[Federal Register Volume 61, Number 76 (Thursday, April 18, 1996)]
[Notices]
[Pages 16948-16955]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-9512]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37107; File No. SR-NASD-96-16]
Self-Regulatory Organizations; Notice of Filing and Order
Granting Temporary Accelerated Approval of Proposed Rule Change by
National Association of Securities Dealers, Inc. Relating to the
Allocation and Delegation of Authority and Responsibilities by the
National Association of Securities Dealers, Inc., to NASD Regulation,
Inc., and the Nasdaq Stock Market, Inc.
April 11, 1996.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on April 10
1996, the National Association of Securities Dealers, Inc. (``NASD'' or
``Association'') filed \1\ 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 Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons. For the reasons discussed
below, the Commission is granting accelerated approval of the proposed
rule change for a period of ninety (90) days.
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\1\ On April 11, 1996, the NASD filed an amendment to its
filing. This amendment supersedes the original filing. This Notice
reflects the amendments.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The NASD is proposing to amend its rules to: (1) add new Rule 0130
\2\ to the NASD's rules delegating to the subsidiaries of the NASD,
NASD Regulation, Inc. (``NASDR'') and The Nasdaq Stock Market, Inc.
(``Nasdaq''), the authority to act on behalf of the Association as set
forth in a Plan of Allocation and Delegation adopted by the Board of
Governors and approved by the Securities and Exchange Commission
pursuant to its authority under the Securities Exchange Act of 1934
(``Act''), and (2) adopting a Plan of Allocation and Delegation (Plan)
setting forth the purpose, function, governance, procedures and
responsibilities of the NASD, NASDR and Nasdaq, following the
reorganization of the NASD.
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\2\ The SEC recently approved rule filing SR-NASD-95-51 which
reorganizes the NASD Manual. The proposed new rule contained in this
rule filing is numbered according to the numbering methodology
adopted with the new Manual.
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Below is the text of the proposed rule change. All language is new.
0130 Delegation, Authority and Access
(a) The National Association of Securities Dealers, Inc., delegates
to its subsidiaries (NASD Regulation, Inc. and The Nasdaq Stock Market,
Inc., hereinafter ``Subsidiaries'') the authority to act on behalf of
the Association as set forth in a Plan of Allocation and Delegation
adopted by the Board of Governors and approved by the Securities and
Exchange Commission pursuant to its authority under the Securities
Exchange Act of 1934 (``Act'').
(b) Notwithstanding any delegation of authority to the Subsidiaries
pursuant to this rule, the staff, books, records and premises of the
Subsidiaries are the staff, books, records and premises of the
Association subject to oversight pursuant to the Act, and all officers,
directors, employees and agents of the Subsidiaries are the officers,
directors, employees and agents of the Association for purposes of the
Act.
Plan of Allocation and Delegation of Functions by NASD to
Subsidiaries
I. NASD, Inc.
The NASD, Inc. (referenced as ``NASD''), the Registered Section 15A
Association, is the parent company of the wholly-owned Subsidiaries
NASD Regulation, Inc. (referenced individually as ``NASDR'') and The
Nasdaq Stock Market, Inc. (referenced individually as ``Nasdaq'')
(referenced collectively as the ``Subsidiaries''). The term
``Association'' shall refer to the NASD and the Subsidiaries
collectively.
A. Governors, Directors and Committee Members
The following definitions are applicable to Governors of the NASD,
Directors of the Subsidiaries, and Members of Committees of the NASD
and the Subsidiaries.
1. ``Industry'' Governors, Directors or Committee Members shall
include (a) officers, directors and employees of brokers and dealers
and persons who have been employed in any such capacity at any time
within the prior three years; and (b) persons who have consulting or
employment relationships with or provide professional services to the
Association and persons who have had any such relationship or provided
any such services at any time within the prior three years.
2. ``Non-industry'' Governors, Directors or Committee Members shall
be (a) Public Governors; (b) officers and employees of issuers of
securities listed on the Nasdaq Stock Market or traded in the over-the-
counter market; (c) persons affiliated with brokers and dealers that
[[Page 16949]]
operate solely to assist the securities-related activities of the
business of non-member affiliates (such as a broker or dealer
established to (i) distribute an affiliate's securities which are
issued on a continuous or regular basis, or (ii) process the limited
buy and sell orders of the shares of employee owners of the affiliate);
(d) employees of an entity that is affiliated with a broker or dealer
that does not account for a material portion of the revenues of the
consolidated entity, and who are primarily engaged in the business of
the non-member entity; and (e) other individuals who would not be
Industry Governors, Directors or Committee Members.
