nasdaq Stock Market or 
traded on other markets operated by The Nasdaq Stock Market.
    b. The NASD Regulation Board shall appoint the Operations Committee 
by resolution. The Operations Committee shall have not more than 50 
percent of its members directly engaged in market-making activity or 
employed by a member firm whose revenues from market-making activity 
exceed ten percent of its total revenues.
III. Delegation to Nasdaq

A. Delegation of Functions and Authority

    1. Subject to Section I.B.11., [The] the NASD hereby delegates to 
Nasdaq and Nasdaq assumes the following responsibilities and functions 
as a registered securities association:
    a. To operate The Nasdaq Stock Market, automated systems supporting 
The Nasdaq Stock Market, and other markets or systems for non-Nasdaq 
securities.
    b. To provide and maintain a telecommunications network 
infrastructure linking market participants for the efficient processing 
and handling of quotations, orders, transaction reports, and 
comparisons of transactions.
    c. To collect, process, consolidate, and provide to [NASDR] NASD 
Regulation the information requisite to operation of the surveillance 
audit trail.
    d. To develop and adopt rule changes (i) applicable to the 
collection, processing, and dissemination of quotation and transaction 
information for securities traded on The Nasdaq Stock Market, on other 
markets operated by The Nasdaq Stock Market, in the third market for 
securities listed on a registered exchange, and in the over-the-counter 
market, (ii) for Nasdaq-operated trading systems for these securities, 
and (iii) establishing trading practices with respect to these 
securities.
    e. To develop and adopt rules, interpretations, policies, and 
procedures and provide exemptions to maintain and enhance the 
integrity, fairness, efficiency, and competitiveness of The Nasdaq 
Stock Market and other markets operated by The Nasdaq Stock Market.
    f. To act as a Securities Information Processor for quotations and 
transaction information related to securities traded on The Nasdaq 
Stock Market and other markets operated by The Nasdaq Stock Market.
    g. To act as processor under the Nasdaq/Unlisted Trading Privileges 
Plan to collect, consolidate, and disseminate quotation and transaction 
reports in eligible securities from all Plan Participants in a fair and 
non-discriminatory manner.
    h. To administer the Association's involvement in National Market 
System Plans related to Nasdaq/Unlisted Trading Privileges or trading 
in the third market for securities listed on a registered exchange.
    i. To develop, adopt, and administer rules governing listing 
standards applicable to securities traded on The Nasdaq Stock Market 
and the issuers of those securities.
    j. To establish standards for participation in The Nasdaq Stock 
Market[,] and other markets or systems operated by Nasdaq, and 
determine in accordance with Association and Nasdaq procedures if: (i) 
persons seeking to participate in any of such markets and systems have 
met the standards established for participants; and (ii) persons 
participating in any of the markets or systems continue to meet the 
standards established for participants.
    k. To establish and assess listing fees upon issuers and fees for 
the products and services offered by Nasdaq.
    l. To establish the annual budget and business plan for Nasdaq.
    m. To determine allocation of Nasdaq resources.
    n. To manage external relations on matters related to trading on 
and the operation and functions of The Nasdaq Stock Market, other 
markets operated by The Nasdaq Stock Market and systems operated by the 
Nasdaq Stock Market with Congress, the [SEC] Commission, state 
regulators, other self-regulatory organizations, business groups, and 
the public.
    o. To operate Stockwatch in conjunction with NASD Regulation 
pursuant to Section IV.
    2. All action taken pursuant to authority delegated pursuant to (1) 
shall be subject to the review, ratification, or rejection by the NASD 
Board in accordance with procedures established by the NASD Board.

[B. Board of Directors

    1. Composition--As of January of 1997 the Nasdaq Board of Directors 
(``Nasdaq Board'') shall be composed of at least Eleven (11) and not 
more than Fifteen (15) Directors. The President of Nasdaq shall be a 
member of the Nasdaq Board and the remaining Members shall be equally 
balanced between Industry and Non-industry Directors, including at 
least two (2) Public Directors. If at any time there shall be an odd 
number of Directors, excluding the President, a majority of the 
Directors other than the President shall be Non-industry. In the event 
that the Nasdaq Board shall consist of more than Twelve (12) Members, 
at least Three (3) shall be Public Directors. The CEO of NASD shall be 
an ex-officio non-voting member of the Nasdaq Board.]

[2. Election Procedures

    a. The National Nominating Committee shall propose to the NASD 
Board nominees for each position on the Nasdaq Board.
    b. Terms of Office and Vacancies: The terms of office of Directors 
and the procedures for the filling of vacancies shall be the same as 
those set forth under I.C.4. and 5. above.]

[C.] B. Nasdaq Board Procedures

    1. Listing/Delisting Decisions--Any initial decision of Nasdaq 
staff concerning the listing or delisting of securities on The Nasdaq 
Stock Market may be appealed to the Nasdaq Listing

