[Federal Register Volume 66, Number 44 (Tuesday, March 6, 2001)]
[Notices]
[Pages 13601-13608]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-5329]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44004; File No. SR-NASD-01-06]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the National Association of Securities Dealers, Inc. Amending 
the NASD By-Laws

February 26, 2001.
    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 December 17, 1999, the National Association of Securities Dealers, 
Inc. (``NASD'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I, II and III below, which Items have been prepared by the NASD. 
The NASD submitted Amendment No. 1 on February 5, 2001,\3\ and 
Amendment No. 2 on February 26, 2001.\4\ The Commission is publishing 
this notice, as amended, to solicit comments on the proposed rule 
change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Letter from T. Grant Callery, Senior Vice President and 
General Counsel, NASD, to Katherine A. England, Assistant Director, 
Division of Market Regulation (``Division''), Commission, dated 
February 2, 2001 (``Amendment No. 1''). In Amendment No. 1 the NASD 
provided the final ballot summary of the membership vote regarding 
the proposed amendments to the NASD By-Laws, indicating that the 
NASD membership approved the proposed amendments.
    \4\ Letter from T. Grant Callery, Senior Vice President and 
General Counsel, NASD, to Katherine A. England, Assistant Director, 
Division, Commission, dated February 23, 2001 (``Amendment No. 2''). 
In Amendment No. 2 the NASD amended proposed Article VII, Section 
10(a)(ii) of the By-Laws to state ``(ii) in the case of petitions in 
support of more than one person, petitions in support of the 
nominations of such persons duly executed by ten percent of the 
members.''
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The NASD is proposing to amend its By-Laws to address several 
corporate governance issues, including the treatment of staff Governors 
for purposes of Industry/Non-Industry balancing on the NASD's Board of 
Governors (the ``Board''); the role of the National Nominating 
Committee (``NNC'') in contested elections; the petition process by 
which individuals and slates can be included in the election process; 
the industry classifications that must be represented on the Board; and 
other clarifying amendments, including the addition of

[[Page 13602]]

certain definitions. Additionally, the amendments reflect the new NASD 
corporate structure, including the impending separation of The Nasdaq 
Stock Market, Inc. (``Nasdaq'') and NASD and the creation of NASD 
Dispute Resolution, Inc., a wholly owned subsidiary of the NASD.
    Below is the text of the proposed rule change, as amended. Proposed 
new language is in italics; proposed deletions are in brackets.

By-Laws of the National Association of Securities Dealers, Inc.

Article I--Definitions

    (n) ``Industry Director'' means a Director of the NASD Regulation 
Board or [Nasdaq] NASD Dispute Resolution 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) 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, NASD Dispute Resolution, Nasdaq, or Amex 
(and any predecessor), 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, the Presidents of NASD Regulation and Nasdaq, and 
the Chief Executive Officer of Amex)] of the NASD and the President of 
NASD Regulation) 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; (6) is a Floor Governor; or (7) has a consulting 
or employment relationship with or provides professional services to 
the NASD, NASD Regulation, NASD Dispute Resolution, Nasdaq or Amex (and 
any predecessor), or has had any such relationship or provided any such 
services at any time within the prior three years;
    (v) ``NASD Dispute Resolution'' means NASD Dispute Resolution, 
Inc.;
    (w) ``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)] (x) ``NASD Regulation'' means NASD Regulation, Inc.;
    [(z)] (y) ``NASD Regulation Board'' means the Board of Directors of 
NASD Regulation;
    [(aa)] (z) ``National Adjudicatory Council'' means a body appointed 
pursuant to Article V of the NASD Regulation By-Laws;
    [(bb)] (aa) ``National Nominating Committee'' means the National 
Nominating Committee appointed pursuant to Article VII, Section 9 of 
these By-Laws;
    [(cc)] (bb) ``Non-Industry Director'' means a Director of the NASD 
Regulation Board or [Nasdaq] NASD Dispute Resolution Board (excluding 
the Presidents of NASD Regulation and [Nasdaq)] NASD Dispute 
Resolution) who is: (1) a Public Director; (2) an officer or employee 
of an issuer of securities listed on Nasdaq or Amex, or traded in the 
over-the-counter market; or (3) any other individual who would not be 
an Industry Director;
    [(dd)] (cc) ``Non-Industry Governor'' or ``Non-Industry committee 
member'' means a Governor (excluding the Chief Executive Officer and 
[Chief Operating Officer] any other officer of the NASD [and], the 
[Presidents] President of NASD Regulation [and Nasdaq], any Floor 
Governor, and the Chief Executive Officer of Amex) 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 Amex, or traded 
in the over-the-counter market; or (3) any other individual who would 
not be an Industry Governor or committee member;
    [(ee)] (dd) ``person associated with a member'' or ``associated 
person of a member'' means: (1) a natural person who is registered or 
has applied for registration under the Rules of the Association; (2) a 
sole proprietor, partner, officer, director, or branch manager of a 
member, or other 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; and (3) for purposes of Rule 
8210, any other person listed in Schedule A of Form BD of a member;
    [(ff)] (ee) ``Public Director'' means a Director of the NASD 
Regulation Board or [Nasdaq Board] NASD Dispute