3. ``Public'' Governors, Directors or Committee Members shall be
non-industry persons who have no material business relationship with a
broker, dealer or the Association.
B. Functions and Authority of NASD
The NASD shall have ultimate responsibility for the rules and
regulations of the Association and its operation and administration. As
set forth below in Sections II.A. and III. A, the NASD has delegated
certain authority and functions to its subsidiaries. Actions taken
pursuant to delegated authority, however, remain subject to review,
ratification or rejection by the NASD Board in accordance with
procedures established by that Board. Any function or responsibility as
a registered securities association under the Exchange Act or as set
forth in the articles of incorporation or the by-laws is hereby
reserved, except as expressly delegated to the subsidiaries. In
addition, the NASD expressly retains the following authority and
functions:
1. To exercise overall responsibility for ensuring that the
Association's statutory and self-regulatory obligations and functions
are fulfilled.
2. To delegate authority to the Subsidiaries to take actions on
behalf of the NASD.
3. To elect the Subsidiary Boards of Directors.
4. To review the rulemaking and disciplinary decisions of the
Subsidiaries (See Sections II.C. and III.C. below).
5. To coordinate actions of the Subsidiary Boards as necessary.
6. To resolve any disputes between the Subsidiaries.
7. To administer common overhead and technology of the
Subsidiaries.
8. To administer the Office of Internal Review as provided in
Section I.D.4 below.
9. To manage external Association relations on major policy issues.
10. To direct the Subsidiaries to take action necessary to
effectuate the purposes and functions of the Association.
C. Board of Governors
1. Composition
The NASD Board of Governors (``NASD Board'') shall be composed of
at least Nine (9) and no more than Thirteen (13) Governors, a majority
of whom shall be Non-industry (including at least Two (2) Public
Governors). The Chief Executive Officer (``CEO'') of NASD shall be a
Governor. In the event that the NASD Board shall consist of Eleven (11)
or more Governors, at least Three (3) shall be Public Governors.
2. Election Procedures
a. Commencing with the selection of Governors to take office in
April of 1997, Governors (except the CEO of NASD) shall be elected by a
majority vote of those members of the NASD casting ballots on a slate
of nominees presented to the NASD membership by the National Nominating
Committee for election by secret ballot.
b. National Nominating Committee:
(1) The National Nominating Committee shall be composed of at least
Six (6) and not more than Nine (9) members, equally balanced between
Industry and Non-industry Committee Members (including at least Two (2)
Public Committee Members). In the event that the Nominating Committee
shall consist of Seven (7) or more members at least Three (3) shall be
Public Committee Members. If at any time there shall be an odd number
of members of the National Nominating Committee, Non-industry Committee
Members shall be in the majority. No officer or employee of the
Association shall serve as a member of the National Nominating
Committee in any voting or non-voting capacity. Two members of the
National Nominating Committee shall be selected by each of the
Subsidiaries and the NASD. No more than three of the Committee Members
and no more than two of the Industry Committee Members shall be current
members of the NASD Board or of the Board of Directors of one of the
Subsidiaries (collectively the ``Association Boards''). Any member of
the National Nominating Committee who is a current member of any
Association Board shall be in his/her final year of service on any
Association Board.
(2) Members of the National Nominating Committee shall be appointed
annually by the NASD Board and may be removed for cause by a majority
vote of the NASD Board.
(3) The National Nominating Committee shall propose to the NASD
Board one or more nominees for each vacant or new Governor position,
and for each Director position on the Boards of Directors of the
Subsidiaries.
3. Contested Elections
a. A candidate for the NASD Board who has not been nominated may be
included on the ballot if the candidate presents duly executed
petitions to the National Nominating Committee demonstrating that such
candidate has the support of Two (2) percent of the members of the
NASD.
b. A candidate for the NASD Board shall be certified by the
National Nominating Committee and included on the ballot only if the
Committee certifies that the candidate's petitions are duly executed by
the requisite number of members of the NASD and that the candidate
meets the qualifications for the position to be filled, as defined in
Section I.A. above.