[[Page 53124]]

and Hearing Review [Committee] Council (``Listing [Committee] 
Council'') within 15 calendar days, or called for review by any member 
of the Listing [Committee] Council within 45 days, as set forth in the 
[Code of Procedure] Rules of the Association. [A decision of the 
Listing Committee may be called for review by any member of the Nasdaq 
Board not later than its meeting next following the Listing Committee's 
decision.] A decision of the [Nasdaq Board] Listing Council may be 
called for review by any member of the NASD Board not later than the 
NASD Board [its] meeting next following the [Nasdaq Board's] Listing 
Council's decision but which is 15 calendar days or more following the 
decision of the Listing [Committee] Council [or the Nasdaq Board]. 
Notwithstanding the preceding sentence, the NASD Board may determine it 
is advisable to call for review any listing/delisting decision with the 
15 calendar day period following the decision of the Listing Council. 
Any decision not appealed or called for review shall become the final 
action of the Association upon expiration of the time allowed for 
appeal or call for review. An issuer has the right to appeal a final 
action of the Association taken by the Listing [Committee] Council[, 
Nasdaq Board] or NASD to the [SEC] Commission.
    2. Rule Filings--[Any rule change adopted by the Nasdaq Board that 
imposes fees or other charges on persons or entities other than NASD 
members or issuers or that the Nasdaq Board determines to refer to the 
NASD Board because in the view of the Nasdaq Board it raises 
significant policy issues shall be reviewed and ratified by the NASD 
Board before becoming the final action of the Association.] The NASD 
Board shall review and ratify a rule change adopted by the Nasdaq Board 
before the rule change becomes the final action of the Association if 
the rule change: (a) Imposes fees or other charges on persons or 
entities other than NASD members or issuers; (b) raises significant 
policy issues in the view of the Nasdaq Board, and the Nasdaq Board 
refers the rule change to the NASD Board; or (c) is materially 
inconsistent with a recommendation of the Nasdaq Listing and Hearing 
Review Council. If the Nasdaq Board does not refer a rule change to the 
NASD Board for review, the Nasdaq Board action [will] shall become the 
final action of the Association unless called for review by any member 
of the NASD Board not later than the NASD Board [its] meeting next 
following the Nasdaq Board's action [but which is 15 calendar days or 
more following the action of the Nasdaq Board]. During the process of 
developing rule proposals, Nasdaq staff shall consult with and seek the 
advice of [NASDR] NASD Regulation staff before presenting any rule 
proposal to the Nasdaq Board.
    [3. Waiver of 15-day Period--Notwithstanding the requirements set 
forth in paragraphs 1 and 2 of this Section, the NASD Board may 
determine it is advisable to call for review any listing/delisting 
decision or rule change within the 15 calendar day period following the 
decision of the Listing Committee or the Nasdaq Board, as applicable.]

3. Petitions for Reconsideration

    a. If the Nasdaq Board or NASD Board takes action on a listing-
related rule change, and such action is materially inconsistent with 
the recommendation of the Nasdaq Listing and Hearing Review Council, 
the Nasdaq Board or the NASD Board, as applicable, shall provide 
written notice of its action to the Nasdaq Listing and Hearing Review 
Council within one calendar day.
    b. Within two calendar days after receipt of such notice, the 
Nasdaq Listing and Hearing Review Council, by majority vote, may 
petition the NASD Board for reconsideration. Such petition shall be in 
writing and include a statement explaining in detail why the Nasdaq 
Listing and Hearing Review Council believes that the Nasdaq Board's or 
NASD Board's action should be set aside.
    c. The NASD Executive Committee shall act on a timely and complete 
petition for reconsideration within three calendar days after its 
receipt. If the NASD Executive Committee grants reconsideration, the 
matter shall be added to the agenda of the next regularly scheduled 
meeting of the NASD Board. If the NASD Executive Committee denies 
reconsideration, the Nasdaq Board's or NASD Board's previous action on 
the rule shall be final, and staff shall submit the necessary rule 
filing to the SEC. 

[D] C. Supplemental Delegation Regarding [the Formation of Committees] 
Committees

    [The Nasdaq Board may designate one or more committees and delegate 
to such committees such powers and authority, as necessary and 
appropriate, to act on behalf of the Nasdaq Board in carrying out the 
functions and authority delegated to Nasdaq by the NASD. Such 
delegations shall be in conformance with law, the charter and the by-
laws and the requirements as set forth below as part of this Plan of 
Allocation and Delegation. Any action taken by a committee pursuant to 
delegated authority shall be subject to review, ratification or 
rejection by the Nasdaq Board.]

[1. Specific Committees]

[a.] 1. Quality of Markets Committee (``QOMC'')

    [(1)](a) The QOMC shall be a committee appointed by the Nasdaq 
Board and shall have the following functions:
    (i)) To provide advice and guidance to the Nasdaq Board on issues 
relating to the fairness, integrity, efficiency, and competitiveness of 
the information, order handling, and execution mechanisms of The Nasdaq 
Stock Market, other markets operated by The Nasdaq Stock Market, and 
systems operated by The Nasdaq Stock Market from the perspective of 
investors, both individual and institutional, retail firms, market 
making firms, Nasdaq-listed companies, and other participants in The 
Nasdaq Stock Market.
    (ii)) To advise the Nasdaq Board with respect to national market 
systems plans and linkages between the facilities of Nasdaq and 
registered exchanges.
    [(2)](b) The QOMC will have broad representation that is equally 
balanced between [industry] Industry and [non-industry] Non-Industry 
committee members. The committee members shall include broad 
representation of participants in The Nasdaq Stock Market, including 
investors, market makers, integrated retail firms, and order entry 
firms.
    (c) At all meetings of the QOMC, a quorum for the transaction of 
business shall consist of a majority of the QOMC, including not less 
than 50 percent of the Non-Industry committee members. If at least 50 
percent of the Non-Industry committee members are (i) present at or 
(ii) have filed a waiver of attendance for a meeting after receiving an 
agenda prior to such meeting, the requirement that not less than 50 
percent of the Non-Industry committee members be present to constitute 
the quorum shall be waived.

[b] 2. Market Operations Review Committee (``MORC'')

    [(1)](a) The MORC shall be a committee appointed by the Nasdaq 
Board and shall exercise the functions contained in [Section 70] Rule 
11890 of the [Uniform Practice Code (``UPC''),] Rules of the 
Association in accordance with the procedures specified therein. 
[NASDR] NASD Regulation shall receive weekly reports of all 
determinations made by the staff or MORC under [Section 70 of the UPC] 
Rule 11890 for regulatory review.