[[Page 13603]]

Resolution who has no material business relationship with a broker or 
dealer or the NASD, NASD Regulation, NASD Dispute Resolution, or 
Nasdaq;
    [(gg)] (ff) ``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, NASD 
Dispute Resolution, or Nasdaq;
    [(hh)] (gg) ``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
    [(ii)] (hh) ``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[.];
    [(jj)] (ii) ``Floor Governor'' or ``Amex Floor Governor'' means a 
Floor Governor of Amex elected pursuant to Article II, Section .01(a) 
of the Amex By-Laws;
    [(kk)] ``Nasdaq-Amex'' means Nasdaq-Amex Market Group, Inc.;
    [(ll)] (ii) ``Amex'' means American Stock Exchange LLC; and
    [(mm)] (kk) ``Amex Board'' means the Board of Governors of Amex[;].

Article IV--Membership

Application for Membership
    Sec. 1. (a) Application for membership in the NASD, properly signed 
by the applicant, shall be made to the NASD via electronic process or 
such other process as the NASD may prescribe, on the form to be 
prescribed by the NASD, and shall contain:
    (1) an agreement to comply with the federal securities laws, the 
rules and regulations thereunder, the rules of the Municipal Securities 
Rulemaking Board and the Treasury Department, the By-Laws of the NASD, 
NASD Regulations, and [Nasdaq] NASD Dispute Resolution, the Rules of 
the Association, and all rulings, orders, directions, and decisions 
issued and sanctions imposed under the Rules of the Association;

Article V--Registered Representatives and Associated Persons

Application for Registration
    Sec. 2. (a) Application by any person for registration with the 
NASD, properly signed by the applicant, shall be made to the NASD via 
electronic process or such other process as the NASD may prescribe, on 
the form to be prescribed by the NASD and shall contain:
    (1) an agreement to comply with the federal securities laws, the 
rules and regulations thereunder, the rules of the Municipal Securities 
Rulemaking Board and the Treasury Department, By-Laws of the NASD, NASD 
Regulation, and [Nasdaq] NASD Dispute Resolution, the Rules of the 
Association, and all rulings, orders, directions, and decisions issued 
and sanctions imposed under the Rules of the Association; and

Article VI--Dues, Assessments, and Other Charges

Power of the NASD to Fix and Levy Assessments
    Sec. 1. The NASD shall prepare an estimate of the funds necessary 
to defray reasonable expenses of administration in carrying on the work 
of the 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 NASD and issuers and any other 
persons using any facility or system which the NASD, NASD Regulation[, 
or Nasdaq] or NASD Dispute Resolution  operates or controls. Fees, 
dues, assessments, and other charges shall be called and payable as 
determined by the NASD 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 NASD operates or controls. The 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 due 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 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.

