Federal Register / Vol. 62, No. 225 / Friday, November 21, 1997 / Notices 62385

12The Commission notes that this exception to

the proposed rule is consistent with the rules

adopted by the NYSE and BSE. See NYSE Rule

80A(b) and Ch. II, Sec. 35(b) of the BSE’s rules.

13See Securities Exchange Act Release No. 32697

(July 29, 1993) 58 FR 41538 (August 4, 1993) (order

approving File No. SR–BSE–92–05).

14 15 U.S.C. 78f(b)(5).

15 15 U.S.C. 78s(b)(2).

16 17 CFR 200.30–3(a)(12).

1 15 U.S.C. 78s(b)(1).

2 17 CFR 240.19b–4.

3 In this Order, NASD Regulation and Nasdaq are

referred to as the ‘‘Subsidiaries.’’ The three entities,

NASD, NASD Regulation, and Nasdaq are referred

to collectively as the ‘‘Association.’’

4The corporate documents proposed for

amendment are: (1) The By-Laws of the NASD; (2)

the By–Laws of NASD Regulation; (3) the By-Laws

of Nasdaq; (4) the Restated Certificate of

Incorporation of the NASD; (5) the Restated

Certificate of Incorporation of NASD Regulation;

and (6) the Restated Certificate of Incorporation of

Nasdaq. The by-laws and restated certificates of

incorporation of the NASD and its Subsidiaries are

collectively referred to in this Order as the

‘‘corporate governance documents.’’

5Securities Exchange Act Release No. 39175

(September 30, 1997), 62 FR 53062 (October 10,

1997). On September 29, 1997, the NASD filed a

technical amendment to the proposed rule change,

the substance of which was included in the Notice.

See letter from T. Grant Callery, General Counsel,

NASD, to Katherine A. England, Assistant Director,

Division of Market Regulation, Commission, dated

September 29, 1997. On September 30, 1997, the

filing was further amended by the NASD to correct

non-substantive typographical errors, all of which

were incorporated in the original filing as well.

Conversation between Mary Dunbar, Office of

General Counsel, NASD Regulation, and Mandy S.

Cohen, Division of Market Regulation, Commission.

Subsequent to notice of the rule filing, the NASD

filed Amendment No. 2, which adjusted the period

during which a member may add an agenda item

to the annual meeting, to allow the NASD sufficient

time to prepare for the new agenda item. See letter

from T. Grant Callery, General Counsel, NASD, to

Katherine A. England, Assistant Director, Division

of Market Regulation, Commission, dated October 7,

1997. Collectively, the original filing and its

subsequent amendments are referred to herein as

the ‘‘NASD’’ Proposal.’’

6Securities Exchange Act Release No. 37106

(April 11, 1996), 61 FR 16944 (April 18, 1996) (File

No. SR–NASD–96–02); Securities Exchange Act

Release No. 37107 (April 11, 1996), 61 FR 16948

(April 18, 1996) (File No. SR–NASD–96–16);

Securities Exchange Act Release No. 37282 (June 6,

1996), 61 FR 29777 (June 12, 1996), (File No. SR–

Continued

instituted will remain eligible for

execution. Consequently, the

Commission believes that investors who

have submitted orders will be unduly

disadvantaged or effected by any

subsequent ban on such orders. The

Commission further believes that

allowing individual investors to enter

stop orders or stop limit orders for 2,099

shares or less, while restricting the

professional use of such orders when

the NYSE institutes a ban pursuant to

Rule 80A represents a reasonable

response to the problem presented by

smaller, individual investors who may

be able to monitor market conditions on

a continuous basis and who desire a

measure of downside protection in a

rapidly moving market. In contrast,

market professionals are able to monitor

the market on a continuous basis and

have less of a need to enter such orders.

The Commission believes that this

exception to the proposed rule should

protect investors and the public interest

by ensuring that individual investors’

stop orders and stop limit orders will be

handled even during periods of market

volatility.12

The Commission finds good cause for

approving the proposed rule change,

including Amendment No. 1, prior to

the thirtieth day after the date of

publication of notice of filing thereof in

the Federal Register. The Commission

notes that Amendment No. 1 merely

accelerates the effectiveness of the

proposed rule. The Commission further

notes that no comments were received

on this proposal.Finally, the

Commission notes that it has previously

approved an identical proposal

submitted by the BSE.13 Therefore, the

Commission believes that this filing

raises no new regulatory issues.

Accordingly, the Commission believes

that it is consistent with Section 6(b)(5)

of the Act 14 to approve the proposed

rule change and Amendment No. 1 on

an accelerated basis.

IV. Solicitation of Comments

Interested persons are invited to

submit written data, views and

arguments concerning Amendment No.

1. Persons making written submissions

should file six copies thereof with the

Secretary, Securities and Exchange

Commission, 450 Fifth Street, N.W.,

Washington, DC 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

Section, 450 Fifth Street, N.W.,

Washington, DC 20549. Copies of such

filing will also be available for

inspection and copying at the principal

office of the CHX. All submissions

should refer to File No. SR–CHX–97–24

and should be submitted by December

12, 1997.

V. Conclusion

It is therefore ordered, pursuant to

Section 19(b)2() of the Act,15 that the

proposed rule change (SR–CHX–97–24),

including Amendment No. 1, is

approved.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.16

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 97–30626 Filed 11–20–97; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–39326; File Nos. SR–

NASD–97–71, SR–NASD–96–20, and

SR–NASD–96–29]

Self-Regulatory Organizations;

National Association of Securities

Dealers, Inc.; Order Approving

Proposed Rule Change and

Amendment No. 1 to the Proposed

Rule Change, Notice of Filing and

Order Granting Accelerated Approval

of Amendment No. 2 to the Proposed

Rule Change, and Order Extending

Temporary Approval of SR–NASD–96–

20 and SR–NASD–96–29, Regarding

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

November 14, 1997.

On September 19, 1997, the National

Association of Securities Dealers, Inc.