4. Term of Office
a. Each Governor shall hold office for a term of not more than
three years, or until a successor is elected and qualified, or until
death, disqualification, resignation, or removal. Except as provided in
paragraph (b) and (c), Governors may not serve more than two
consecutive terms of office on any Association Board.
b. The CEO of the NASD shall serve as a member of the NASD Board
until a successor is selected and qualified, or until death,
resignation, disqualification, or removal.
c. Where a Governor is appointed to fill a term of less than one
year, such Governor shall not be precluded from serving two additional
terms of office.
5. Vacancies
a. If a Governor position becomes vacant before the expiration of
the Governor's term of office, the National Nominating Committee shall
recommend, and the NASD Board shall elect by majority vote of the
remaining Governors, a person satisfying the criteria for a Governor
position of the type (Industry, Non-industry or Public), vacated as
defined in Section I.A. above, unless such Governor has a remaining
term of office of no more than six months, in which case no replacement
will be required.
b. If a Governor no longer satisfies the criteria for the category
in which he or she was elected (Industry, Non-industry or Public) and
has a remaining term of office of more than six months, such
[[Page 16950]]
Governor shall be automatically removed from office unless the
remaining members of the NASD Board determine otherwise by a majority
vote and the failure to remove the Governor does not affect the
proportional representation set forth in Section I.C.1. above.
D. Audit Committee
1. The Audit Committee shall be a committee of the NASD Board and
shall include the following functions:
a. To ensure the existence of adequate controls and the integrity
of the financial reporting process of the Association.
b. To recommend to the NASD Board, and to monitor the independence
and performance of, the certified public accountants retained as
outside auditors by the NASD.
c. To direct and oversee all the activities of the Association's
internal review function, including but not limited to management's
responses to the internal review function.
2. Composition: The Audit Committee shall be composed of Four (4)
or Five (5) members of the NASD Board, none of whom are officers or
employees of the Association. The Committee shall include at least one
Public Committee Member who shall serve as Chairperson of the
Committee. The Committee shall have no more than two Industry Committee
Members. If the Committee shall have Four (4) members it shall have not
more than One (1) Industry Committee Member. In the event that the size
of the NASD Board shall at any time consist of Eleven (11) or more
members, the Audit Committee shall include Two (2) Public Committee
Members. In addition, each Subsidiary shall designate a Public Member
of its Board as a liaison to the Audit Committee. The Audit Committee
may consult with that person on issues relating to the functions of the
Subsidiary, but neither the liaison nor any officer or employee of the
Association shall serve on the Audit Committee in any voting or non-
voting capacity.
3. No member of the Audit Committee shall participate in the
consideration or decision of any matter relating to a particular NASD
member, company or individual if he or she has a material interest in,
or a professional, business or personal relationship with, that member,
company or individual or if such participation shall create an
appearance of impropriety. Committee members shall consult with the
General Counsel of NASD to determine if recusal is necessary. In the
event that a member of the Committee is recused from consideration of a
matter, any decision on the matter shall be by a vote of a majority of
the remaining members of the Committee.
4. Office of Internal Review: The Audit Committee shall have
exclusive authority: (a) To hire or terminate the Director of Internal
Review, (b) to determine the compensation of the Director of Internal
Review, and (c) to determine the budget for the Office of Internal
Review. The Office of Internal Review shall report directly to the
Audit Committee. The Audit Committee may, in its discretion, direct
that the Office of Internal Review also report to senior management of
the NASD on matters it deems appropriate and may request that senior
NASD management perform such operational oversight as necessary and
proper, consistent with preservation of the independence of the
internal review function.
E. Management Compensation Committee
1. The Management Compensation Committee shall be a Committee of
the NASD Board and shall have the following functions: To consider and
recommend compensation policies, programs and practices for employees
of the Association.
2. Composition: The Management Compensation Committee shall be
composed of Four (4) or more Members of the NASD Board, equally
balanced between Industry and Non-industry Governors. If at any time
there shall be an odd number of members of the Management Compensation
Committee, Non-industry Committee Members shall be in the majority.
