53062 Federal Register / Vol. 62, No. 197 / Friday, October 10, 1997 / Notices

1 15 U.S.C. § 78s(b)(1).

2On 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.

3All 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.

4Securities Exchange Act Release No. 37282 (June

6, 1996), 61 FR 29777 (June 12, 1996), as amended.

5Securities Exchange Act Release No. 37425 (July

11, 1996), 61 FR 37518 (July 18, 1996), as amended.

6Securities Exchange Act Release No. 38545

(April 24, 1997) 62 FR 25226 (May 8, 1997), as

amended.

7SR–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approval of 96–20 and 96–29 will be rescinded.

8See 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).

9Currently, 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.

10As 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.

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’’), 1 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 selfregulatory organization. 2 The

Commission is publishing this notice to

solicit comments on the proposed rule

change from interested persons.

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. 3 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’’).

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, 4

SR–NASD–96–29, 5 and SR–NASD–97–

28. 6 No comments were received on

those parts of these rule filings

concerning the Association’s corporate

documents and the Delegation Plan. 7

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. 8 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.

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.9 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.10

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 tiebreaking 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
Federal Register / Vol. 62, No. 197 / Friday, October 10, 1997 / Notices 53063

11See proposed Article V of the NASD Regulation

By-Laws.

12See proposed Article V of the Nasdaq By-Laws.

13Amendments 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. 14See Proposed Delegation Plan I.B.11.

15Securities 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’’).

16See 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.

17See Proposed Delegation Plan II.A.1.

18 Id.

19See proposed NASD By-Laws Article IX,

Section 5.

20All references to Articles or Sections in this

section ‘‘b’’ refer to the NASD By-Laws, unless

otherwise noted.

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.11 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’’).12 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.

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.13 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.

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.14

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.15 Specifically, the

proposed rule changes comport with the

requirements for balancing the

Association’s boards and committees,16

placing primary day-to-day

responsibility for regulatory matters

with NASD Regulation,17 providing for

the autonomy and independence of the

regulatory staff of the NASD and its

subsidiaries,18 and ensuring the

existence of a substantial, independent

internal audit staff that reports directly

to an audit committee of the NASD

Board.19

b. Proposed Changes to NASD ByLaws: 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, nonsubstantive changes are not described.20

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
53064 Federal Register / Vol. 62, No. 197 / Friday, October 10, 1997 / Notices

21See Delegation Plan, I.A. and I.C.

22See proposed NASD By-Laws Article I(n),

(o),(bb), (cc), (dd), (ff), and (gg).

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.

26See proposed NASD By-Laws Article I,

‘‘Definitions’’; proposed NASD Regulation By-Laws

Article I, ‘‘Definitions’’; and proposed Nasdaq ByLaws Article I, ‘‘Definitions’’.

27See Current NASD By-Laws Article I(v).

28See Current NASD By-Laws Article I (d) and

(i)).

definitions from the Delegation Plan 21

to the appropriate corporate by-laws:

‘‘Industry Director’’; ‘‘Industry

Governor’’ or ‘‘Industry committee

member’’; ‘‘National Nominating

Committee’’; ‘‘Non-Industry Director’’;

‘‘Non-Industry Governor’’ or ‘‘NonIndustry committee member’’; ‘‘Public

Director’’; ‘‘Public Governor’’ or ‘‘Public

committee member’’.22 Related,

substantive provisions of the Delegation

Plan also would be moved to the ByLaws of the appropriate corporate

entity.

The Association also is proposing

certain refinements to the NASD ByLaws’ 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.23 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.24 The New York Court of

Appeals denied the member’s request to

review the September 1996 ruling.25

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.26

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’’.27 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.28 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 ByLaws, as amended or supplemented. A

cross-reference from the Rules of the
Federal Register / Vol. 62, No. 197 / Friday, October 10, 1997 / Notices 53065

29See proposed NASD By-Laws Article I (c), (d),

(g), (h), (i), (j), (q), (t), (u), (v), (w), (x), (y), (z), and

(aa).