(‘‘NASD’’) filed with the Securities and

Exchange Commission (‘‘Commission’’)

a proposed rule change pursuant to

Section 19(b)(1) of the Securities

Exchange Act of 1934 (‘‘Act’’),1 and

Rule 19b–4 thereunder.2 In this filing,

the NASD proposed amendments to the

corporate documents of the NASD, its

regulatory subsidiary, NASD Regulation,

Inc. (‘‘NASD Regulation’’), and its stock

market operating subsidiary, The

Nasdaq Stock Market, Inc. (‘‘Nasdaq’’),3

as well as to the Plan of Allocation and

Delegation of Functions by NASD to

Subsidiaries (‘‘Delegation Plan’’), in

order to finalize the corporate

restructuring of the Association.4 Notice

of this proposed rule filing was

published in the Federal Register on

October 10, 1997 (‘‘Notice’’).5 The

Commission did not receive any

comment letters on the filing.

Portions of the NASD Proposal were

previously submitted and noticed in the

Federal Register in SR–NASD–96–02,

SR–NASD–96–16, SR–NASD–96–20,

SR–NASD–96–29, and SR–NASD–97–

28.6 The versions of the by-laws and
62386 Federal Register / Vol. 62, No. 225 / Friday, November 21, 1997 / Notices

NASD–96–20), as amended; Securities Exchange

Act Release No. 37425 (July 11, 1996), 61 FR 37518

(July 18, 1996) (File No. SR–NASD–96–29), as

amended; and Securities Exchange Act Release No.

38545 (April 24, 1997) 62 FR 25226 (May 8, 1997)

(File No. SR–NASD–97–28), as amended,

respectively.

7See Securities Exchange Act Release No. 38909

(August 7, 1997), 62 FR 43571 (August 14, 1997)

(SR–NASD–97–29) and Securities Exchange Act

Release No. 38644 (May 15, 1997), 62 FR 43571

(May 22, 1997) (SR–NASD–96–20). The effective

dates of the provisions approved by this Order are

set forth infra notes 51 and 52 and the

accompanying text.

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).

9The initial version of the Delegation Plan (with

the implementing provisions contained in Rule

0130) was filed with the Commission in SR–NASD–

96–16. For the purposes of this Order, reference to

a ‘‘Rule’’ refers to the NASD Rules of the

Association. It was published for comment and

approved by the Commission on a temporary basis

for a period of 90 days. See Release No. 34–37107,

supra note 6. The Commission thereafter published

notice of proposed rule changes containing

revisions to the initial Delegation Plan and granted

temporary accelerated approval thereto in Release

No. 34–37425, supra note 6 (additional 120 day

approval, as revised), Securities Exchange Act

Release No. 37957 (November 15, 1996), 61 FR

59267 (November 21, 1997) (additional six month

temporary approval through November 15, 1997, as

revised), Securities Exchange Act Release No. 38645

(May 15, 1997), 62 FR 28086 (May 22, 1997)

(additional six month temporary approval, as

revised), and Release No. 34–38909, supra note 7

(continuing temporary approval through November

15, 1997).

10The Commission first granted temporary

approval of the by-law revisions implementing the

restructuring on April 11, 1996. See Release No. 34–

37106, supra note 6. The Commission thereafter

published notice of proposed rule changes

containing revisions to the by-laws and/or granted

temporary accelerated approval of such revisions in

Securities Exchange Act Release No. 37424 (July 11,

1996), 61 FR 37515 (July 18, 1996) (notice); Release

No. 34–37282, supra, note 6 (temporary approval

for 120 days, as revised); Securities Exchange Act

Release No. 37956 (November 15, 1996), 61 FR

59265 (November 21, 1996) (temporary approval for

6 months, as revised); Release No. 34–38644, supra

note 7 (temporary approval for 6 months, as

revised).

11Securities Exchange Act Release No. 37538

(Aug. 8, 1996) (SEC 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

first six Undertakings included in the SEC Order are

reproduced infra, in note 14.

12Report and Appendix to Report Pursuant to

Section 21(a) of the Securities Exchange Act of 1934

Regarding the NASD and The Nasdaq Stock Market

(Aug. 8, 1996).

13See 21(a) Report, supra note 11, at 39.

14Undertakings one through six of the SEC Order

require the NASD:

(1) To implement and maintain at least fifty

percent independent public and non-industry

membership in its Board of Governors, the Board(s)

of Governors or Directors of all of its subsidiaries

and affiliates that exercise or have delegated selfregulatory functions, and the following committees:

The National Nominating Committee, the Trading/

Quality of Markets Committee, the Arbitration

Committee, the Market Surveillance Committee

(now the Market Regulation Committee), the

National Business Conduct Committee, the

Management Compensation Committee, and all

successors thereto.

(2) To provide that NASDR and any successor

thereto has, consistent with the NASD’s By-Laws

and Plan of Delegation, as amended from time to

time and as approved by the Commission, primary

day-to-day responsibility for the regulation,

surveillance, examination, and disciplining of

NASD member firms and registered persons, with

respect to market activities as well as other selfregulatory matters, with full access to the records

of the Nasdaq market.

(3) To institute the participation of professional

Hearing Officers (who shall be attorneys with

appropriate experience and training) to preside over

disciplinary proceedings.

(4) To provide for the autonomy and

independence of the regulatory staff of the NASD

and its subsidiaries such that the staff, subject only

to the supervision of the Board of Governors of the

NASD and the Boards of Directors of NASDR and

Nasdaq, and any successor thereto, (a) has sole

discretion as to what matters to investigate and

prosecute, (b) has sole discretion to handle

regulatory matters such as approval of applications

for membership and the conditions and limitations

that may be placed thereon, (c) prepares rule

proposals, rule interpretations and other policy

matters with any consultations with interested

NASD constituencies made in fair and evenhanded

manner, and (d) is generally insulated from the

commercial interests of its members and the Nasdaq

market. Among other things, the District Business

Conduct Committees and the Market Surveillance

Committee shall not have any involvement in

deciding whether or not to institute disciplinary

proceedings, nor shall the District Committees, or

any subcommittee thereof, have any involvement in

the review or approval of applications for

membership in the NASD. Subject to the foregoing,

the regulatory staff of the NASDR engaged in the

Delegation Plan contained in SR–

NASD–96–02 and 96–16 were

superseded by the later filings. The

Commission’s temporary approval of the

versions of the by-laws and Delegation

Plan proposed in SR–NASD–96–20 and

96–29 (as amended), which is scheduled

to lapse on November 15, 1997, will be

temporarily extended again, until the

effective dates of the provisions

approved in this Order.7 The revisions

to the corporate governance documents

and the Delegation Plan proposed in

SR–NASD–97–28 were withdrawn by

Amendment No. 3 thereto.8

I. Introduction and Background

In November 1994, the NASD Board

of Governors appointed the Select

Committee on Structure and

Governance (‘‘Select Committee’’) to

review the NASD’s corporate

governance structure and to recommend

changes to enable the NASD to better

meet its regulatory and business

obligations, including its oversight of

the Nasdaq market. The Select

Committee published its findings and

recommendations in the Report of the

NASD Select Committee on Structure

and Governance to the NASD Board of

Governors (‘‘Select Committee Report’’),

which was presented to the NASD

Board of Governors at its September

1995 board meeting.