F. Access to and Status of Officers, Directors, Employees, Books,
Records and Premises of Subsidiaries
Notwithstanding the delegation of authority to the Subsidiaries, as
set forth in Section II.A. and III.A. below, the staff, books, records
and premises of the Subsidiaries are the staff, books, records and
premises of the NASD subject to oversight pursuant to the Securities
Exchange Act of 1934 (``Act''), and all officers, directors, employees
and agents of the Subsidiaries are officers and directors, employees
and agents of the NASD for purposes of the Act.
II. NASD Regulation, Inc. (``NASDR'')
A. Delegation of Functions and Authority
1. The NASD hereby delegates to the NASDR and the NASDR assumes the
following responsibilities and functions as a registered securities
association:
a. To establish rules and regulations for NASD members including,
but not limited to fees and membership requirements and the Code of
Arbitration and Mediation Procedure.
b. To determine Association policy, including developing and
adopting necessary or appropriate rule changes, relating to the
business and sales practices of NASD members and associated persons
with respect to, but not limited to, (i) arbitration of disputes among
and between NASD members, associated persons and customers, (ii) public
and private sale or distribution of securities including underwriting
arrangements and compensation, (iii) financial responsibility, (iv)
qualifications for NASD membership and association with NASD members,
(v) clearance and settlement of securities transactions, (vi) NASD
member advertising practices, (vii) administration, interpretation and
enforcement of Association rules, (viii) administration and enforcement
of Municipal Securities Rulemaking Board (``MSRB'') rules, the federal
securities laws, and other laws, rules and regulations the Association
has the authority to administer or enforce, and (ix) standards of proof
for violations and sanctions imposed on NASD members and associated
persons in connection with disciplinary actions.
c. To take necessary or appropriate action to assure compliance
with Association policy, Association and MSRB rules, the federal
securities laws, and other laws, rules and regulations the Association
has the authority to administer or enforce, through examination,
surveillance, investigation, enforcement, disciplinary and other
programs.
d. To administer programs and systems for the surveillance and
enforcement of rules governing NASD members' conduct and trading
activities in The Nasdaq Stock Market, other markets operated by The
Nasdaq Stock Market, the third market for securities listed on a
registered exchange, and the over-the-counter market.
e. To examine and investigate NASD members and associated persons
to determine if they have violated Association or MSRB rules, the
federal securities laws, and other laws, rules and regulations the
Association has the authority to administer, interpret or enforce.
f. To administer Association enforcement and disciplinary programs,
including investigation, adjudication of cases and the imposition of
fines and other sanctions.
g. To administer the Association's office of professional hearing
officers.
h. To conduct arbitrations, mediations and other dispute resolution
programs.
[[Page 16951]]
i. To conduct qualification examinations and continuing education
programs.
j. To operate the Central Registration Depository (``CRD'').
k. To determine whether applicants for NASD membership have met the
requirements for membership established by the Association.
l. To place restrictions on the business activities of NASD members
consistent with the public interest, the protection of investors and
the federal securities laws.
m. To determine whether persons seeking to register as associated
persons of NASD members have met such qualifications for registration
as may be established by the Association, including whether statutorily
disqualified persons will be permitted to associate with particular
NASD members and the conditions of such association.
n. To oversee all District Office activities.
o. To establish the annual budget and business plan for NASDR.
p. To determine allocation of NASDR resources.
q. To establish and assess fees and other charges on NASD members,
persons associated with NASD members and others using the services or
facilities of NASDR.
r. To manage external relations on enforcement, regulatory and
other policy issues with Congress, the Securities and Exchange
Commission (``SEC''), state regulators, other self-regulatory
organizations, business groups, and the public.
2. All action taken pursuant to authority delegated pursuant to (1)
shall be subject to the review, ratification, or rejection by the NASD
Board in accordance with procedures established by the NASD Board.
B. Board of Directors
1. Subsequent to January of 1997, the NASDR Board of Directors
(``NASDR Board'') shall be composed of at least Twenty-one (21) and no
more than Twenty-five (25) Directors. The President of NASDR shall be a
member of the NASDR Board and the remaining members shall be equally
balanced between Industry and Non-industry Directors. If at any time
there shall be an odd number of Directors, excluding the President, a
majority of the Directors other than the President shall be Non-
industry. The NASDR Board shall include Seven (7) representatives of
NASD members representing geographical regions defined by the NASDR
Board, and at least Three (3) at-large industry representatives. The
NASDR Board shall include at least Ten (10) Non-industry Directors,
including at least Three (3) Public Directors. In the event that the
NASDR Board shall consist of more than Twenty-two (22) Members, at
least Four (4) shall be Public Directors. The NASDR Board shall include
representatives of an issuer of investment company shares or an
affiliate of such an issuer and an insurance company or an affiliated
NASD member. The CEO of NASD shall be an ex-officio non-voting member
of the NASDR Board.