[[Page 53125]]

    [(2)](b) The MORC shall be appointed by resolution of the Nasdaq 
Board and shall have no more than [Fifty (50)] 50 percent of its 
members directly engaged in market making activity or employed by a 
member firm whose revenues from market making activity exceed [10 %] 
ten percent of its total revenues.
[c. Firm Operations and Clearance Committee (``FOCC'')

    (1) The FOCC shall be a committee appointed by the Nasdaq Board and 
shall have the following functions:
    (i) To issue interpretations or rulings with respect to Sections 4-
10, 12, 46, 67-68 and 71 of the UPC as well as any other provision of 
the UPC pertaining to transactions and post execution processing.
    (ii) To advise the Nasdaq Board with respect to modifications to 
the UPC dealing with the transactions and post execution processing.]

[d. Nasdaq Listing and Hearing Review Committee (``Listing Committee'')

    (1) The Listing Committee shall be a committee appointed by the 
Nasdaq Board and shall have the following functions:
    (i) To advise the Nasdaq Board on the formulation or modification 
of initial or maintenance eligibility criteria and fees applicable to 
securities listed on The Nasdaq Stock Market or traded on other markets 
operated by The Nasdaq Stock Market.
    (ii) To exercise the functions set forth in Article IX of the Code 
of Procedure, in accordance with the procedures specified therein.
    (2) The Listing Committee shall be appointed by resolution of the 
Nasdaq Board and shall have no more than Fifty (50) percent of its 
members directly engaged in market making activity or employed by a 
member firm whose revenues from market making activity exceed 10% of 
its total revenues.]

[2. Other Committees

    With respect to any other committees that may be formed pursuant to 
this Section D for purposes other than those set forth in (1) above, 
such committee shall be created in accordance with the By-laws by 
resolution or resolutions adopted by a majority of the whole Nasdaq 
Board.]

[E.] IV. Stockwatch

    The Stockwatch section handles the trading halt functions for The 
Nasdaq Stock Market and exchange-listed securities traded in the over-
the-counter market (i.e., the Third Market). Review of all questionable 
market activity, possible rule infractions or any other matters that 
require any type of investigative or regulatory follow-up will be 
referred to and conducted by [NASDR] NASD Regulation, which will assume 
sole responsibility for the matter until resolution. This 
responsibility will include examinations, investigations, document 
requests, and any enforcement actions that [the NASDR] NASD Regulation 
may deem necessary. [NASDR] NASD Regulation staff at all times will 
have access to all records and files of the Stockwatch function.
* * * * *
Restated Certificate of Incorporation of National Association of 
Securities Dealers, Inc.
    The present name of the corporation is National Association of 
Securities Dealers, Inc. [(the ``Corporation''). The Corporation] 
(``NASD''). The NASD was originally incorporated as a nonstock 
corporation under the name of Investment Bankers Conference, Inc., and 
its original Certificate of Incorporation was filed with the Secretary 
of State of the State of Delaware on September 3, 1936. This Restated 
Certificate of Incorporation of the [Corporation] NASD, which both 
restates and further amends the provisions of the [Corporation's] 
NASD's Certificate of Incorporation as heretofore amended, was duly 
adopted in accordance with the provisions of Sections 242 and 245 of 
the General Corporation Law of the State of Delaware.
Name
    First: The name of the [Corporation] corporation is National 
Association of Securities Dealers, Inc.
Delaware Office and Agent
    Second: The registered office of the [Corporation] NASD in the 
State of Delaware is located at 1209 Orange Street, in the City of 
Wilmington, County of New Castle. The name and address of its 
registered agent is the Corporation Trust Company, 1209 Orange Street, 
Wilmington, Delaware.
Objects or Purposes
    Third: The nature of the business or purposes to be conducted or 
promoted is to engage in any lawful act or activity for which 
corporations may be organized under the General Corporation Law of the 
State of Delaware, and, without limiting the generality of the 
foregoing, the business or purposes to be conducted or promoted shall 
include the following:
    (1) To promote through cooperative effort the investment banking 
and securities business, to standardize its principles and practices, 
to promote therein high standards of commercial honor, and to encourage 
and promote among members observance of Federal and [State] State 
securities laws;
    (2) To provide a medium through which its membership may be enabled 
to confer, consult, and cooperate with governmental and other agencies 
in the solution of problems affecting investors, the public, and the 
investment banking and securities business;
    (3) To adopt, administer, and enforce rules of fair practice and 
rules to prevent fraudulent and manipulative acts and practices, and in 
general to promote just and equitable principles of trade for the 
protection of investors;
    (4) To promote self-discipline among members, and to investigate 
and adjust grievances between the public and members and between 
members;
    (5) To establish, and to register with the Securities and Exchange 
Commission as, a national securities association pursuant to Section 
15A of the Securities Exchange Act of 1934, as amended, and thereby to 
provide a medium for effectuating the purposes of said [section;] 
Section; and
    (6) To transact business and to purchase, hold, own, lease, 
mortgage, sell, and convey any and all property, real and personal, 
necessary, convenient, or useful for the purposes of the [Corporation;] 
NASD.
    The objects and purposes specified in the foregoing clauses shall, 
except where otherwise expressed, not be limited or restricted by 
reference to, or inference from, the terms of any other clause in this 
[certificate of incorporation] Restated Certificate of Incorporation, 
but the objects and purposes specified in each of the foregoing clauses 
of this [article] Article shall be regarded as independent objects and 
purposes.
Form of Organization
    Fourth: [This Corporation] The NASD shall be a membership 
corporation and shall have no capital stock. The [Corporation] NASD is 
not organized and shall not be conducted for profit, and no part of its 
net revenues or earnings shall inure to the benefit of any individual, 
subscriber, contributor, or member.
    Except as may be otherwise provided by [applicable law] the General 
Corporation Law of the State of Delaware or this Restated Certificate 
of Incorporation, the members of the [Corporation] NASD shall have no 
voting rights. Notwithstanding the foregoing, the members shall be 
entitled to vote for the election of Governors and on any amendment to 
the By-Laws of the [Corporation] NASD in accordance