30This proposed deletion was not included in

SR–NASD–97–28.

31This proposed deletion was not included in

SR–NASD–97–28.

32See proposed NASD Regulation By-Laws

Article IV, Section 4.1 and proposed Nasdaq Article

IV, Section 4.1, respectively.

33See, e.g., Rules 8225 and 9516.

34The 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.

Association deferring to the NASD ByLaws is included in Rule 0121.

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’’.29

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.30 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.

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.31

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 ByLaws.32

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.33 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.

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,34 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
53066 Federal Register / Vol. 62, No. 197 / Friday, October 10, 1997 / Notices

35Under 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.

36See 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.

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

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

40 In SR–NASD–97–28, the Association proposed

to change this provision to require supporting

petitions from three percent of the members, onehalf 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.

Adjudicatory Council from serving as

Chair of the Board. The Association

believes that the responsibilities of each

chairmanship require the attention of

one individual.

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.35 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.

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.36 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.37

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.38

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.39 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.

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.40 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.

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
Federal Register / Vol. 62, No. 197 / Friday, October 10, 1997 / Notices 53067

41Other 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.

42But 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.

43Undertaking 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.

44The 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.

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.41 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.

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.42 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.

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 ByLaws. 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 crossreference 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 43

to have a particular balance of Industry,

Non-Industry, and Public committee

members.44 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, NonIndustry, 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.

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
53068 Federal Register / Vol. 62, No. 197 / Friday, October 10, 1997 / Notices

45Similar 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.

46See current Delegation Plan, I.D. 47See, e.g., Rule 9160.

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 NonIndustry committee members.45

Proposed Section 5, ‘‘Audit

Committee’’, contains the provisions

relating to the Audit Committee

currently found in the Delegation

Plan,46 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 NonIndustry 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.

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 NonIndustry 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.47

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.

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
Federal Register / Vol. 62, No. 197 / Friday, October 10, 1997 / Notices 53069

48All references to Articles or Sections in this

section ‘‘c’’ refer to the NASD Regulation By-Laws,

unless otherwise noted.

49See proposed Section 1.1(h), (o), (q), (u), (v) (w),

(x), (y), and (z).

50See proposed Section 1.1(b), (e), (g), (i), (r), (t),

and (bb).

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.48

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 ByLaws 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 ByLaws: ‘‘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’’.49

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’’.50

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,
53070 Federal Register / Vol. 62, No. 197 / Friday, October 10, 1997 / Notices

51See Section 211(b) of the General Corporation

Law of the State of Delaware.

52There 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.

53A 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.

54The 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.

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. 51 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.

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. 52

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. 53

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. 54 Proposed Section

4.13(h) mirrors Article IX, Section 2 of

the NASD By-Laws.

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
Federal Register / Vol. 62, No. 197 / Friday, October 10, 1997 / Notices 53071

55As stated above, revised review procedures will

be set forth in a separate rule filing. 56See current Delegation Plan II.B.

57See 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.

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. 55 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.

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 56 and in NASD

Regulation Board resolutions. The

regional nomination process would

begin in 1998 for the 1999 National

Adjudicatory Council.

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.57 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.

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
53072 Federal Register / Vol. 62, No. 197 / Friday, October 10, 1997 / Notices

58See proposed NASD By-Laws Article VIII,

Section 3, and proposed Nasdaq By-Laws Article

VII, Section 7.3.

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.58

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
Federal Register / Vol. 62, No. 197 / Friday, October 10, 1997 / Notices 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 ByLaws: Nasdaq adopted its current ByLaws 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, nonsubstantive 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 ‘‘NonIndustry 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 NonIndustry 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
53074 Federal Register / Vol. 62, No. 197 / Friday, October 10, 1997 / Notices

59See 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.

60Procedures for NASD Board review of Listing

Council decisions will be proposed in a separate

rule filing.