2. Election Procedures.
a. The National Nominating Committee shall propose to the NASD
Board nominees for each position on the NASDR Board.
b. The Seven (7) Industry Members of the NASDR Board shall be
nominated by Regional Nominating Committees for consideration by the
National Nominating Committee. A Regional Nominating Committee shall
consist of equal numbers of members from each district comprising the
regions and members shall be selected by the District Committee for
that District.
c. Any officer, director or employee of an NASD member who has not
otherwise been nominated by the Regional Nominating Committee may seek
nomination if the candidate presents duly executed petitions to the
Regional Nominating Committee for the appropriate geographical region
demonstrating that such candidate has the support of at least Ten (10)
percent of the NASD members in that region. The Regional Nominating
Committee shall submit the names of its nominees and of all the
candidates presenting qualifying petitions to the members in that
region for nomination by secret ballot. The Regional Nominating
Committee shall nominate to the National Nominating Committee the
candidate receiving the most votes.
d. Terms of Office and Vacancies: The terms of office of Directors
and the procedures for the filling of vacancies shall be the same as
those set forth under Section I.C.4. and 5. above.
C. NASDR Board Procedures
1. Disciplinary Action--Any initial disciplinary decision of the
Association, including dismissals, may be appealed to the NBCC within
15 calendar days, or called for review by the NBCC within 45 calendar
days, as set forth in the Code of Procedure. A decision of the NBCC may
be called for review by any member of the NASDR Board not later than
its meeting next following the NBCC's decision. A decision of the NBCC
or the NASDR Board may be called for review by any member of the NASD
Board not later than its meeting next following the decision of the
NBCC or NASDR Board but which is 15 calendar days or more following the
decision of the NBCC or NASD Board. Any disciplinary decision not
appealed or called for review shall become the final action of the
Association upon the expiration of the time allowed for appeal or call
for review. A respondent has the right to appeal a final action of the
Association taken by the NBCC, NASDR or NASD to the SEC.
2. Statutory Disqualification Decisions--Any decision of the NBCC
with respect to statutory disqualification may be called for review by
any member of the NASDR Board not later than its meeting next following
the NBCC's decision. A decision of the NBCC or the NASDR Board may be
called for review by any member of the NASD Board not later than its
meeting next following the decision of the NBCC or NASDR Board but
which is 15 calendar days or more following the decision of the NBCC or
the NASDR Board. Any decision that is not called for review shall
become the final action of the Association upon expiration of the time
allowed for appeal or call for review. A respondent has the right to
appeal a final action of the Association taken by the NBCC, NASDR or
NASD to the SEC.
3. Rule Filings--Any rule change adopted by the NASDR Board that
imposes fees or other charges on persons or entities other than NASD
members or that the NASDR Board refers to the NASD Board because in the
view of the NASDR Board it raises significant policy issues shall be
reviewed and ratified by the NASD Board before becoming the final
action of the Association. If the NASDR Board does not refer a rule
change to the NASD Board for review, the NASDR Board action will become
the final action of the Association unless called for review by any
member of the NASD Board not later than its meeting next following the
NASDR Board's action but which is 15 calendar days or more following
the action of the NASDR Board. During the process of developing rule
proposals, NASDR staff shall consult with and seek the advice of Nasdaq
staff before presenting any rule proposal to the NASDR Board.
D. Supplemental Delegation Regarding the Formation of Committees
1. The NASDR Board may designate one or more committees and
delegate to such committees such powers and authority, as necessary and
appropriate, to act on behalf of the NASDR Board in carrying out the
functions and authority delegated to the NASDR by the NASD.
[[Page 16952]]
Such delegations shall be in conformance with law, the charter and the
by-laws and the requirement as set forth below as part of this Plan of
Allocation and Delegation. Any action taken by a committee pursuant to
delegated authority shall be subject to review, ratification or
rejection by the NASDR Board in accordance with procedures established
by the NASDR Board.