Following the recommendations of

the Select Committee, the NASD

proposed reorganizing its corporate

structure. Nasdaq was given sole

responsibility to operate and oversee the

Nasdaq market and other over-thecounter (‘‘OTC’’) markets, while NASD

Regulation was given responsibility for

regulation and member and constituent

services. The NASD retained ultimate

policymaking, oversight, and corporate

authority as the parent holding

company and statutory self-regulatory

organization (‘‘SRO’’), while granting

substantial deference to the operating

Subsidiaries in the areas of their

respective jurisdictions. These revisions

to the corporate structure, outlined in

the Delegation Plan 9 and implemented

through amendment of the governing

corporate documents, were proposed

and adopted in mid-1996.10

On August 8, 1996, the Commission

issued an order pursuant to Section

19(h)(1) of the Act (‘‘SEC Order’’),

including fourteen undertakings

(‘‘Undertakings’’),11 and a related report

pursuant to Section 21(a) of the Act

(‘‘21(a) Report’’).12 The SEC Order made

certain findings about the NASD and

imposed remedial sanctions, including

ordering the NASD to comply with the

Undertakings. The Commission

determined that the NASD had not

complied with its own rules and had

failed to satisfy its obligations under the

Act to enforce such rules and the federal

securities laws.

The 21(a) Report findings indicated,

among other things, that market making

firms were afforded a disproportionate

representation on the boards and

committees that formerly governed the

NASD, administered its disciplinary

process, and operated the Nasdaq

market. The Commission found that the

‘‘undue influence of market makers and

a lack of vigor and balance in the

NASD’s enforcement activities with

respect to market maker firms’’ was

inconsistent with the NASD’s statutory

obligation to oversee the Nasdaq market,

and to enforce its rules and regulations

fairly as to all member firms.13

Based on the Commission’s specific

findings, the NASD agreed to the

Undertakings, including, among other

things, undertakings to improve public

representation on its Boards and

committees, to confer sole discretion in

the regulatory staff of the NASD as to

prosecutorial and regulatory matters,

and to promulgate and apply uniform

standards for regulatory and other

access issues.14 In response to the
Federal Register / Vol. 62, No. 225 / Friday, November 21, 1997 / Notices 62387

disciplinary process may, solely on their own

initiative, inform themselves on matters of market

or other securities industry expertise by consulting

with representatives of member firms or committees

of the NASD or its subsidiaries.

(5) To promulgate and apply on a consistent basis

uniform standards for regulatory and other access

issues, such as admission to the NASD as a member

firm, and conditions to becoming a market maker;

and institute safeguards to ensure fair and

evenhanded access to all services and facilities of

the NASD.

(6) To ensure the existence of a substantial,

independent internal audit staff which reviews all

aspects of the NASD (including the regulatory

function, the disciplinary process and the Nasdaq

stock market and its systems) and reports directly

to an audit committee of the NASD Board of

Governors which includes a majority of public and

non-industry Governors and is chaired by a public

Governor.

15Only substantive changes to the corporate

governance documents and the Delegation Plan are

highlighted. Unless specifically noted otherwise,

the term ‘‘committee’’ include the NAC and the

Listing Council. For a more detailed description of

the NASD’s proposed rule change, see Notice, supra

page 2.

16The NASD Proposal will allow the Association

to reduce the overall number of Association board

members from forty-nine to twenty-seven, reduce

the number of board meetings from seventeen 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.

17As reconstituted, the NASD Board will include

the Chief Executive Officer and the Chief Operating

Officer of the NASD, the Presidents of NASD

Regulation and Nasdaq, the Chair of the NAC, and

between 16 and 22 elected Governors. The elected

Governors will include an investment company, an

insurance company, and a Nasdaq issuer.

18The NASD Regulation and Nasdaq Boards of

Directors will have five to eight Directors, and will

be equal in size at all times. Only Governors of the

NASD Board are eligible for election to these

boards. The boards will include their respective

Presidents. The Chief Executive Officer of the

NASD will be an ex-officio non-voting member of

each, but will not be recognized for compositional

purposes. The NASD Regulation Board will also

include the chair of NAC, as well as an investment

company and an issuance company representative.

The Nasdaq Board will include at least one issuer

representative. See new NASD Regulation By-Laws,

Article IV, Sections 4.2, 4.3; see also new Nasdaq

By-Laws, Article IV, Sections. 4.2, 4.3.

19A majority of the Governors on the NASD

Board will be Non-Industry, including five or six

Public Governors, depending on the size of the

board. Non-Industry Directors on the NASD

Regulation and Nasdaq Boards must equal or

exceed the number of Industry Directors plus their

respective President, and will also include at least

one Public Director each (or two each for eightmember boards). For a discussion of the terms

‘‘Public,’’ ‘‘Non-Industry,’’ and ‘‘Industry,’’ see infra

notes 26, 27, and 29.

20The term of office for the Board of Governors

of the NASD varies between elected and appointed

positions. The Chief Executive Officer and the Chief

Operating Officer of the NASD and the Presidents

of NASD Regulation and Nasdaq serve until a

successor is elected, or until death, resignation, or

removal. The Chair of the NAC serves as a Governor

for a one year term, or until a successor is elected

and qualified, or until death, resignation,

disqualification, or removal. The Governors elected

by the members of the NASD serve three year terms.

See new NASD By-Laws, Article VII, Sections 5(a–

c). Members of the Boards of Directors for both

NASD Regulation and Nasdaq are elected annually.