[[Page 53126]]

with the procedures for such a vote as provided in the By-Laws.
    Except as may be otherwise provided by the General Corporation Law 
of the State of Delaware, other applicable law or this Restated 
Certificate of Incorporation, the conditions, method of admission, 
qualifications and classifications of membership, the limitations, 
rights, powers and duties of members, the dues, assessments, and 
contributions of members, the method of expulsion from and termination 
of membership, and all other matters pertaining to the membership and 
the conduct, management, and control of the business, property, and 
affairs of the [Corporation] NASD shall be as provided from time to 
time in the By-Laws of the [Corporation] NASD and the Rules of the 
Association.
Indemnification; Governor Liability
    Fifth: (a) [To] The NASD shall indemnify, and hold harmless, to the 
fullest extent permitted by [applicable law] the General Corporation 
Law of the State of Delaware as it presently exists or may [hereafter 
be amended, the Corporation shall indemnify any person who was or is 
made] thereafter be amended, any person (and the heirs, executors, and 
administrators of such person) who, by reason of the fact that he or 
she is or was a Governor, officer, employee or committee member of the 
NASD, or is or was a Governor, officer, or employee of the NASD who is 
or was serving at the request of the NASD as a director, officer, 
employee, or agent of another corporation, partnership, joint venture, 
trust, enterprise, or non-profit entity, including service with respect 
to employee benefit plans, is or was a party, or is threatened to be 
made a party [or is otherwise involved in any] to:
    (i) Any threatened, pending, or completed action, suit, or 
proceeding, whether civil, criminal, administrative [or 
investigative,], or investigative (other than an action by or in the 
right of the NASD) against expenses (including attorneys' fees and 
disbursements), judgments, fines, and amounts paid in settlement 
actually and reasonably incurred by such person in connection with any 
such action, suit, or proceeding; or
    (ii) Any threatened, pending, or completed action or suit by or in 
the right of the NASD to procure a judgment in its favor against 
expenses (including attorneys' fees and disbursements) actually and 
reasonably incurred by such person in connection with the defense or 
settlement of such action or suit.
    [(b) A Governor of the Corporation shall not be liable to the 
Corporation or its members for monetary damages for breach of fiduciary 
duty as a Governor, except to the extent such exemption from liability 
or limitation thereof is not permitted under the General Corporation 
Law as the same exists or may hereafter by amended.]
    (b) The NASD shall advance expenses (including attorneys' fees and 
disbursements) to persons described in Article Fifth (a); provided, 
however, that the payment of expenses incurred by such person in 
advance of the final disposition of the matter shall be conditioned 
upon receipt of a written undertaking by that person to repay all 
amounts advanced if it should be ultimately determined that the person 
is not entitled to be indemnified under this Article Fifth or 
otherwise.
    (c) The NASD may, in its discretion, indemnify and hold harmless, 
to the fullest extent permitted by the General Corporation Law of the 
State of Delaware as it presently exists or may thereafter be amended, 
any person (and the heirs, executors, and administrators of such 
persons) who, by reason of the fact that he[, or a person for whom he 
is the legal representative, is or was a Governor or officer of the 
Corporation] or she is or was an agent of the NASD or is or was an 
agent of the NASD who is or was serving at the request of the 
[Corporation] NASD as a director, officer, employee, or agent of 
another corporation [or of a], partnership, [joint venture,] trust, 
enterprise, or non-profit entity, including service with respect to 
employee benefit plans, [against all expenses, liability, and loss 
reasonably incurred or suffered by such person, and the Corporation 
shall advance expenses (including attorneys' fees) to such person] was 
or is a party, or is threatened to be made a party to any action or 
proceeding described in Article Fifth (a).
    (d) The NASD may, in its discretion, pay the expenses (including 
attorneys' fees and disbursements) reasonably and actually incurred by 
an agent in defending any action, suit, or proceeding in advance of its 
final disposition; provided, however, that the payment of expenses 
incurred by such person in advance of the final disposition of the 
matter shall be conditioned upon receipt of a written undertaking by 
that person to repay all amounts advanced if it should be ultimately 
determined that the person is not entitled to be indemnified under this 
Article Fifth or otherwise.
    (e) Notwithstanding the foregoing [, the Corporation shall be 
required to indemnify a person and advance expenses to such person in 
connection with a proceeding (or part thereof) commenced by such person 
only if the commencement of such proceeding (or part thereof) was 
authorized by the Board of Governors. The Board of Governors may 
indemnify and/or advance expenses to any employee or agent of the 
Corporation to the extent it deems appropriate and to the extent 
permitted by applicable law. The rights conferred on any person by this 
Article Fifth(a) shall not be] or any other provision of these By-Laws, 
no advance shall be made by the NASD to an agent or non-officer 
employee if a determination is reasonably and promptly made by the 
Board by a majority vote of those Governors who have not been named 
parties to the action, even though less than a quorum, or, if there are 
no such Governors or if such Governors so direct, by independent legal 
counsel, that, based upon the facts known to the Board or such counsel 
at the time such determination is made: (1) The person seeking 
advancement of expenses (i) acted in bad faith, or (ii) did not act in 
a manner that he or she reasonably believed to be in or not opposed to 
the best interests of the NASD; (2) with respect to any criminal 
proceeding, such person believed or had reasonable cause to believe 
that his or her conduct was unlawful; or (3) such person deliberately 
breached his or her duty to the NASD.
    (f) The indemnification provided by this Article Fifth in a 
specific case shall not be deemed exclusive of any other rights [which 
such person may have or hereafter acquire under any statute, provision 
of this Restated Certificate of Incorporation, By-Law, agreement, vote 
of members or disinterested Governors or otherwise] to which a person 
seeking indemnification may be entitled, both as to action in his or 
her official capacity and as to action in another capacity while 
holding such office, and shall continue as to a person who has ceased 
to be a Governor, officer, employee, or agent and shall inure to the 
benefit of such person's heirs, executors, and administrators.
    (g) Notwithstanding the foregoing, but subject to Article Fifth 
(j), the NASD shall be required to indemnify any person identified in 
Article Fifth (a) in connection with a proceeding (or part thereof) 
initiated by such person only if the initiation of such proceeding (or 
part thereof) by such person was authorized by the Board.
    (h) The NASD's obligation, if any, to indemnify or advance expenses 
to any person who is or was serving at its request as a director, 
officer, employee, or agent of another corporation,