Article VII--Board of Governors

Powers and Authority of Board
    Sec. 1. (a) The Board shall be the governing body of the 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 NASD and the promotion of the NASD's welfare, objects, 
and purposes. In the exercise of such powers, the Board shall have the 
authority to:
    (c) To the fullest extent permitted by applicable law, the Restated 
Certificate of Incorporation, and these By-Laws, the NASD may delegate 
any power of the NASD or the Board to a committee appointed pursuant to 
Article IX, Section 1, the NASD Regulation Board, the [Nasdaq] NASD 
Dispute Resolution Board, or NASD staff in a manner not inconsistent 
with the Delegation Plan.
Authority to Take Action Under Emergency or Extraordinary Market 
Conditions
    Sec. 3. The Board, 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:
    (a) the trading in or operation of the over-the-counter securities 
market, the operation of any automated system owned or operated by the 
NASD[,] or 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
Composition and Qualifications of the Board
    Sec. 4. (a) The Board shall consist of no fewer than 17 nor more 
than 27 Governors, comprising (i) the Chief Executive [Officer and the 
Chief Operating] Officer of the NASD, [the Presidents of NASD 
Regulation and Nasdaq,] (ii) if the Board of Governors determines, from 
time to time, in its sole discretion, that the appointment of a second 
officer of the NASD to the Board of Governors is advisable, a second 
officer of the NASD, (iii) the President of NASD Regulation, (iv) the 
Chair of the National Adjudicatory Council, (v) the Chief Executive 
Officer [of Amex] and one Floor Governor of Amex, and (vi) no fewer 
than [16] 12 and no more than [28] 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 representative of a national retail 
firm, a representative of a regional retail or independent financial 
planning member firm, a representative of a firm that provides clearing 
services to other NASD members, and a representative of an NASD member 
having not more than 150 registered persons. [A majority of the] The 
number of Non-Industry Governors shall [be Non-] exceed the number of 
Industry Governors. If the

[[Page 13604]]

[Board consists of 23 Governors, at least five shall be] number of 
Industry and Non-Industry Governors is 15 to 17, the Board shall 
include at least four Public Governors. If the [Board consists of 24 to 
27 Governors, at least six shall be] number of Industry and Non-
Industry Governors is 18 to 19, the Board shall include at least five 
Public Governors. If the [Board consists of 28 to 31 Governors, at 
least seven shall be Public Governors. If the Board consists of 32 to 
35 Governors, at least eight shall be] number of Industry and Non-
Industry Governors is 20-25, the Board shall include at least six 
Public Governors.
Term of Office of Governors
    Sec.5. (a) The Chief Executive Officer and [the Chief Operating 
Officer], if appointed, the second officer of the NASD, the 
[Presidents] President of NASD Regulation [and Nasdaq], and the Chief 
Executive Officer of Amex shall serve as Governors until a successor is 
elected, or until death, resignation, or removal (or, in addition, in 
the case of a second officer of the NASD, until the Board of Governors, 
in its sole discretion, determines that such appointment is no longer 
advisable).
    (d) 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 each 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.
Filling of Vacancies
    Sec. 7. If [a] an elected Governor position becomes vacant, whether 
because of death, disability, disqualification, removal, or 
resignation, the National Nominating Committee shall nominate, and the 
Board shall elect by majority vote of the remaining Governors then in 
office, a person satisfying the classification (Industry, Non-Industry, 
or Public Governor) for the governorship as provided in Section 4 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.
The National Nominating Committee
    Sec. 9. (a) The National Nominating Committee shall nominate and, 
in the event of a contested election, may, as described in Section 
11(b), support: 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] 
NASD Dispute Resolution Board for election by the [Board;] stockholder; 
and Industry, Non-Industry, and Public members for each vacant or new 
position on the National Adjudicatory Council for appointment by the 
NASD Regulation Board [; and Industry and Non-Industry members for each 
vacant or new position on the Nasdaq Listing and Hearing Review Council 
for appointment by the Nasdaq Board].
    (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.]
Procedure for Nomination of Governors
    Sec. 10. Prior to a meeting of members pursuant to Article XXI for 
the election of Governors, the NASD shall notify the members of the 
names of each nominee selected by the National Nominating Committee for 
each governorship up for election, 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 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: (a) within [30] 45 days 
after the date of such notice [in 1997, or within 45 days after the 
date of such notice in 1998 and thereafter], such person presents to 
the Secretary of the NASD (i) in the case of petitions solely in 
support of such person, petitions in support of his or her nomination 
duly executed by three percent of the members, and no member shall 
endorse more than one such nominee, or (ii) in the case of petitions in 
support of one or more persons, petitions in support of the nominations 
of such persons duly executed by ten percent of the members; and (b) 
the Secretary certifies that (i) the petitions are duly executed by the 
Executive Representatives of the requisite number of members[;], and 
(ii) the person satisfies the classification (Industry, Non-Industry, 
or Public Governor) of the governorship to be filled, based on such 
information provided by the person as is reasonably necessary to make 
the certification. The Secretary shall not unreasonably withhold or 
delay the certification. Upon certification, the election shall be 
deemed a contested election. After the certification of a contested 
election or the expiration of time for contesting an election under 
this Section, the Secretary shall deliver notice of a meeting of 
members pursuant to Article XXI, Section 3(a).
Communication of Views
    Sec. 11. (a) 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 any 
committee (other than 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, or any 
committee (other than 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.
    (b) In a contested election, the National Nominating Committee may 
support its nominees under this Article by sending to NASD members 
eligible to vote up to two mailings of materials, in the manner set 
forth in Article VII, Section 12, in support of its nominees.

