[Federal Register Volume 63, Number 213 (Wednesday, November 4, 1998)]
[Notices]
[Pages 59614-59615]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-29513]
[[Page 59614]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40615; File No. SR-NASD-98-56]
Self-Regulatory Organizations; Order Granting Partial Approval to
Proposed Rule Change by the National Association of Securities Dealers,
Inc. Relating to the Small Firm Representative on NASD Board Portion of
the Proposed Rule Change Relating to Amendment to Composition of NASD
Board to Include Members of New Amex LLC and for Other Purposes
October 28, 1998.
On August 10, 1998, the National Association of Securities Dealers,
Inc. (``NASD'' or ``Association'') filed with the Securities and
Exchange Commission (``SEC'' or ``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 its proposal, among
other matters, the NASD proposed revision of its by-laws to reserve one
Industry Governor position on the NASD Board of Governors (``Board'')
for a representative of smaller NASD member firms. Notice of the
proposal was published in the Federal Register on August 26, 1998
(``Notice'').\3\ The Commission received one comment letter on the
filing.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 40399 (August 19,
1998), 63 FR 22839 (File No. SR-NASD-98-56).
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I. Introduction and Description of the Proposal
In 1997, the NASD reorganized its corporate governance structure in
connection with a revision of its disciplinary process following
issuance of the Commission's Report Pursuant to Section 21(a) of the
Act and related order and undertakings.\4\ The changes streamlined the
NASD's decisionmaking process, improved communication among members of
the Board and Association staff and enabled the Association to act
quickly and decisively when appropriate.\5\ After the reorganization,
the NASD established the Small Firm Advisory Board \6\ to address
concerns raised by a number of smaller member firms about their
representation within the new NASD corporate structure.
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\4\ Report and Appendix to Report Pursuant to Section 21(a) of
the Securities Exchange Act of 1934 Regarding the NASD and The
Nasdaq Stock Market (August 8, 1996) and Securities Exchange Act
Release No. 37538 (August 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), respectively. The
undertakings were included in the SEC Order.
\5\ See Securities Exchange Act Release No. 39326 (November 14,
1997), 62 FR 62385 (November 21, 1997) (File Nos. NASD-97-71, 96-29
and 96-20).
\6\ Press Release, National Association of Securities Dealers,
NASD Creates Small Firm Advisory Board (Feb. 17, 1998).
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The Notice indicated that the NASD's experience under the new
corporate structure suggested that further participation by the small
member firm community in matters affecting their business and their
customers would be desirable. To provide this, the NASD filed the
proposed rule change, seeking amendment of its by-laws to include one
representative of member firms with 150 or fewer registered
representatives among the Industry positions on the Board of
Governors.\7\
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\7\ To qualify for this position, a proposed nominee must be
associated with a member firm of 150 or fewer registered
representatives. The definition of an Industry Governor is set forth
in Article I of the NASD By-laws.
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II. Summary of Comments
The Commission received one comment letter from the Independent
Broker-Dealer Association (``IBDA'').\8\ The NASD responded to this
letter.\9\
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\8\ See Letter from Bill T. Singer, Singer Fumiento LLP to The
Secretary, Securities and Exchange Commission, dated September 11,
1998. The comment letter is composed of a cover letter from Mr.
Singer, counsel to the IBDA and a report to Alan Davidson, President
of the IBDA from Mr. Singer, addressing the small firm
representative and other issues, dated September 10, 1998.
\9\ See Letter from T. Grant Callery, General Counsel, NASD to
Katherine England, Assistant Director, Division of Market
Regulation, Commission, dated October 22, 1998.
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The comment letter expresses numerous concerns about the
representation of small firms within the NASD.\10\ Primarily, the
comment letter questions whether the proposed ``small firm Board
position,'' combined with the current Small Firm Advisory Board,
adequately represent the IBDA members within the NASD. The letter
stresses the need for enhanced representation of small firms and
asserts that IBDA members have been hurt by the lack of adequate
representation. The comment letter suggests that IBDA members would be
better represented if they were able to elect the members of the Small
Firm Advisory Board and the small firm Board representative directly.
The comment letter also suggests that the maximum number of registered
representatives allowed by the proposed definition of a small firm
should be reduced, to more adequately represent the majority of smaller
firms.
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\10\ The comment letter also questioned: (a) certain aspects of
the proposed NASD/Amex combination; (b) inclusion of the small firm
representative vote in the same filing as the combination; and (c)
the effects of the post 21(a) Report enhancement of the NASD
disciplinary process on OBDA members. That portion of SR-NASD-98-56
regarding the NASD/Amex combination, and any comment letters
received thereto, will be separately addressed by the Commission at
a later date, in connection with review of all filings addressing
the combination. See, e.g., Securities Exchange Act Release No.
40426 (September 10, 1998) (Notice of Filing of Proposed Rule Change
and Amendment No. 1 Thereto by the American Stock Exchange, Inc.
Relating to Changes to the Combination of the American Stock
Exchange, Inc. and the National Association of Securities Dealers,
Inc. File No. SR-AMEX-98-32) and Securities Exchange Act Release No.