61See proposed Article VIII, Section 3 of the

NASD By-Laws and proposed Article VII, Section

7.3 of the NASD Regulation By-Laws.

62All references to Sections in this section ‘‘d’’

refer to the Delegation Plan, unless otherwise noted.

63See proposed Article I of the NASD By-Laws;

proposed Article I of the NASD Regulation ByLaws; proposed Article I of the Nasdaq By-Laws.

64This proposed rule change is a result of the

corporate restructuring and was not proposed in

SR–NASD–97–28.

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.59

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.60 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.

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 ByLaws 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.61

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 ByLaws.

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 ByLaws of the NASD, NASD Regulation,

and Nasdaq.62 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.63

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.64 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
Federal Register / Vol. 62, No. 197 / Friday, October 10, 1997 / Notices 53075

65See 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 ByLaws.

66See 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.

that subsidiary’s board before

consideration by the NASD Board.

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 asneeded 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.65 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.

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 NonIndustry 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 NonIndustry 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.66

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 listingrelated rule change that was materially

inconsistent with the recommendation

of the Listing Council.

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:
53076 Federal Register / Vol. 62, No. 197 / Friday, October 10, 1997 / Notices

67 17 CFR 200.30–3(a)(12).

(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 selfregulatory 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. § 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: rule-comments@sec.gov. 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.67

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. § 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)
Federal Register / Vol. 62, No. 197 / Friday, October 10, 1997 / Notices 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 ByLaws;

(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 ByLaws 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;
53078 Federal Register / Vol. 62, No. 197 / Friday, October 10, 1997 / Notices

(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]
Federal Register / Vol. 62, No. 197 / Friday, October 10, 1997 / Notices 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. § 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,
53080 Federal Register / Vol. 62, No. 197 / Friday, October 10, 1997 / Notices

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.
Federal Register / Vol. 62, No. 197 / Friday, October 10, 1997 / Notices 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
53082 Federal Register / Vol. 62, No. 197 / Friday, October 10, 1997 / Notices

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 ByLaws 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
Federal Register / Vol. 62, No. 197 / Friday, October 10, 1997 / Notices 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
53084 Federal Register / Vol. 62, No. 197 / Friday, October 10, 1997 / Notices

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 ByLaws, 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.
Federal Register / Vol. 62, No. 197 / Friday, October 10, 1997 / Notices 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, NonIndustry, 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, NonIndustry, 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.
53086 Federal Register / Vol. 62, No. 197 / Friday, October 10, 1997 / Notices

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, NonIndustry, 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, NonIndustry, 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
Federal Register / Vol. 62, No. 197 / Friday, October 10, 1997 / Notices 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
53088 Federal Register / Vol. 62, No. 197 / Friday, October 10, 1997 / Notices

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 NonIndustry 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
Federal Register / Vol. 62, No. 197 / Friday, October 10, 1997 / Notices 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
53090 Federal Register / Vol. 62, No. 197 / Friday, October 10, 1997 / Notices

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
Federal Register / Vol. 62, No. 197 / Friday, October 10, 1997 / Notices 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 twentyfive 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 ByLaws 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
53092 Federal Register / Vol. 62, No. 197 / Friday, October 10, 1997 / Notices

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 ByLaws;

(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
Federal Register / Vol. 62, No. 197 / Friday, October 10, 1997 / Notices 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 ‘‘NonIndustry 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-thecounter 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.]
53094 Federal Register / Vol. 62, No. 197 / Friday, October 10, 1997 / Notices

[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 exofficio 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
Federal Register / Vol. 62, No. 197 / Friday, October 10, 1997 / Notices 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
53096 Federal Register / Vol. 62, No. 197 / Friday, October 10, 1997 / Notices

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
Federal Register / Vol. 62, No. 197 / Friday, October 10, 1997 / Notices 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 ByLaws 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
53098 Federal Register / Vol. 62, No. 197 / Friday, October 10, 1997 / Notices