[[Page 53127]]

partnership, joint venture, trust, enterprise, or non-profit entity 
shall be reduced by any amount such person may collect as 
indemnification or advancement from such other corporation, 
partnership, joint venture, trust, enterprise, or non-profit entity.
    (i) Any repeal or modification of the [first sentence] foregoing 
provisions of this Article Fifth[(b)] shall not adversely affect any 
right or protection [of a Governor of the Corporation existing 
hereunder with respect to] hereunder of any person respecting any act 
or omission occurring prior to the time of such repeal or modification.
    (j) If a claim for indemnification or advancement of expenses under 
this Article Fifth is not paid in full within 60 days after a written 
claim therefor by an indemnified person has been received by the NASD, 
the indemnified person may file suit to recover the unpaid amount of 
such claim and, if successful in whole or in part, shall be entitled to 
be paid the expense of prosecuting such claim. In any such action, the 
NASD shall have the burden of proving that the indemnified person is 
not entitled to the requested indemnification or advancement of 
expenses under the General Corporation Law of the State of Delaware.
    (k) The NASD shall have power to purchase and maintain insurance on 
behalf of any person who is or was a Governor, officer, employee, or 
agent of the NASD, or is or was serving at the request of the NASD as a 
director, officer, employee, or agent of another corporation, 
partnership, joint venture, trust, enterprise, or non-profit entity 
against any liability asserted against such person and incurred by such 
person in any such capacity, or arising out of such person's status as 
such, whether or not the NASD would have the power to indemnify such 
person against such liability hereunder.
    (l) A Governor shall not be liable to the NASD or its members for 
monetary damages for breach of fiduciary duty as a Governor, except to 
the extent such exemption from liability or limitation thereof is not 
permitted under the General Corporation Law of the State of Delaware as 
it presently exists or may hereafter be amended.
Perpetual Existence
    Sixth: The [Corporation] NASD shall have perpetual existence.
Members' Liability
    Seventh: The private property of the members shall not be subject 
to the payment of corporate debts to any extent whatever.
Governors
    Eighth: To the fullest extent permitted by Sections 141(a), 141(j), 
and 215 of the General Corporation Law of the State of Delaware and 
other applicable law, the business and affairs of the [Corporation] 
NASD shall be managed and the election of Governors shall be conducted 
in the manner provided in this Restated Certificate of Incorporation 
and the By-Laws of the [Corporation] NASD. To the extent there is any 
inconsistency between the provisions of this Restated Certificate of 
Incorporation and the By-Laws relating to such matters and the General 
Corporation Law, the provisions of this Restated Certificate of 
Incorporation and the By-Laws shall govern to the fullest extent 
permitted by the General Corporation Law and other applicable law. To 
the fullest extent permitted by the General Corporation Law of the 
State of Delaware and other applicable law, the Board of Governors may 
delegate such powers, authority, and functions as it shall determine 
from time to time, in a manner not inconsistent with the ``Plan of 
Allocation and Delegation of Functions by NASD to Subsidiaries,'' 
approved by the Securities and Exchange Commission, as amended from 
time to time.
    The [Corporation] NASD shall be managed under the direction of a 
Board of Governors having such powers and duties as shall be provided 
from time to time in this Restated Certificate of Incorporation or the 
By-Laws of the [Corporation] NASD. The Board of Governors shall be the 
governing body of the [Corporation] NASD. The members of the Board of 
Governors shall be elected by a plurality of the votes of the members 
of the [Corporation] NASD present in person or represented by proxy at 
the annual meeting of the members of the [Corporation] NASD and 
entitled to vote thereat. Elections shall be by written ballot. Any 
Governor so elected must be nominated by the National Nominating 
Committee or certified by the Secretary of the NASD (as provided in the 
By-[laws] Laws) and must satisfy the other qualifications for Governors 
set forth in the By-Laws or established by resolution of the Board of 
Governors from time to time, which qualifications shall be consistent 
with the ``Plan of Allocation and Delegation of Functions by NASD to 
Subsidiaries[`` as approved by the Securities and Exchange Commission, 
as amended from time to time. ].'' The By-Laws may also provide for 
such assistants to the Board of Governors, and such officers, agents, 
and employees, as may be deemed necessary to administer affairs of the 
[Corporation] NASD.
    [The Board of Governors shall be divided into three classes. Each 
Governor shall hold office for a term of not more than three years, 
such term to be fixed by the Board at the time of the nomination of 
such Governor, or until his successor is duly elected and qualified, or 
until his death, resignation, disqualification, or removal. Except for 
the Chief Executive Officer, no Governor may serve more than two 
consecutive terms, provided, however, that if a Governor is appointed 
to fill a term of less than one year, such Governor may serve up to two 
consecutive terms following the expiration of such Governor's current 
term. The Chief Executive Officer of the Corporation shall serve as a 
member of the Board until his successor is selected and qualified, or 
until his death, resignation, disqualification, or removal.]
    The Board of Governors shall consist of the Chief Executive Officer 
and the Chief Operating Officer of the NASD, the Presidents of NASD 
Regulation, Inc. (``NASD Regulation'') and The Nasdaq Stock Market 
(``Nasdaq''), the Chair of the National Adjudicatory Council of NASD 
Regulation, and Governors elected by the members of the NASD.
    The Chief Executive Officer and the Chief Operating Officer of the 
NASD and the Presidents of NASD Regulation and Nasdaq shall serve as 
Governors until a successor is elected, or until death, resignation, or 
removal.
    The Chair of the National Adjudicatory Council shall serve as a 
Governor for a term of one year, or until a successor is duly elected 
and qualified, or until death, resignation, disqualification, or 
removal. A Chair of the National Adjudicatory Council may not serve 
more than two consecutive terms as a Governor, unless a Chair of the 
National Adjudicatory Council is appointed to fill a term of less than 
one year for such office. In such case, the Chair may serve an initial 
term as Governor and up to two consecutive terms as a Governor 
following the expiration of the initial term. After serving as a Chair 
of the National Adjudicatory Council, an individual may serve as a 
Governor elected by the NASD members.
    The Governors elected by the members of the NASD shall be divided 
into three classes and shall hold office for a term of not more than 
three years, such term to be fixed by the Board at the time of the 
nomination or certification of each such Governor, or until a successor 
is duly elected and qualified, or until death, resignation, 
disqualification, or removal. A Governor