See new NASD Regulation By-Laws, Article IV,

Section 4.4; new Nasdaq By-Laws, Article IV,

Section 4.4.; new Nasdaq By-Laws, Article IV,

Section 4.4. Members of the NASD’s Management

Compensation Committee serve a term of one year.

See new Delegation Plan, Article I(C).

21See new NASD Regulation By-Laws Article V.

22See new Nasdaq By-Laws Article V.

23See new NASD By-Laws Article IX, Section

4(d); new NASD By-Laws Article IX, Section 5(e);

see also new NASD By-Laws Article VII, Section 8

(establishing quorum for transaction of business at

Board meetings as a ‘‘majority of the Board,

including not less than 50 percent of the NonIndustry Governors’’); new NASD Regulation ByLaws Article V, Section 5.9 (establishing quorum

requirements for the NAC as ‘‘a majority of the

members, including not less than 50 percent of the

Non-Industry members’’); new Nasdaq By-Laws

Article IV, Section 4.9 (establishing quorum for the

Continued

Commission’s findings in the 21(a)

Report and to comply with the terms of

certain undertakings, the NASD

subsequently proposed the amendments

to the Delegation Plan and the

Association’s corporate governance

documents; these amendments were

temporarily approved by the

Commission. As discussed below, the

NASD is now proposing further changes

to the Association’s corporate

governance documents.

II. Description of the Proposal 15

The revisions to the Association’s

corporate governance documents and

the Delegation Plan respond to the

changes required by the SEC Order, and

the 21(a) Report. They also implement

the most recent corporate restructuring,

by reducing the number of members of

the NASD, NASD Regulation and

Nasdaq governing boards. In addition,

they clarify various provisions in the

corporate governance documents to

more clearly delineate Association

practices and procedures. The purpose

of the amendments is to streamline the

Association’s decision making process

to be more responsive, while

simultaneously promoting public and

member access to, and scrutiny of, the

day-to-day activities of the Association.

A. The Corporate Governance

Documents

The NASD proposes to retain the

current three corporation structure, but

reduce the overall number of board

members for the three corporations and

revise the structure of the three

governing boards. Currently, the NASD

Board has eleven Governors, the NASD

Regulation Board has twenty-four

Directors, and the Nasdaq Board has

fourteen Directors.16 As amended, the

NASD Board will consist of twenty-one

to twenty-seven Governors, and include

a nucleus of Governors who will not

serve as directors on either Subsidiary

board.17 The Subsidiary boards will

have five to eight Directors each, all of

whom will serve simultaneously as an

NASD Governor.18 The number of

directors on each Subsidiary board will

be equal, thereby enabling the nucleus

of individuals serving only as NASD

Governors to perform a tie-breaking

function on the parent board. Each

board will be balanced between Public,

Non-Industry and Industry

participants.19 Specific terms of office

for board and committee members have

also been imposed.20

The NASD Board, while remaining

ultimately responsible for the actions of

its Subsidiaries, will retain its current

authority to review and ratify or reject

certain actions of the Subsidiaries. The

process of exercising this authority,

however, will be expedited by

transferring certain functions to new

entities under each Subsidiary board.

The most significant of these transfers

involves adjudication and listing

decisions. Given the increased

responsibilities of individual Governors

created by the new interlocking boards

structure, the Association wishes to

ensure that a sufficient number of

qualified individuals are available to

review adjudication and listing

decisions. The functions of the National

Business Conduct Committee, a

committee of the NASD Regulation

Board composed entirely of board

members, therefore will be transferred

to a new entity, the National

Adjudicatory Council (‘‘NAC’’),21 and

the functions of the Nasdaq Listing and

Hearing Review Committee will transfer

to the new Nasdaq Listing and Hearing

Review Council (‘‘Listing Council’’).22

The NAC will be appointed by the

NASD Regulation Board, after

nomination by the National Nominating

Committee. Similarly, the Listing

Council members will be appointed by

the Nasdaq Board. Except for the Chair

of the NAC, members of the councils

will not serve on any of the

Association’s boards. These new

councils will meet at least 15 days

before the Subsidiary boards and

generally will provide written reports of

their decisions to their respective boards

not later than 15 days before the

Subsidiary board meetings, which will

be scheduled to occur one day before

the meetings of the NASD Board.

In addition to changes in the structure

and composition of the Association’s

boards and committees, the NASD

proposes to include strict quorum

requirements. These requirements

provide that decisions made by less

than the entire board or balanced

committee are also reached through

balanced consideration.23 For example,
62388 Federal Register / Vol. 62, No. 225 / Friday, November 21, 1997 / Notices

Board of Directors to transact business as ‘‘a

majority of the Board, including not less than 50

percent of the Non-industry Directors’’.

24Similar quorum requirements will be imposed

on the Executive Committees of the Subsidiaries,

the NASD Finance Committee, the National

Nominating Committee, the Management

Compensation Committee, and the NAC.

25 In addition, disqualification and removal

procedures have been imposed, supporting

adherence to a balanced compositional structure.

Disqualification in this instance refers to a change

in status from Public and/or Non-Industry to

Industry. See new NASD Article VII, Section 6.

Both Governors and members of the NAC and the

National Nominating Committee may be removed

by the Board if they refuse, fail, neglect, or are not

able to discharge their duties. See NASD By-Laws,

Article VII, Section 1(b) (NASD); NASD By-Laws,

Article VII, Section 9(d) (NAC); See NASD

Regulation By-Laws, Article V, Section 5.6

(National Nominating Committee).

26The new NASD By-Laws define a ‘‘Public’’

participant as one ‘‘who has no material business

relationship with a broker or dealer or the NASD,

NASD Regulation, or Nasdaq.’’ See NASD By-Laws

Article I, Section (ff) and (gg); new NASD

Regulation By-Laws Article I, Section (z); new

Nasdaq By-Laws Article I, Section (s).

27The new NASD By-Laws define a ‘‘NonIndustry’’ participant as one ‘‘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.’’ See new NASD

By-Laws Article I, Section (cc) and (dd); NASD

Regulation By-Laws Article I, Section (x); new

Nasdaq By-Laws Article I, Section (q).