40443 (September 16, 1998.) (Notice of Filing of Proposed Rule
Change and Amendment No. 1 Thereto by the National Association of
Securities Dealers, Inc. Relating to Policies Regarding Authority
Over American Stock Exchange LLC and Composition of Board of
Governors of American Stock Exchange LLC, File No. SR-NASD-98-67).
The Association has indicated to the Commission that the small
firm representative Board member vote was included in the same
ballot as the NASD/Amex combination issues as a cost-savings
mechanism, to avoid incurring the expense of separate mailings to
the NASD membership on each issue. Conversation between Philip
Rosen, Associate General Counsel, Office of General Counsel, NASD
and Mandy S. Cohen, Special Counsel, Division of Market Regulation,
Commission, on October 26, 1998.
The comments on the post 21(a) Report disciplinary process
enhancements do not relate to the subject of SR-NASD-98-56, the
proposal currently under consideration. The Commission notes,
however, that enhancement of the disciplinary process is a favorable
outcome of the 21(a) Report and SEC Order.
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Responding to the IBDA's concerns, the NASD points out that the
Commission approved its 1997 corporate structure and in doing so, found
the restructuring to be consistent with the requirements of Section 15A
of the Act, including the provisions requiring fair representation of
members in the governance of the NASD.\11\ In particular, the
Association responds that the Commission assessed the 1997 corporate
structure changes in terms of the fair representation requirement
before reservation of a small firm Board position. Additionally, the
NASD asserts that the Small Firm Advisory Board was voluntarily
established by the Board of Governors to provide a more effective voice
for the small firm member community, notwithstanding the minimum
requirements of the Act. Moreover, the NASD points out that, regardless
of the proposed definition, the current nominee for the small firm
Governor position is associated with a member firm of eight registered
representatives,\12\ and that eight of the twelve members of the Small
Firm
[[Page 59615]]
Advisory Board are from member firms with fewer than twenty registered
representatives. Finally, the NASD notes that its by-laws allow for the
nomination of dissident candidates for specific positions, such as the
small firm representative, through the by-laws' contested election
procedures.\13\
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\11\ See 15 U.S.C. 78o(b)(4).
\12\ See, e.g., Notice To Members 98-80 (Sept. 29, 1998); supra
note 9.
\13\ See Article VII, Section 10 to the NASD by-laws. In this
context, dissident candidates are those not nominated by the NASD
Nominating Committee.
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III. Discussion
As discussed below, the Commission has determined to approve the
Association's proposal incorporating a small firm Board representative.
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 Section 15A of the Act \14\ and the
rules and regulations thereunder that govern the NASD.\15\ 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 proposal.\16\
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\14\ 15 U.S.C. 78o-3.
\15\ 15 U.S.C. 78s(b).
\16\ 15 U.S.C. 78o-3.
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The Commission believes the creation of a small firm representative
is consistent with that portion of Section 15A requiring fair member
representation in the governance of the NASD.\17\ As discussed above,
the Association made substantial changes to its corporate governance
structure in 1997, many of which responded to the Commission's 21(a)
Report and related documents. After these changes, the NASD created the
Small Firm Advisory Board to address concerns raised by small firms
about their ability to participate in the new NASD corporate structure.
Today, the Commission approves the reservation of a Governor position
to represent member firms with 150 or fewer registered representatives.
The Commission agrees with the NASD that the changes, as proposed, will
enhance the representation of small firms within the NASD corporate
governance structure by inserting a small firm representative into the
center of the decisionmaking process, the NASD Board of Governors. As a
member of the Board of Governors, the small firm representative, unlike
a member of the Small Firm Advisory Board, will have an opportunity to
actively participate in the governance of the NASD and keep abreast of
the Association's new initiatives.
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\17\ 15 U.S.C. 78o(b)(4).
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Additionally, the Commission believes that the NASD acted within
its discretion by defining a small member firm as one having 150 or
fewer registered representatives. Approval of the exercise of this
discretion is supported by the fact that the NASD by-laws include
contested election provisions approved in connection with the 1997
restructuring. These provision will allow organizations such as the
IBDA to present candidates for the NASD Board of Governors to the NASD
membership during the regular election process, if they do not like
those nominated by the NASD Nominating Committee. The existence of
these contested election procedures further supports the finding that
the amendments approved today satisfy the fair representation
requirements of the Act discussed above, since these provisions permit
presentation of an alternative nominee for the small firm
representative Board position.
IV. Conclusion
The Commission believes that the proposed rule change is consistent
with the Act, and, particularly, with Section 15A thereof.\18\ In
approving the proposal, the Commission has considered its impact on
efficiency, competition, and capital formation.\19\
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\18\ 15 U.S.C. 78o-3.
\19\ 15 U.S.C. 78(c)f.
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It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\20\ that the portion of the proposed rule change (SR-NASD-98-56)
relating to reservation of a small firm representative on the NASD
Board of Governors, is approved.
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\20\ 15 U.S.C. 78s(b)(2).
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For the Commission, by the Division of Market Regulation, pursuant
to delegated authority.\21\
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\21\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-29513 Filed 11-3-98; 8:45 am]
BILLING CODE 8010-01-M