[[Page 13605]]

In addition to such two mailings, in the event of mailings and or other 
communications to the NASD members by or on behalf of a candidate by 
petition in a contested election, the National Nominating Committee may 
respond in-kind, but shall not take a position unresponsive, to the 
contesting candidate's communications.
Election of Governors
    Sec. 13. Governors that are to be elected by the members shall be 
elected by a plurality of the votes of the members of the NASD present 
in person or represented by proxy at the annual meeting of the NASD and 
entitled to vote thereat. The annual meeting of the NASD shall be on 
such date and at such place as the Board shall designate pursuant to 
Article XXI. Any Governor so elected must be nominated by the National 
Nominating Committee or certified by the Secretary pursuant to Section 
10.
Maintenance of Compositional Requirements of the Board
    Sec. 14. Each elected Governor shall update the information 
submitted under Section 9(e) regarding his or her classification as an 
Industry, Non-Industry, or Public Governor at least annually and upon 
request of the Secretary of the NASD, and shall report immediately to 
the Secretary any change in such classification.

Article VIII--Officers, Agents, and Employees

Resignation and Removal of Officers
    Sec. 6. (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] adopted by all of the Governors then in office in 
accordance with applicable law. Such removal shall be without prejudice 
to the contractual rights of the affected officer, if any, with the 
NASD.

Article IX--Committees

Appointment
    Sec. 1. 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. 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 NASD. Any committee 
having the authority to exercise the powers and authority of the Board 
shall have a percentage of Non-Industry committee members at least as 
great as the percentage of Non-Industry Governors on the Board and a 
percentage of Public committee members at least as great as the 
percentage of Public Governors on the Board.
Executive Committee
    Sec. 4. (b) The Executive Committee shall consist of no fewer than 
six 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,] at least one 
Governor of Amex, and at least two Governors who are not members of 
either the NASD Regulation Board[, the Nasdaq Board, or the Amex Board. 
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.] or the Amex Board. 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.

Article X--Compensation of Board and Committee Members

    Sec. 1. The Board may provide for reasonable compensation of the 
Chair of the Board, the Governors, 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 the NASD, 
including those expenses incurred in connection with the support of a 
candidate or candidates by the National Nominating Committee in 
contested elections in accordance with the By-Laws.