28Although not specifically defined as ‘‘Industry’’

participants, officers of the NASD, NASD

Regulation or Nasdaq serving as members (other

than ex-officio members) of a board or committee

appointed under the newly revised by-laws of any

of the three corporations, will be counted with the

Industry participants for compositional and quorum

requirements.

29The new NASD By-Laws define an ‘‘Industry’’

participant as one ‘‘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 revenue 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.’’

See new NASD By-Laws Article I, Section (n) and

(o); new NASD Regulation By-Laws, Article I,

Section (q); new Nasdaq By-Laws Article I, Section

(j).

30See new NASD By-Laws Article VII, Sections

9 and 10.

31See, e.g., new NASD By-Laws Article VII,

Section 4(a) (Board size and composition); new

NASD By-Laws Article VII, Section 1(b) (removal of

Governors for cause); new NASD Regulation ByLaws Article V, Section 5.2(a) (NAC size and

composition); new NASD Regulation By-Laws

Article V, Section 5.6 (NAC member removal

provisions); new Nasdaq By-Laws Article Vi,

Section 5.2(a) (Listing Council size and

composition); new Nasdaq By-Laws Article V,

Section 5.6 (Listing Council member removal

provisions).

32See new Article VII, Section 10. Related to

these changes, enhanced procedures for

participation in annual meetings have been added.

See new NASD By-Laws Article XXI, ‘‘Meetings of

Members.’’

33See new NASD By-Laws Article VII, Section 11;

new NASD Regulation By-Laws Article IV, Section

4.14; new Nasdaq By-Laws Article IV, Section 4.15.

34See, e.g., new NASD By-Laws, Article 4,

Section 4.14(a).

35See, e.g., Rule 9160.

36New Article XV, Section 4(b) of the NASD ByLaws 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.

New Section 4(b) further 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. Contracts and Transactions

between the NASD and its Subsidiaries are not

subject to proposed Section 4(b). See also new

NASD Regulation By-Laws, Article IV, Section

4.14(b); new Nasdaq By-Laws, Article IV, Section

4.14(b).

37See new NASD By-Laws Article I(ee); new

NASD Regulation By-Laws I(y); and new Nasdaq

By-Laws Article I(r).

representation of Non-Industry and

Public committee members on the new

NASD Executive Committee must be at

least as great as the representation of

Non-Industry and Public Governors on

the NASD Board, and the quorum for

the transaction of business at Executive

Committee meetings must consist of a

majority of its members, including at

least 50 percent of the Non-Industry

committee members. Similarly, a

quorum for the transaction of business

at Audit Committee meetings will

require a majority of the Audit

Committee, including at least 50 percent

of the Non-Industry committee

members.24

Finally, the definitions of Industry,

Non-Industry and Public have been

revised.25 A Public participant on a

board or committee is someone who has

no material business relationship with

the Association, or with any broker or

dealer.26 The Non-Industry category is

slightly broader, permitting

participation by those connected with

companies listed on Nasdaq.27 The

Industry category is,28 and includes all

brokers and dealers, their officers,

directors, and holding companies, large

shareholders of brokers and dealers, as

well as many of the people (including

professionals) that work for them.29

In addition to revising the structure of

the boards and defining the categories of

participants, the NASD proposes to

change the nomination process for

Governors, Directors and members of

the NAC and the Listing Council.30

Compositional requirements will be

introduced for the National Nominating

Committee, the number of Governors

and Directors serving will be limited,

and specific removal provisions for

National Nominating Committee

members will be added.31 In addition,

the provisions through which dissident

candidates can stand for election will be

refined.32 Members will be given

additional time in which to propose

dissident candidates, and, in their

official capacities, Governors will not be

allowed to express a preference for any

candidate during elections involving

dissident candidates.33

The NASD also proposes to amend

the conflicts of interest provisions.34 As

revised, Governors and committee

members will be prohibited from

directly or indirectly participating in

any adjudication of the interests of a

party if they have a conflict of interest

or bias, or if circumstances otherwise

exist where their fairness might

reasonably be questioned. Governors or

committee members must recuse

themselves or be disqualified in

accordance with the Rules of the

Association.35 In addition, similar

provisions address contracts and

transactions between the NASD and any

entity in which a Governor or officer is

involved.36

1. Changes to the NASD By-Laws

In addition to the structural and

related changes, the NASD is proposing

several clarifying amendments to its bylaws. For example, the term ‘‘person

associated with a member’’ is revised to

clarify that this term includes any

natural person registered under the

Rules of the Association, without regard

to employment responsibilities.37 This
Federal Register / Vol. 62, No. 225 / Friday, November 21, 1997 / Notices 62389

38See Slade versus Metropolitan Life Ins. Co.

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).

39See Article III, Section 3(d). The changes

include deletion of Section 3(d)(2), the status of

members or persons engaged in eligibility

proceedings, which is not set forth in the 9520

series of the Rules of the Association. This is not

a substantive change in the Association’s practice.

The by-law revisions also remove the requirement

that members, registered representative and other

associated persons release the Association from

liability except for willful malfeasance. See Former

Article III, ‘‘Membership,’’ renumbered as new

Article IV, and former Article IV, ‘‘Registered

Representatives and Associated Persons,’’

renumbered as new Article V. The Association

proposes to delete Sections 1(a)(3) of Membership

and 2(a)(2) of Registered Representatives and

Associated Persons, which previously included the

willful malfeasance release. This is not substantive

revision, however. The governing state law in

Delaware contains a similar release from liability

under the ‘‘business judgment’’ rule, see, Smith v.

Van Gorkom, 488 A.2d 858, 873 (De. 1985)

(recognizing the gross negligence standard of care

in the context of analyzing a corporate director’s

duty of care), although ‘‘there is no protection for

directors who have made ‘an unintelligent or

unadvised judgment.’’’ Id., at 872 (citing Mitchell

v. Highland-Western Glass, 167 A.2d 831, 833 (De.

1933)).

40See new NASD Revised Certificate of

Incorporation Article Fifth (Indemnification;

Governor Liability); new Nasdaq By-Laws Article

VIII (Indemnification of Directors, Officers,

Employees, Agents, Nasdaq Listing and Hearing

Review Council and Committee Members).

