[Federal Register Volume 63, Number 112 (Thursday, June 11, 1998)]
[Notices]
[Pages 32033-32035]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-15505]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40062; File No. SR-NASD-98-36]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by NASD Regulation, Inc. Relating to At-Large Industry Members 
of the National Adjudicatory Council

June 3, 1998.
    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 May 12, 1998, the National Association of Securities Dealers, Inc. 
(``NASD'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by NASD Regulation, Inc. 
(``NASD Regulation''). The filing was thereafter amended on May 19, 
1998.\3\ The Commission is publishing this notice to solicit comments 
on the proposed rule change, as amended, from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Letter from T. Grant Callery, General Counsel, NASD to 
Katherine England, Assistant Director, Commission dated May 19, 
1998. Several additional non-substantive textual changes were also 
provided by telephone call on June 2, 1998. Telephone call between 
Alden Adkins, General Counsel, NASD Regulation and Mandy S. Cohen, 
Division of Market Regulation, Commission.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    NASD Regulation proposes to amend Article V, Section 5.2 of its By-
Laws relating to the composition of the National Adjudicatory Council 
(``NAC''). The NAC, which is responsible for overseeing Association 
disciplinary proceedings, is balanced between industry and non-industry 
members. The current by-laws require the NASD Regulation Board of 
Governors to divide the United States into various geographical regions 
for the purpose of selecting nominees for industry positions on the 
NAC. The purpose of the current proposal is to differentiate between 
those industry positions on the NAC that are subject to such regional 
nomination requirements, and those that are not. The following sets 
forth the text of the proposed rule change. Proposed new language is 
italicized; proposed deletions are in brackets.

BY-LAWS OF NASD REGULATION, INC

* * * * *

ARTICLE V

NATIONAL ADJUDICATORY COUNCIL

* * * * *

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, each [the 
Industry members shall represent a] geographic region [designated] 
established by the Board under Article VI, Section 6.1 shall be 
represented by an Industry member.

[[Page 32034]]

Those Industry members not representing a geographic region, if any, 
shall be considered at-large Industry members.
* * * * *

Nomination Process

    Sec. 5.3 (a) Pursuant to Article VII, Section 9 of the NASD By-
Laws, the National Nominating Committee shall nominate all candidates 
for the National Adjudicatory Council for subsequent appointment by the 
Board. Each Regional Nominating Committee shall nominate an Industry 
member candidate for consideration by the National Nominating Committee 
as provided in Article VI of these By-Laws [and subsection (b) of this 
Section] Candidates for at-large Industry member positions on the 
National Adjudicatory Council shall not be subject to regional 
nominating procedures.
* * * * *

ARTICLE VI

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SECURITIES AND EXCHANGE COMMISSION
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 regional industry [membership] member positions 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.
* * * * *

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

    In its filing with the Commission, NASD Regulation included 
statements concerning the purpose of and basis for the proposed rule 
change and discussed any comments it received on the proposed rule 
change. The text of these statements may be examined at the places 
specified in Item IV below. NASD Regulation has prepared summaries, set 
forth in Sections A, B, and C below, of the most significant aspects of 
such statements.