Article XIII--Powers of Board To Impose Sanctions

    Sec. 1. The Board is hereby authorized to 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 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:
    (b) violation by a member or a person associated with a member of 
any of the terms, conditions, covenants, and provisions of the By-Laws 
of the NASD, NASD Regulation, or [Nasdaq] NASD Dispute Resolution, the 
Rules of the Association, or the federal securities laws, including the 
rules and regulations adopted thereunder, the rules of the Municipal 
Securities Rulemaking Board, and the rules of the Treasury Department;

Article XV--Limitation of Powers

Conflicts of Interest
    Sec. 4. (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, even 
though the disinterested governors be less than a quorum; 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 even 
though the disinterested governors be less than a quorum. 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, [Nasdaq-Amex, Nasdaq] NASD Dispute Resolution, or Amex.

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 NASD included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed

[[Page 13606]]

rule change. The text of these statemenets may be examined at the 
places specified in Item IV below. The NASD has prepared summaries, set 
forth in Sections A, B, and C below, of the most significant aspects of 
such statements.

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

1. Purpose
    According to the NASD, the proposed rule change has several 
significant purposes. First, the NASD Board of Governors has both 
Industry and Non-Industry members and is required by the By-Laws to 
have a majority of Non-Industry Governors. In 1998, the NASD affected a 
substantial corporate restructuring which included the acquisition of 
the American Stock Exchange LLC (``Amex''). As part of this 
restructuring, the NASD moved to an overlapping Board structure whereby 
all members of the NASD Regulation, Inc. (``NASDR'') and Nasdaq Boards 
became members of the NASD Board. As a result of the 1998 
restructuring, the number of Governors serving on the Board by virtue 
of their status as staff increased to five (the NASD Chief Executive 
Officer, the NASD Chief Operating Officer, the Presidents of NASDR and 
Nasdaq and the Chairman of Amex). In accordance with current NASD By-
Laws, these five Governors have counted as Industry Governors for 
balancing purposes. With this current composition and classification of 
staff Governors, the only realistic manner for NASD to satisfy its 
obligation to ensure fair representation of all relevant constituencies 
has been to increase the number of Industry seats on the Boards, and, 
in order to maintain the required absolute majority of Non-Industry/
Public seats on the Board, increase in the number of Non-Industry seats 
as well. These increases have made it extremely difficult for the NASD 
Board to be small enough to function with optimum efficiency while 
still satisfying NASD's obligation to ensure fair representation of the 
relevant constituencies.
    To improve the efficiency of the Board while maintaining fair 
representation of the relevant constituents, the Association has 
determined to reclassify the NASD CEO and president of NASDR Governor 
positions as ``neutral'' Governors; that is, neither Industry nor Non-
Industry Governors. The reclassification of these Governor positions as 
``neutral'' is consistent with the neutrality classification other 
Self-Regulatory Organizations assign to their Board staff members and 
allows the two Industry seats the staff occupy to now be available to 
Industry candidates elected by the NASD membership.
    Second, the proposed By-Law amendments allow limited National 
Nominating Committee participation in contested elections. Under the 
current By-Laws, the NASD, NASD staff, the NNC and other corporate 
committees are prohibited from taking a position in contested 
elections. As a result of this prohibition, in contested elections the 
NNC has been unable to explain the reasons a NNC nominated candidate is 
worthy of support, and has been unable to respond to statements made by 
other candidates or parties about the NNC nominees. The NNC's current 
inability to support its candidates in contested elections is a 
deterrent to qualified individuals accepting nominations. To remedy 
this, the NASD is proposing to allow the NNC to provide limited support 
to NNC nominated candidates. Specifically, the NASD will allow the NNC 
to distribute two mailings to NASD voting members in support of its 
candidates. The NASD will also allow the NNC to respond in-kind to vote 
solictations and additional mailings by other candidates. By limiting 
NNC's additional support to ``responsiveness'', the NASD will allow the 
NNC to support its candidates but not allow the NNC to unilaterally 
wage an electoral campaign on behalf of those candidates.
    Next, the NASD elected to revise the NASD By-Laws with regard to 
inclusion on the ballot by petition. Under the current ballot by 
petition process, Industry candidates seeking nomination by petition 
can ``coattail'' other Industry and/or Non-Industry candidates in the 
same petition-gathering process. This process essentially allows the 
creation of a ``slate'' through the use of a single set of petitions 
signed by three percent of the membership. The NASD determined to 
continue to allow the nomination by petition of an individual signed by 
three percent of NASD's voting members and to permit each member to 
endorse only one such nominee. Under the revised amendments, the NASD 
specifically recognizes the validity of slate petitions, but requires 
that the slate be endorsed by ten percent of NASD's voting members. The 
NASD's adoption of separate thresholds for petition candidates and 
slate petitions is reasonable given the size and diversity of NASD's 
membership.
    Fourth, to more accurately represent the full range of relevant 
industry constituents, the NASD proposes representation by three 
additional industry segments: a national retail firm, a regional retail 
or independent financial planning member firm and a clearing firm. 
These segments are in addition to required representation by an 
investment company, an insurance affiliate and a small firm. The Board 
will periodically adopt resolutions establishing the criteria for 
national and regional firm representatives in accordance with changes 
in the industry structure and demographics.
    Finally, to set forth the new NASD corporate structure and the 
change in the NASD-Nasdaq relationship, the NASD determined to make 
several technical changes to the By-Laws reflecting the current 
corporate structure. The changes primarily consist of adding references 
to the newly formed NASD Dispute Resolutions subsidiary and deleting 
references to Nasdaq.