41See e.g., new NASD Revised Certificate of

Incorporation Article Fifth (Indemnification;

Governor Liability); new NASD Regulation By-Laws

Article X (Indemnification of Directors, Officers,

Employees, Agents, NAC and Committee Members).

42See new Article Eighth.

43Full text versions of these changes are

contained in the Notice, see supra text

accompanying note 5.

44See new sections II.B.2. and III.B.3.

45See new section II.A.1.f. Additional discussion

of these procedures is included in the order

approving SR–NASD–97–28, discussed supra note

6, in connection with deletion of former Rule 8120

of the Rules of the Association. See Securities

Exchange Act Release No. 38908 (August 7, 1997),

62 FR 43385 (August 13, 1997).

counters the suggestion in certain case

law that any person whose job title or

position is not specifically identified in

the Association’s definition of

associated person (regardless of whether

the individual is registered with an

NASD member firm) may not be

considered an associated person if he or

she is not directly ‘‘engaged’’ in the

securities business.38

Similarly, the revisions clarify the

proceedings for obtaining relief from the

Association’s eligibility requirements.

The current language could be read to

suggest that a broker or dealer seeking

admission to the Association could use

such proceedings to obtain relief from

the eligibility requirements as a means

of gaining admission to the Association.

The Association did not intend to apply

this provision to applicants for

membership, and the amendment

removes this potential ambiguity.39

2. Changes to the NASD Regulation ByLaws

The current NASD Regulation ByLaws were adopted on July 19, 1996, in

connection with the initial restructuring

of the NASD following presentation of

the Select Committee Report to the

NASD Board. In addition to amending

the NASD Regulation By-Laws to

conform them to the changes described

above, the by-laws now include

recognition of the NASD as sole

stockholder of NASD Regulation capital

stock. Furthermore, the language

describing the composition and powers

of the new NAC, including procedures

for district elections, are included in the

NASD Regulation By-Laws. Finally,

indemnification provisions protecting

NASD Regulation personnel (including

Directors), identical to those of the

NASD and proposed for Nasdaq, have

been added.40

3. Changes to the Nasdaq By-Laws

Nasdaq adopted its current By-Laws

on October 27, 1993. The proposed

amendments conform the by-laws to the

changes described above. The

provisions creating and defining the

Listing Council are contained herein. In

addition, indemnification provisions

mirroring the NASD and NASD

Regulation have been included.41

4. Changes to the Restated Certificates of

Incorporation

The changes to the NASD Restated

Certificate of Incorporation conform it to

the NASD Board structural changes

previously described.42 Similar

conforming changes will be made to the

NASD Regulation and Nasdaq

Certificates of Incorporation.43

B. The Delegation Plan

The amendments to the Delegation

Plan reflect the new interlocking board

structure of the NASD and its

Subsidiaries, discussed above. For

example, the Delegation Plan is

amended to authorize the NASD Board

to take action on its own initiative,

either by the full board or through the

NASD Executive Committee. The

purpose of this amendment is to allow

the Association to act quickly and

decisively when necessary. Separate

consideration by the Subsidiary board

can 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 requires that

matters within a Subsidiary’s sphere of

delegated authority be considered by

that Subsidiary’s board before

consideration by the NASD Board.

In addition, time-sensitive matters

arising between regularly scheduled

board meetings can be resolved by the

NASD Executive Committee. Currently,

the Subsidiaries’ executive committees

may take initial action on such matters,

but the action cannot be implemented

without the unanimous written consent

of the NASD Board. Obtaining such

consent can impede the Association’s

ability to respond to urgent matters. As

revised, the NASD Executive Committee

will be able to convene telephonically

on an as-needed basis to address timesensitive matters.

The revisions to the Delegation Plan

also include provisions addressing

petitions for reconsideration of NAC

and Listing Council recommendations

on proposed rule changes, when their

recommendations are inconsistent with

later action taken by their respective

governing Subsidiary boards. If either

the NAC or Listing Council disagrees

with its respective Subsidiary board,

they may now petition the NASD Board

for reconsideration of the matter.44

In addition to the changes related to

reconstitution of the governing boards,

the revised Delegation Plan includes

changes to several important

committees. Specifically, the

compositional and quorum

requirements of the NASD’s

Management Compensation Committee,

NASD Regulation’s Market Regulation,

National Arbitration and Mediation, and

Operations Committees, as well as

Nasdaq’s Quality of Markets and Market

Operations Review Committees, are

included in the revised Delegation Plan,

providing for diversity of member, nonindustry and public participation.

Furthermore, the revised Delegation

Plan includes an amendment requiring

establishment of procedures to consider

requests by members, associated

persons, and members of the public to

initiate formal disciplinary action.45

This will allow the Association to be

more responsive to public inquiry and/

or complaints about brokers, dealers and

their employees.

Finally, the oversight and

management responsibilities of

Stockwatch, which handles the trading

halt functions for the Nasdaq market

and exchange-listed securities traded in

the over-the-counter market, are more

clearly defined. As amended, the

Delegation Plan provides that review of

all questionable market activity,

possible rule infractions, or any other

matters that require any type of
62390 Federal Register / Vol. 62, No. 225 / Friday, November 21, 1997 / Notices

46 15 U.S.C. 78s(b).

47 15 U.S.C. 78o–3.

48For example, Section 15A(b)(8) requires that

the rules of an association provide a fair procedure

for the disciplining of members and persons

associated with members, the denial of

membership, the barring of any person becoming

associated with a member thereof, and for the

prohibition or limitation by the association of any

person with respect to access to services offered by

the association. Section 15A(h)(2) requires a

registered securities association when determining

whether a person shall be denied membership,

barred from becoming associated with a member, or

prohibited or limited with respect to access to

services offered by the association or member

thereof, to notify such person of and give him an

opportunity to be heard upon, the specific grounds

for denial, bar, or prohibition or limitation under

consideration and keep a record. Section 15A(h)(3)

governs when a registered securities association

may summarily suspend a member or a person

associated with a member.

49 In approving this proposal, the Commission

notes that it has considered the proposed rule

change’s impact on efficiency, competition, and

capital formation. 15 U.S.C. 78c(f).