(a) National Business Conduct Committee--A National Business
Conduct Committee may be created for the purpose of:
(i) Hearing and deciding appeals of initial disciplinary decisions
of the Association.
(ii) Considering and recommending to the NASDR Board policy and
rule changes relating to the business and sales practices of NASD
members and associated persons.
(iii) Considering and recommending Association enforcement
policies, including policies with respect to fines and other sanctions.
(b) The NBCC shall be composed of at least Eight (8) members of the
NASDR Board equally balanced between Industry and Non-industry
Committee Members (including at least one Public Member). If at any
time there shall be an odd number of Committee Members, a majority of
the Members shall be Non-industry. Each NBCC Member shall be elected to
serve a one-year term.
2. Other Committees--With respect to any other committees that may
be formed pursuant to this Section D for purposes other than those set
forth in 1. above, such committee shall be created in accordance with
the by-laws by resolution or resolutions adopted by a majority of the
whole NASDR Board.
III. Delegation to Nasdaq
A. Delegation of Functions and Authority
1. The NASD hereby delegates to Nasdaq and Nasdaq assumes the
following responsibilities and functions as a registered securities
association:
a. To operate The Nasdaq Stock Market, automated systems supporting
The Nasdaq Stock Market, and other markets or systems for non-Nasdaq
securities.
b. To provide and maintain a telecommunications network
infrastructure linking market participants for the efficient processing
and handling of quotations, orders, transaction reports and comparisons
of transactions.
c. To collect, process, consolidate and provide to NASDR the
information requisite to operation of the surveillance audit trail.
d. To develop and adopt rule changes (i) applicable to the
collection, processing, and dissemination of quotation and transaction
information for securities traded on The Nasdaq Stock Market, on other
markets operated by The Nasdaq Stock Market, in the third market for
securities listed on a registered exchange, and in the over-the-counter
market, (ii) for Nasdaq-operated trading systems for these securities,
and (iii) establishing trading practices with respect to these
securities.
e. To develop and adopt rules, interpretations, policies and
procedures to maintain and enhance the integrity, fairness, efficiency,
and competitiveness of The Nasdaq Stock Market and other markets
operated by The Nasdaq Stock Market.
f. To act as a Securities Information Processor for quotations and
transaction information related to securities traded on The Nasdaq
Stock Market and other markets operated by The Nasdaq Stock Market.
g. To act as processor under the Nasdaq/Unlisted Trading Privileges
Plan to collect, consolidate, and disseminate quotation and transaction
reports in eligible securities from all Plan Participants in a fair and
non-discriminatory manner.
h. To administer the Association's involvement in National Market
System Plans related to Nasdaq/Unlisted Trading Privileges or the
trading in the third market for securities listed on a registered
exchange.
i. To develop, adopt and administer rules governing listing
standards applicable to securities traded on The Nasdaq Stock Market
and the issuers of those securities.
j. To establish standards for participation in The Nasdaq Stock
Market, other markets or systems operated by Nasdaq and determine in
accordance with Association and Nasdaq procedures if: (i) persons
seeking to participate in any of such markets and systems have met the
standards established for participants; and (ii) persons participating
in any of the markets or systems continue to meet the standards
established for participants.
k. To establish and assess listing fees upon issuers and fees for
the products and services offered by Nasdaq.
l. To establish the annual budget and business plan for Nasdaq.
m. To determine allocation of Nasdaq resources.
n. To manage external relations on matters related to trading on
and the operation and functions of The Nasdaq Stock Market, other
markets operated by The Nasdaq Stock Market and systems operated by the
Nasdaq Stock Market with Congress, the SEC, state regulators, other
self-regulatory organizations, business groups, and the public.
2. All action taken pursuant to authority delegated pursuant to 1.
shall be subject to the review, ratification, or rejection by the NASD
Board in accordance with procedures established by the NASD Board.
B. Board of Directors
1. Composition--As of January of 1997 the Nasdaq Board of Directors
(``Nasdaq Board'') shall be composed of at least Eleven (11) and not
more than Fifteen (15) Directors. The President of Nasdaq shall be a
member of the Nasdaq Board and the remaining Members shall be equally
balanced between Industry and Non-industry Directors, including at
least two (2) Public Directors. If at any time there shall be an odd
number of Directors, excluding the President, a majority of the
Directors other than the President shall be Non-industry. In the event
that the Nasdaq Board shall consist of more than Twelve (12) Members,
at least Three (3) shall be Public Directors. The CEO of NASD shall be
an ex-officio non-voting member of the Nasdaq Board.