[[Page 53128]]

elected by the members of NASD may not serve more than two consecutive 
terms. If a Governor is elected by the Board to fill a term of less 
than one year, the Governor may serve up to two consecutive terms 
following the expiration of the Governor's initial term.
    In furtherance and not in limitation of the powers granted by 
[applicable law] the General Corporation Law of the State of Delaware, 
the Board of Governors is expressly authorized unless the By-Laws 
otherwise provide, to make, alter, or repeal the By-Laws of the 
[Corporation] NASD.
    In the event of the refusal, failure, neglect, or inability of any 
member of the Board of Governors to discharge [his] such member's 
duties, or for any cause affecting the best interest of the 
[Corporation] NASD the sufficiency of which the Board of Governors 
shall be the sole judge, the Board shall have the power, by the 
affirmative vote of two-thirds of the Governors then in office, to 
remove such member and declare [his] such member's position vacant and 
that it shall be filled in accordance with the provisions of the By-
Laws.
    The [Corporation] NASD may, in its By-Laws, confer powers upon its 
Board of Governors in addition to the foregoing and in addition to the 
powers and authorities expressly conferred upon them by [applicable 
law] the General Corporation Law of the State of Delaware.
Meetings and Offices
    Ninth: Both members and the Board of Governors shall have power, if 
the By-Laws so provide, to hold their meetings and to have one or more 
offices within or without the State of Delaware and to keep the books 
of the [Corporation] NASD (subject to the provision of the statutes), 
outside the State of Delaware at such places as may be from time to 
time designated by the Board of Governors.
Right to Amend Certificate of Incorporation
    Tenth: The [Corporation] NASD reserves the right to amend, alter, 
change, or repeal any provisions contained in this [certificate of 
incorporation] Restated Certificate of Incorporation, in the manner now 
or hereafter prescribed by statute, and all rights conferred upon 
members herein are granted subject to this reservation.
    IN WITNESS WHEREOF, this Restated Certificate of Incorporation has 
been signed under the seal of the [Corporation] NASD this __________ 
day of __________, [1996] 1997.
* * * * *
Restated Certificate of Incorporation of NASD Regulation, Inc.
    The undersigned, Mary Schapiro, President of NASD Regulation, Inc. 
(``NASD Regulation''), a Delaware corporation, does hereby certify:
    First: That [The] the name of the corporation is NASD Regulation, 
Inc. The date of filing of its original Certificate of Incorporation 
with the Secretary of State of the State of Delaware was January 25, 
1996. The name under which NASD Regulation was originally incorporated 
was NASD Regulation, Inc.
    Second: [The address of the Corporation's] That the Certificate of 
Incorporation of NASD Regulation has been amended and restated in its 
entirety as follows:
Article First
    The name of the corporation is NASD Regulation, Inc.
Article Second
    The address of NASD Regulation's registered office in the State of 
Delaware is 1209 Orange Street, City of Wilmington, County of New 
Castle, 19801. The name of [the Corporation's] NASD Regulation's 
registered agent at such address is The Corporation Trust Company.
Article Third
    [Third:] The purpose of [the Corporation] NASD Regulation is to 
engage in any lawful act or activity for which corporations may be 
organized under the General Corporation Law of the State of 
Delaware[.], and, without limiting the generality of the forgoing 
business or purposes to be conducted or promoted, shall include the 
responsibilities and functions set forth in the ``Plan of Allocation 
and Delegation of Functions by NASD to Subsidiaries,'' as approved by 
the Securities and Exchange Commission, as amended from time to time. 
NASD Regulation [The Corporation] is not organized for profit and no 
part of the net earnings of [the Corporation] NASD Regulation shall 
inure to the benefit of any private stockholder or individual.
Article Fourth
    [Fourth:] The total number of shares of stock which [the 
Corporation] NASD Regulation shall have authority to issue is 2,000, 
par value $0.01 per share, all of which shall be shares of common 
stock.
Article Fifth
    [Fifth:] (a) The business and affairs of [the Corporation] NASD 
Regulation shall be managed by or under the direction of the Board of 
Directors. The qualifications, number, tenure, powers, and duties of 
the members of the Board of Directors shall be provided in the By-Laws. 
Except as otherwise provided in this Restated Certificate of 
Incorporation, the By-Laws shall specify the manner by which directors 
of [the Corporation] NASD Regulation shall be nominated and elected.
    (b) Unless and except to the extent that the By-Laws of NASD 
Regulation [the Corporation] shall so require, the election of 
directors of [the Corporation] NASD Regulation need not be by written 
ballot.
    [Sixth: To the fullest extent permitted by applicable law as it 
presently exists or may hereafter be amended, the Corporation shall 
indemnify any person who was or is made or is threatened to be made a 
party or is otherwise involved in any action, suit, or proceeding, 
whether civil, criminal, administrative or investigative, by reason of 
the fact that he, or a person for whom he is the legal representative, 
is or was a director or officer of the Corporation or is or was serving 
at the request of the Corporation as a director, officer, employee or 
agent of another corporation or of a partnership, joint venture, trust, 
enterprise or non-profit entity, including service with respect to 
employee benefit plans, against all expenses, liability, and loss 
reasonably incurred or suffered by such person, and the Corporation 
shall advance expenses (including attorneys' fees) to such person. 
Notwithstanding the foregoing, the Corporation shall be required to 
indemnify a person and advance expenses to such person in connection 
with a proceeding (or part thereof) commenced by such person only if 
the commencement of such proceeding (or part thereof) was authorized by 
the Board of Directors. The rights conferred on any person by this 
Article Sixth shall not be exclusive of any other rights which such 
person may have or hereafter acquire under any statute, provision of 
this Certificate of Incorporation, By-Law, agreement, vote of 
stockholders or disinterested directors or otherwise.]
Article Sixth
    [Seventh:] A director of [the Corporation] NASD Regulation shall 
not be liable to [the Corporation] NASD Regulation or its 
[stockholders] stockholder for monetary damages for breach of fiduciary 
duty as a director, except to the extent such exemption from liability 
or limitation thereof is not permitted under the General Corporation 
Law as the same exists or may hereafter be amended. Any repeal