50Specifically, the proposed rule changes

comport with the requirements (i) by balancing the

Association’s boards and committees (see new

NASD By-Laws Article VII, Section 4 and Article

IX; new NASD Regulation By-Laws Article IV; new

Nasdaq By-Laws Article IV; Delegation Plan I.C.,

II.C); (ii) by placing primary day-to-day

responsibility for regulatory matters with NASD

Regulation (see new Delegation Plan section II.A.1);

(iii) by providing for the autonomy and

independence of the regulatory staff of the NASD

and its Subsidiaries (see id.); and (iv) by providing

for the existence of a substantial, independent

internal audit staff that reports directly to an audit

committee of the NASD Board (see new NASD ByLaws Article IX, Section 5).

51See Letter from T. Grant Callery, Vice President

and Generl Counsel, NADS to Katherine A.

England, Assistant Director, Commission, dated

November 12, 1997.

52Specifically, the following sections of the

corporate governance documents will become

effective immediately upon issuance of this Order:

• NASD By-Laws Article VII, Section 9(a), 9(e),

and 10 through 14;

• NASD By-Laws Article XX and XXI;

• NASD Regulation By-Laws Article IV, section

4.16

• Nasdq By-Laws Article IV, Section 4.15.

These provisions will supersede the following

provisions of the temporarily approved Plan of

Allocation and Delegation of Functions by NADS to

Subsidiaries: I.C.2.a; I.C.2.b.3; IC.3., II.B.2. a

through II.B.2.c; and III.B.2.a.

investigative or regulatory follow-up

will be referred to and conducted by

NASD Regulation, which will assume

sole responsibility for the matter until

resolution. This responsibility will

include examinations, investigations,

document requests, and any

enforcement action that NASD

Regulation deems necessary. In

addition, the revisions provide that

NASD Regulation staff at all times will

have access to all records and files of

the Stockwatch function.

III. Comments

The Commission did not receive

comments on the NASD Proposal.

IV. Discussion

A. The Proposed Amendments

As discussed below, the Commission

has determined at this time to approve

the NASD Proposal. The standard by

which the Commission must evaluate a

proposed rule change is set forth in

Section 19(b) of the Act. The

Commission must approve a proposed

NASD rule change if it finds that the

proposal is consistent with the

requirements of the Act and the rules

and regulations thereunder that govern

the NASD.46 In evaluating a given

proposal, the Commission examines the

record before it and all relevant factors

and necessary information. In addition,

Section 15A of the Act establishes

specific standards for NASD rules

against which the Commission must

measure the NASD Proposal.47

The Commission has evaluated the

NASD’s proposed rule change in light of

the standards and objectives set forth in

the Act (particularly Sections 15A 48 and

3(f) 49), as well as the SEC Order and the

21(a) Report. The Commission believes

that the changes to the Association’s

corporate structure are consistent with

those provisions, as well as the

objectives of the Undertakings and the

21(a) Report. The proposed rule change

maintains a balanced governance

structure by providing that the number

of Public and Non-Industry members of

the NASD Board exceed the number of

Industry members. By providing for

substantial and meaningful public and

non-industry involvement, in addition

to diverse representation of various

sectors of the securities industry, on the

governing boards, the NASD Proposal

should encourage dispassionate

performance of the NASD’s

responsibilities as an SRO.

As reconstituted under the proposed

rule change, each corporation will

continue to retain a clear and distinct

role, with separate officers and staff.

Specifically, the NASD will continue to

resolve conflicts between the

Subsidiaries and retain ultimate

responsibility for its statutory

obligations as an SRO; NASD Regulation

will continue to perform the day-to-day

regulation of brokers and dealers, have

primary responsibility for adjudication

and enforcement, and to supervise

surveillance of Nasdaq and other OTC

markets; and Nasdaq will continue to

own and operate the Nasdaq market and

develop and implement rules governing

that market.50

The substitution of the NAC and the

Listing Council for their predecessor

board committees, should provide that

the adjudication and listing review

process is conducted by qualified

individuals representing both the public

and the industry. Creation of the new

councils is consistent with the

requirements of the Act, and with the

NASD’s obligations under the SEC

Order and the 21(a) Report.

Finally, the various changes to the

quorum provisions, the nominating

procedures, and the conflicts of interest

provisions contribute to and enhance

the Association’s ability to perform its

SRO responsibilities in an objective,

balanced and responsive manner.

B. Effectiveness of the Amendments

The NASD has requested varying

effective dates for the amendments

contained in this Order.51 In general,

those portions addressing nomination

and election procedures will become

effective upon issuance of this Order.

Immediate effectiveness of these

changes will facilitate the nomination

and election of members of the NASD,

NASD Regulation, and Nasdaq Boards,

the NAC, and the Listing Council whose

terms of office will begin in 1998.

The remaining changes will become

effective at the January 1998 meeting of

the NASD Board, which will itself

conform to the new balanced

compositional requirements contained

in this Order. Allowing a period of time

between approval of this Order and the

effective date will give the Association

adequate time to achieve the

comprehensive changes to its structure.

Finally, the Commission’s temporary

approval of SR–NASD–96–20 and SR–

NASD–96–29, which is currently

scheduled to lapse on November 15,

1997 (to the extent these rule filings are

not superseded by the immediatelyeffective nomination and election

procedure amendments), is extended

until the first meeting of the NASD

Board of Governors in January, 1998.52

V. Amendment No. 2

The Commission finds good cause for

approving Amendment No. 2 prior to

the thirtieth day after the date of

publication of notice thereof in the

Federal Register. Specifically,

Amendment No. 2 amends the time

during which a member may submit

agenda items for the annual meeting of

NASD members. The Commission

believes that this change, combined

with those in the initial filing of SR–

NASD–97–71 are consistent with the

Act, and should enhance both the fair

and efficient operation of the NASD and

the dispassionate application of the

rules and fairness in the NASD’s

adjudicatory and listing processes, as
Federal Register / Vol. 62, No. 225 / Friday, November 21, 1997 / Notices 62391

53 15 U.S.C. 78s(b)(2).

54 15 U.S.C. 78s(b)(2).

55 17 CFR 200.300–3(a)(12).

1 15 U.S.C. 78s(b)(1).

2 17 CFR 240.19b–4.