Summary of Amendments

By-Laws of the NASD

Article I. Definitions

    New definitions have been added, and the terms Industry, Non-
Industry and Public ``Director'' ``Governor'' and ``committee member'' 
have been amended, to reflect the new corporate structure, namely, the 
inclusion of NASD Dispute Resolution within the family of companies and 
the changed NASD-Nasdaq relationship.

Article IV. Membership

Application for Membership
    Section 1 has been amended to reflect the new corporate structure, 
namely, the inclusion of NASD Dispute Resolution within the family of 
companies and the changed NASD-Nasdaq relationship.

Article V. Registered Representatives and Associated Persons

Application for Registration
    Section 2 has been amended to reflect the new corporate structure, 
namely, the inclusion of NASD Dispute Resolution within the family of 
companies and the changed NASD-Nasdaq relationship.

Article VI. Dues, Assessments, and Other Charges

Power of the NASD to Fix and Levy Assessments
    Section 1 has been amended to reflect the new corporate structure, 
namely, the inclusion of NASD Dispute Resolution within the family of 
companies and the changed NASD-Nasdaq relationship.

[[Page 13607]]

Article VII. Board of Governors

Powers and Authority of Board
    Section 1 has been amended to reflect the new corporate structure, 
namely, the inclusion of NASD Dispute Resolution within the family of 
companies and the changed NASD-Nasdaq relationship.
Authority to Take Action Under Emergency or Extraordinary Market 
Conditions
    Section 3 has been amended to reflect the new corporate structure, 
namely, the inclusion of NASD Dispute Resolution within the family of 
companies and the changed NASD-Nasdaq relationship.
Composition and Qualifications of the Board
    Section 4 has been amended to adjust the overall Board composition 
to no fewer than 17 nor more than 27 Governors, including no more than 
four staff Governors. This section has also been amended to require 
representation by three additional industry segments: a national retail 
firm, a regional retail or independent financial planning member firm 
and a clearing services firm. Finally, this section has been amended to 
allow the Board, by resolution, to specify the criteria for 
representatives of national retail and regional retail or independent 
financial planning firms.
Term of Office of Governors
    Section 5 has been amended to reflect the changed NASD-Nasdaq 
relationship and to recognize the Board's discretion in limiting the 
term of a second NASD officer serving as a Governor.
Filing of Vacancies
    Section 7 has been amended by clarifying that the provision applies 
to elected Governor positions.
The National Nominating Committee
    Section 9 has been amended to specify that the NNC may support 
Governors in contested elections. This section has also been amended to 
reflect the new corporate structure and to eliminate the requirement 
that NASDR and Nasdaq propose two candidates each to the NASD Board for 
appointment to the NNC.
Procedure for Nomination of Governors
    Section 10 has been amended to allow nomination by petition for 
individual ballots by three percent of NASD voting membership, to limit 
voting members from endorsing more than one individual nominee, and to 
allow nomination by petition for slates by ten percent of the NASD 
voting membership.
Communication of Views
    Section 11 has been amended to detail the NNC's limited support of 
NNC nominees.
Election of Governors
    Section 13 has been amended by clarifying that the provision 
applies to elected Governor positions.
Maintenance of Compositional Requirements of the Board
    Section 14 has been amended by clarifying that the provision 
applies to elected Governor positions.