Certificate of Incorporation, these ByLaws, 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 oneyear 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
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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 twothirds 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
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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,
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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.
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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
Federal Register / Vol. 62, No. 197 / Friday, October 10, 1997 / Notices 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 twothirds 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.
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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
Federal Register / Vol. 62, No. 197 / Friday, October 10, 1997 / Notices 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)
53106 Federal Register / Vol. 62, No. 197 / Friday, October 10, 1997 / Notices

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
Federal Register / Vol. 62, No. 197 / Friday, October 10, 1997 / Notices 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 ByLaws, 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
53108 Federal Register / Vol. 62, No. 197 / Friday, October 10, 1997 / Notices

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 ByLaws, 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 ByLaws 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
Federal Register / Vol. 62, No. 197 / Friday, October 10, 1997 / Notices 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 ‘‘NonIndustry 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 overthe-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,
53110 Federal Register / Vol. 62, No. 197 / Friday, October 10, 1997 / Notices

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 selfregulatory 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 nonvoting 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.
Federal Register / Vol. 62, No. 197 / Friday, October 10, 1997 / Notices 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 ByLaws 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
53112 Federal Register / Vol. 62, No. 197 / Friday, October 10, 1997 / Notices

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 ByLaws, 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, NonIndustry, 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.
Federal Register / Vol. 62, No. 197 / Friday, October 10, 1997 / Notices 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 marketmaking activity or employed by a

member whose revenues from marketmaking 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 NonIndustry 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
53114 Federal Register / Vol. 62, No. 197 / Friday, October 10, 1997 / Notices

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 ByLaws] 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.
Federal Register / Vol. 62, No. 197 / Friday, October 10, 1997 / Notices 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,
53116 Federal Register / Vol. 62, No. 197 / Friday, October 10, 1997 / Notices

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.
Federal Register / Vol. 62, No. 197 / Friday, October 10, 1997 / Notices 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 ByLaws, 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
53118 Federal Register / Vol. 62, No. 197 / Friday, October 10, 1997 / Notices

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 ByLaws 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 ByLaws, 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
Federal Register / Vol. 62, No. 197 / Friday, October 10, 1997 / Notices 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 nonindustry 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
53120 Federal Register / Vol. 62, No. 197 / Friday, October 10, 1997 / Notices

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
Federal Register / Vol. 62, No. 197 / Friday, October 10, 1997 / Notices 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 Nonindustry. The NASDR Board shall

include Seven (7) representatives of

NASD members representing

geographical regions defined by the

NASDR Board, and at least Three (3) atlarge 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
53122 Federal Register / Vol. 62, No. 197 / Friday, October 10, 1997 / Notices

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 Nonindustry. 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
Federal Register / Vol. 62, No. 197 / Friday, October 10, 1997 / Notices 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 marketmaking 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-thecounter 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 nondiscriminatory 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
53124 Federal Register / Vol. 62, No. 197 / Friday, October 10, 1997 / Notices

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 [nonindustry] 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 NonIndustry 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.
Federal Register / Vol. 62, No. 197 / Friday, October 10, 1997 / Notices 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
53126 Federal Register / Vol. 62, No. 197 / Friday, October 10, 1997 / Notices

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 ByLaws 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,
Federal Register / Vol. 62, No. 197 / Friday, October 10, 1997 / Notices 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 ByLaws 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
53128 Federal Register / Vol. 62, No. 197 / Friday, October 10, 1997 / Notices

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 twothirds 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 lllll day

of lllll, [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 ByLaws. 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
Federal Register / Vol. 62, No. 197 / Friday, October 10, 1997 / Notices 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 lllll 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
53130 Federal Register / Vol. 62, No. 197 / Friday, October 10, 1997 / Notices

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]

ll day of [December] llll, [1993]

1997.

[FR Doc. 97–26522 Filed 10–9–97; 8:45 am]

BILLING CODE 8010–01–P