3On November 6, 1997, the NASD Regulation,

Inc. filed an amendment, which among other

things, clarifies the reference to ‘‘associated person’’

and explains the absence of the term ‘‘issuer’’ in the

definition of ‘‘investment-related.’’ See letter from

Alden S. Adkins, General Counsel, NASD

Regulations, Inc. to Katherine A. England, Assistant

Director, Division of Market Regulation, SEC, dated

November 6, 1997 (‘‘Amendment No. 1’’). On

November 12, 1997, the NASD Regulation, Inc.

amended its proposal to clarify the definition of

‘‘appropriate signatory’’ and to clarify the

implementation dates of the interim Forms and the

disclosure of additional information. See letter from

Alden S. Adkins, General Counsel, NASD

Regulation, Inc., to Katherine A. England, Assistant

Director, Division of Market Regulation, SEC, dated

November 12, 1997 (‘‘Amendment No. 2’’).

4The Association submitted a similar proposal on

November 25, 1996. See Securities Exchange Act

Release No. 37994 (November 27, 1996) 61 FR

64549 (December 5, 1996) (SR–NASD–96–38). After

several negotiations among the Commission, the

NASD, and the North American Securities

Administrators Association, Inc. (‘‘NASAA’’), SR–

NASD–96–38 has been withdrawn and replaced in

its entirety by the current filing. See letter from Joan

C. Conley, Corporate Secretary, NASD Regulation,

Inc., to Katherine A. England, Assistant Director,

Division of Market Regulation, SEC, dated October

17, 1997.

5Copies of Forms U–4 and U–5, containing the

interim pages, were submitted as Attachment A to

the NASD’s rule proposal. A complete set of these

revised forms is available for inspection and

copying in the Commission’s Public Reference

Room and is also available from the NASD.

6Upon approval of this proposal, the NASD plans

to begin responding to electronic inquiries via the

Internet on or about January 1, 1998. See

Amendment No. 2, p. 1.

well as other regulatory activities.

Finally, the acceleration of the

effectiveness of Amendment No. 2 will

enable the Commission to approve its

changes at the same time as the other

major modifications to the NASD

corporate governance procedures

proposed in the Notice. Therefore, the

Commission believes that granting

accelerated approval to Amendment No.

2 is appropriate and consistent with

Section 19(b)(2) of the Act.53

VI. Solicitation of Comments

Interested persons are invited to

submit written data, views and

arguments concerning Amendment No.

2 to the proposed rule change. 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 Amendment

No. 2 that are filed with the

Commission, and all written

communications relating to Amendment

No. 2 between the Commission and any

persons, other than those that may be

withheld from the public in accordance

with the provisions of 5 U.S.C. 552, will

be available for inspection and copying

in the Commission’s Public Reference

Room. Copies of such filing will also be

available for inspection and copying at

the principal office of the NASD. All

submissions should refer to File No.

SR–NASD–97–71 and should be

submitted by December 12, 1997.

VII. Conclusion

For all of the aforementioned reasons,

the Commission finds that the proposed

rule changes are consistent with the

requirements of the Act and the rules

and regulations thereunder applicable to

a national securities association.

It is therefore ordered, pursuant to

Section 19(b)(2) of the Act,54 that (a) the

proposed rule change (SR–NASD–97–

71) is approved, including approval of

Amendment No. 2 on an accelerated

basis (with the effective date of the

nomination and election procedures to

be immediate and the effective date of

the remaining provisions to occur at the

time of the January 1998 meeting of the

NASD Board), and (b) temporary

approval of the proposed rule changes

(SR–NASD–96–20 and SR–NASD–96–

29), to the extent not superseded by the

immediately effective amendments to

SR–NASD–97–71, is extended until the

January 1998 meeting of the NASD

Board.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.55

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 97–30622 Filed 11–20–97; 8:45 am]

BILLING CODE 8010–01–U

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–39322; File No. SR–NASD–

97–78]

Self-Regulatory Organizations; Notice

of Filing of Proposed Rule Change by

National Association of Securities

Dealers, Inc., Relating to the Amended

Interpretation of IM–8310–2, Release of

Disciplinary Information, and the

Implementation of Interim Pages in

Forms U–4 and U–5

November 13, 1997.

Pursuant to Section 19(b)(1) of the

Securities Exchange Act of 1934

(‘‘Act’’) 1 and Rule 19b–4, thereunder,2

notice is hereby given that on October

17, 1997,3 the National Association of

Securities Dealers, Inc. (‘‘NASD’’ or

‘‘Association’’) filed with the Securities

and Exchange Commission (‘‘SEC’’ or

‘‘Commission’’) the proposed rule

change as described in Items I, II, and

III below, which Items have been

prepared by NASD Regulation, Inc.

(‘‘NASDR’’).4 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

NASDR is proposing to amend the

Interpretation on the Release of

Disciplinary Information, IM–8310–2 of

Rule 8310 of the Procedural Rules of the

NASD, to include additional

information required to be reported

pursuant to the amended Forms U–4,

U–5, and BD. Interim pages for Forms

U–4 and U–5 also have been filed to

facilitate the immediate release of this

additional information.5 Below is the

text of the proposed rule change.

Proposed new language is an italics.

IM–8310–2. Release of Disciplinary

Information

(a) The Association shall, in response

to a written inquiry, electronic inquiry,6

or telephonic inquiry via a toll-free

telephone listing, release certain

information contained in its files

regarding the employment and

disciplinary history of members and

their associated persons, including

information regarding past and present

employment history with Association

members; all final disciplinary actions

taken by federal, state, or foreign

securities agencies or self-regulatory

organizations that relate to securities or

commodities transactions; all pending

disciplinary actions that have been

taken by federal or state securities

agencies or self-regulatory organizations

that relate to securities and commodities

transactions and are required to be

reported on Form BD for Form U–4 and

all foreign government or self-regulatory

organization disciplinary actions that

relate to securities or commodities

transactions and are required to be

reported on Form BD or Form U–4; and

all criminal indictments, informations

or convictions that are required to be

reported on Form BD or Form U–4. The

Association will also release

information required to be reported on

Form BD or Form U–4 concerning civil

judgments and arbitration decisions in

securities and commodities disputes

involving public customers, pending

and settled customer complaints,

arbitrations and civil litigation, current

investigations involving criminal or