Article VIII. Officers, Agents, and Employees

Resignation and Removal of Officers
    Section 6 has been amended to allow the Board to remove an officer 
of the NASD by a resolution adopting by a majority of Governors or a 
consent adopted by all Governors.

Article IX. Committees

Appointment
    Section 1 has been amended to ensure that the Industry/Non-Industry 
balance of any committee given powers of the Board reflects the same 
balance of the Board.
Executive Committee
    Section 4 has been amended to ensure balanced committee 
representation and to reflect the changed NASD-Nasdaq relationship.

Article X. Compensation of Board and Committee Members

    Section 1 of this Article has been amended to allow member 
reimbursement of expenditures related to the limited NNC nominee 
support in contested elections.

Article XIII. Powers of Board to Impose Sanctions

    Section 1 has been amended to reflect the new corporate structure, 
namely, the inclusion of NASD Dispute Resolution within the family of 
companies and the changed NASD-Nasdaq relationship.
2. Statutory Basis
    The NASD believes that the proposed rule change, as amended, is 
consistent with the provisions of Section 15A(b)(4) of the Act,\5\ 
which requires, among other things, that the Association's rules must 
be designed to assure a fair representation of its members in the 
administration of its affairs. The NASD believes that the proposed rule 
change, as amended, enhances the Association's ability to assure fair 
representation on the NASD Board of its members.
---------------------------------------------------------------------------

    \5\ 15 U.S.C. 78o(b)(4).
---------------------------------------------------------------------------

    (i) Proposed Changes to NASD Board Composition. NASD believes that 
the reservation of Board seats for three additional specific industry 
segments, a national retail firm, a regional retail firm or independent 
financial planning member and a clearing firm, assures the ongoing 
participation in the governance of the NASD by these important segments 
of NASD membership. The reclassification of two staff Governor 
positions as neutral allows for a smaller, more efficient Board without 
compromising either the fair representation of NASD members or an 
appropriate balance of Industry and Non-Industry members.
    (ii) Proposed Changes to NASD Board Elections. The NASD believes 
that the proposed changes, as amended, to the election procedures will 
foster a fair and vigorous NASD Board election process. The proposed 
changes reflect two enhancements. First, the amendments set clear and 
fair thresholds for petitions by ballot for individuals and slates. 
Second, the NNC will be able to respond in-kind in support of NNC 
nominated candidates and, as a result, NASD members will be better 
informed about the candidates and issues arising in contested 
elections.

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

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

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

    Written comments were neither solicited nor received.

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

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

[[Page 13608]]

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change, as amended, 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 20549-0609. 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 NASD. All submissions should refer to File No. 
SR-NASD-01-06 and should be submitted by March 27, 2001.

For the Commission, by the Division of Market Regulation, pursuant 
to delegated authority.\6\
---------------------------------------------------------------------------

    \6\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-5329 Filed 3-5-01; 8:45 am]
BILLING CODE 8010-01-M