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

1. Purpose
    The purpose of the proposed rule change is to amend the NASD 
Regulation By-Laws to permit one or more Industry members of the NAC 
\4\ to serve as at-large Industry members of the NAC, rather than 
requiring that all Industry members represent a region as is currently 
provided in the NASD Regulation By-Laws. Currently, the NASD Regulation 
By-Laws authorize the NASD Regulation Board to appoint an NAC of 12 to 
14 members, and require that the number of Non-Industry members equal 
or exceed the number of Industry members.\5\ Thus, the NAC generally 
will include six or seven Industry members. The By-Laws also require 
that beginning in 1999 and thereafter, all Industry members represent a 
geographic region.\6\ Industry members must be nominated by a Regional 
Nominating Committee and may be challenged for such nomination.\7\ The 
Regional Nominating Committees then nominate their candidates to the 
National Nominating Committee, which makes the final determination as 
to the nominees presented to the NASD Regulation Board for appointment 
to the NAC.\8\
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    \4\ The functions of the NAC include hearing appeals and 
conducting reviews of disciplinary proceedings, statutory 
disqualification proceedings, and membership proceedings; reviewing 
offers of settlement; reviewing exemptions granted or denied by 
staff; and making recommendations to the Board on policy and rule 
changes relating to securities business and sales practices and 
enforcement policies, including policies with respect to fines and 
other sanctions. See Article V, Section 5.1 of the NASD Regulation 
By-Laws.
    \5\ Article V, Section 5.2 of the NASD Regulation By-Laws.
    \6\ Id.
    \7\ Article VI of the NASD Regulation By-Laws.
    \8\ Article VII, Section 9 of the NASD By-Laws; Article VI, 
Section 6.25 of the NASD Regulation By-Laws.
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    The proposed rule change would create up to two NAC Industry 
members who would not be subject to the regional nominating process; 
instead, these members would be considered as at-large Industry members 
of the NAC. The number of at-large Industry members could vary from 
year-to-year depending on the total number of Industry seats on the NAC 
and the number of regions selected by the Board. For example, if the 
Board determined that there should be a 12- or 13-member NAC (which 
would include six Industry seats) and five regions, then there would be 
one at-large Industry member. If the Board determined that there should 
be a 14-member NAC (which would include seven Industry seats) and five 
regions, then there would be two at-large Industry members. If the 
number of Industry seats and the number of regions were equal, then 
there would be no at-large Industry seats that year. Thus, given the 
limitations on the size of the NAC and the number of Industry seats, 
the proposed rule change would create zero, one, or two at-large 
Industry members in any given year.
    The proposed rule change would provide NASD Regulation with greater 
flexibility in the nomination and appointment of Industry members to 
the NAC. The availability of an at-large seat could assist the National 
Nominating Committee in recruiting a particularly strong candidate for 
the NAC by permitting the National Nominating Committee to nominate 
that candidate to an at-large seat so that the candidate would not have 
to go through the regional nominating process. Similarly, where a 
region had two strong candidates, the proposed rule change would allow 
the National Nominating Committee to nominate one of the candidates to 
an at-large seat, which in some circumstances could save the time and 
expense associated with a contested nomination.\9\ At the same time, 
NASD member involvement in nominating Industry members for the NAC 
would be preserved by requiring most Industry members of the NAC to 
represent regions. This additional flexibility would help ensure that 
the most highly qualified candidates are selected for the NAC.
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    \9\ See Article VI, Sections 6.13 to 6.26 of the NASD Regulation 
By-Laws.
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    The proposed rule change is consistent with the corporate 
reorganization approved by the Commission in SR-NASD-97-71 \10\ in that 
the number of regions that may be established by the Board is not 
specified in the NASD Regulation By-Laws so that the Board may retain 
flexibility in determining the appropriate number of regions. The 
proposed rule change also is consistent with the regional plan approved 
by the Board at its meeting on May 6, 1998, which proposes a 12-member 
NAC and five regions for 1999. The proposed rule change thus would 
permit five Industry members of the NAC to be nominated by the regions 
for consideration by the National Nominating Committee and one at-large

[[Page 32035]]

Industry member of the NAC who would not be subject to the regional 
nominating requirements in Article VI of the NASD Regulation By-Laws. 
All six Industry members, along with six Non-Industry members, would be 
nominated by the National Nominating Committee and appointed by the 
NASD Regulation Board.
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    \10\ Securities Exchange Act Release No. 39326 (November 14, 
1997), 62 FR 62385 (November 21, 1997) (File No. SR-NASD-97-71).
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    NASD Regulation proposes to make the rule change effective upon 
approval from the Commission.
2. Statutory Basis
    NASD Regulation believes that the proposed rule change is 
consistent with the provisions of Section 15A(b)(6) of the Act, which 
requires, among other things, that the Association's rules must be 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, and, in general, to 
protect investors and the public interest. The NASD believes that the 
proposed rule change will provide greater flexibility to the National 
Nominating Committee and the NASD Regulation Board in selecting the 
most highly qualified candidates for the National Adjudicatory Council, 
which serves an important role in reviewing disciplinary, membership, 
and other matters for NASD Regulation.

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

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

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

    Written comments were neither solicited nor received.

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

    Withing 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    A. By order approve such proposed rule change, or
    B. Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549. Copies 
of the submission, all subsequent amendments, all written statements 
with respect to the propose rule change that are filed with the 
Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for inspection and copying in the 
Commission's Public Reference Room. Copies of such filing will also be 
available for inspection and copying at the principal office of NASD 
Regulation. All submissions should refer to file number SR-NASD-98-36 
and should be submitted by July 2, 1998.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-15505 Filed 6-10-98; 8:45 am]
BILLING CODE 8010-01-M