[[Page 53129]]

or modification of the first sentence of this Article [Seventh] Sixth 
shall not adversely affect any right or protection of a director of 
[the Corporation] NASD Regulation existing hereunder with respect to 
any act or omission occurring prior to such repeal or modification.
Article Seventh
    [Eighth:] In furtherance and not in limitation of the powers 
conferred by the laws of the State of Delaware, the Board of Directors 
is expressly authorized and empowered to make, alter, and repeal the 
By-Laws of [the Corporation] NASD Regulation, subject to the power of 
the [stockholders of the Corporation] stockholder of NASD Regulation to 
alter or repeal any By-Law made by the Board of Directors.
Article Eighth
    [Ninth: The Corporation] NASD Regulation reserves the right [at any 
time, and from time to time,] to amend, alter, change, or repeal any 
provision contained in this Restated Certificate of Incorporation, [and 
other provisions authorized by the laws of the State of Delaware at the 
time in force may be added or inserted,] in the manner now or hereafter 
prescribed by [law; and all rights, preferences and privileges of 
whatsoever nature conferred upon stockholders, directors or any other 
persons whomsoever by and pursuant to this Certificate of Incorporation 
in its present form or as hereafter amended] statute, and all rights 
conferred herein are granted subject to [the rights reserved in this 
Article Ninth] this reservation.
Article Ninth
    [Tenth: The Corporation] NASD Regulation shall have perpetual 
existence.
    [Eleventh: The name and mailing address of the incorporator is 
Joseph R. Hardiman, c/o National Association of Securities Dealers, 
Inc., 1735 K Street, N.W., Washington, D.C. 20006.]
    [Twelfth: The powers of the Incorporator shall terminate upon the 
filing of this Certificate of Incorporation. The names and mailing 
addresses of the persons who are to serve as the directors of the 
Corporation until the first annual meeting of the stockholders of the 
Corporation, or until their successors are elected and qualified are 
Joseph R. Hardiman, c/o National Association of Securities Dealers, 
Inc., 1735 K Street, N.W., Washington, D.C. 20006, Richard G. Ketchum, 
c/o National Association of Securities Dealers, Inc., 1735 K Street, 
N.W., Washington, D.C. 20006 and Mary Schapiro, c/o National 
Association of Securities Dealers, Inc., 1735 K Street, N.W., 
Washington, D.C. 20006.]
    Third: That such Restated Certificate of Incorporation has been 
duly adopted by the stockholder of NASD Regulation in accordance with 
the applicable provisions of Sections 242 and 245 of the General 
Corporation Law of the State of Delaware.
    In witness whereof, [I, the undersigned, being the sole 
incorporator hereinabove named, hereby acknowledge that the foregoing 
Certificate of Incorporation is my act and deed and further certify 
that the facts hereinabove stated are truly set forth, and accordingly 
I have hereunto set my hand this __________ day of January, 1996] the 
undersigned have executed this certificate this day of , 1997.
* * * * *
Restated Certificate of Incorporation of the NASDAQ Stock Market, Inc.
    [Adopted in accordance with the provisions of Section 242 and 
Section 245 of the General Corporation Law of the State of Delaware]
    [The undersigned, Joseph R. Hardiman] The undersigned, Alfred 
Berkeley, President of The Nasdaq Stock Market, Inc. (``Nasdaq''), a 
Delaware corporation [(the ``Corporation')], does hereby certify:
    First: That the name of the [Corporation] corporation is The Nasdaq 
Stock Market, Inc. The date of filing of its original Certificate of 
Incorporation with the Secretary of State of the State of Delaware was 
November 13, 1979. The name under which [the Corporation] Nasdaq was 
originally incorporated was ``NASD Market Services, Inc.''
    Second: That the Certificate of Incorporation of [the Corporation] 
Nasdaq has been amended and restated in its entirety as follows:
Article First
    The name of the [Corporation] corporation is The Nasdaq Stock 
Market, Inc.
Article Second
    The address of [the Corporation's] Nasdaq's registered office in 
the State of Delaware is 1209 Orange Street, City of Wilmington, 
[Delaware 19801,] County of New Castle, Delaware 19801. The name of 
[its] Nasdaq's registered agent at such address is The Corporation 
Trust Company.
Article Third
    The nature of the business or purposes to be conducted or promoted 
is to engage in any lawful act or activity for which corporations may 
be organized under the General Corporation Law of the State of 
Delaware, and, without limiting the generality of the foregoing 
business or purposes to be conducted or promoted, shall include the 
responsibilities and functions set forth in the ``Plan of Allocation 
and Delegation of Functions by NASD to Subsidiaries,'' as approved by 
the Securities and Exchange Commission, as amended from time to time. 
[shall include the following:
    (a) To investigate, study, organize, develop, maintain and operate, 
and to assist and contract with others for the investigation, study, 
organization, development, maintenance and operation of systems for 
collecting, processing, and preparing for distribution and publication, 
and otherwise assisting, participating in, and coordinating the 
distribution and publication of information with respect to 
transactions in and quotations for securities by means of an electronic 
data processing system or systems, as such may be required or permitted 
by federal statute and regulation (in particular the Securities 
Exchange Act of 1934 (``Exchange Act'') and the regulations thereunder, 
as either may be amended from time to time) on a current and continuing 
basis, consistent with the public interest, the protection of 
investors, the maintenance of fair and orderly markets in securities, 
and the removal if impediments to and perfection of the mechanism of a 
national market system;
    (b) To organize, develop, operate and maintain securities markets 
and related systems that assure: (i) Economically efficient execution, 
clearance and settlement of securities transactions; (ii) fair 
competition among brokers and dealers, and among exchange markets and 
markets other than exchange markets; (iii) the practicability of 
broker/dealers executing inventors' orders in the best market; (iv) the 
linking of all markets for qualified securities through communications 
and data processing facilities; and (v) appropriate regulatory 
oversight;
    (c) To develop, organize, operate and maintain securities markets 
and related systems that will assist the National Association of 
Securities Dealers, Inc. in carrying out its regulatory 
responsibilities under the Exchange Act, particularly Sections 11A and 
15A and all applicable rules promulgated under the Exchange Act;
    (d) To establish terms, conditions, rules, regulations, orders, and 
schedules for the operation, maintenance, and regulation of methods, 
means and

[[Page 53130]]

systems established by the Corporation; and
    (e) To offer consulting services respecting the organization, 
development, operation, and maintenance of securities market systems 
and facilities, including systems and procedures for regulatory 
oversight of trading in securities markets.]
Article Fourth
    [The Corporation] Nasdaq shall be authorized to issue a total of 
2,000 shares of common stock with no par value.
Article Fifth
    [The Corporation] Nasdaq shall be governed by the Board of 
Directors of such number and having such qualifications, powers, and 
duties[,] as shall be provided in the By-Laws. The Board shall be 
selected in such manner, and shall serve for such term, as shall be 
stated in the By-Laws. The Board of Directors shall have the power to 
adopt, alter, or repeal the By-Laws of [the Corporation] Nasdaq at any 
meeting at which a quorum is present by the affirmative vote of the 
majority of the whole Board of Directors.
    A [Director of this Corporation] director of Nasdaq shall not be 
liable to [the Corporation] Nasdaq or its stockholders for monetary 
damages for breach of fiduciary duty as a director, except to the 
extent that such exemption from liability or limitation thereof is not 
permitted under the General Corporation Law of the State of Delaware as 
the same exists or may hereafter be amended.
    Any repeal or modification of the foregoing paragraph shall not 
adversely affect any right or protection of a director of [the 
Corporation] Nasdaq existing hereunder with respect to any act or 
omission occurring prior to such repeal or modification.
Article Sixth
    Nasdaq reserves the right to amend, alter, change, or repeal any 
provisions contained in this Restated Certificate of Incorporation, in 
the manner now or hereafter prescribed by statute, and all rights 
conferred herein are granted subject to this reservation.
Article Seventh
    [The Corporation] Nasdaq shall have perpetual existence.
    Third: That such Restated Certificate of Incorporation has been 
duly adopted by the [stockholders of the Corporation] stockholder of 
Nasdaq in accordance with the applicable provisions of Sections 242 and 
245 of the General Corporation Law of the State of Delaware.
    In witness whereof, the undersigned have executed this certificate 
this [20th] ____ day of [December] ________, [1993] 1997.

[FR Doc. 97-26522 Filed 10-9-97; 8:45 am]
BILLING CODE 8010-01-P


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