2. Election Procedures.
a. The National Nominating Committee shall propose to the NASD
Board nominees for each position on the Nasdaq Board.
b. Terms of Office and Vacancies: The terms of office of Directors
and the procedures for the filling of vacancies shall be the same as
those set forth under I.C.4. and 5. above.
C. Nasdaq Board Procedures
1. Listing/Delisting Decisions--Any initial decision of Nasdaq
staff concerning the listing or delisting of securities on The Nasdaq
Stock Market may be appealed to the Nasdaq Listing and Hearing Review
Committee (``Listing Committee'') within 15 calendar days, or called
for review by any member of the Listing Committee within 45 days, as
set forth in the Code of Procedure. A decision of the Listing Committee
may be called for review by any member of the Nasdaq Board not later
than its meeting next following the Listing Committee's decision. A
decision of the Nasdaq Board may be called for review by any member of
the NASD Board not later than its meeting next following the Nasdaq
Board's decision but which is 15 calendar days or more following the
decision of the Listing Committee or the Nasdaq Board. Any decision not
appealed or called for review shall become the final action of the
Association upon expiration of the
[[Page 16953]]
time allowed for appeal or call for review. An issuer has the right to
appeal a final action of the Association taken by the Listing
Committee, Nasdaq Board or NASD to the SEC.
2. Rule Filings--Any rule change adopted by the Nasdaq Board that
imposes fees or other charges on persons or entities other than NASD
members or issuers or that the Nasdaq Board determines to refer to the
NASD Board because in the view of the Nasdaq Board it raises
significant policy issues shall be reviewed and ratified by the NASD
Board before becoming the final action of the Association. If the
Nasdaq Board does not refer a rule change to the NASD Board for review,
the Nasdaq Board action will become the final action of the Association
unless called for review by any member of the NASD Board not later than
its meeting next following the Nasdaq Board's action but which is 15
calendar days or more following the action of the Nasdaq Board. During
the process of developing rule proposals, Nasdaq staff shall consult
with and seek the advice of NASDR staff before presenting any rule
proposal to the Nasdaq Board.
D. Supplemental Delegation Regarding the Formation of Committees
The Nasdaq Board may designate one or more committees and delegate
to such committees such powers and authority, as necessary and
appropriate, to act on behalf of the Nasdaq Board in carrying out the
functions and authority delegated to Nasdaq by the NASD. Such
delegations shall be in conformance with law, the charter and the by-
laws and the requirements as set forth below as part of this Plan of
Allocation and Delegation. Any action taken by a committee pursuant to
delegated authority shall be subject to review, ratification or
rejection by the Nasdaq Board.
1. Specific Committees
a. Quality of Markets Committee (``QOMC'')
(1) The QOMC shall be a committee appointed by the Nasdaq Board on
issues relating to the fairness, integrity, efficiency and
competitiveness of the information, order handling and execution
mechanisms of The Nasdaq Stock Market, other markets operated by The
Nasdaq Stock Market and systems operated by The Nasdaq Stock Market
from the perspective of investors, both individual and institutional,
retail firms, market making firms, and Nasdaq-listed companies, and
other participants in The Nasdaq Stock Market.
(ii) To advise the Nasdaq Board with respect to national market
systems plans and linkages between the facilities of Nasdaq and
registered exchanges.
(2) The QOMC will have broad representation that is equally
balanced between industry and non-industry committee members. The
committee members shall include broad representation of participants in
The Nasdaq Stock Market, including investors, market makers, integrated
retail firms and order entry firms.
b. Market Operations Review Committee (``MORC'')
(1) the MORC shall be a committee appointed by the Nasdaq Board and
shall exercise the functions contained in Section 70 of the Uniform
Practice Code (``UPC''), in accordance with the procedures specified
therein. NASDR shall receive weekly reports of all determinations made
by the staff or MORC under Section 70 of the UPC for regulatory review.
(2) The MORC shall be appointed by resolution of the Nasdaq Board
and shall have no more than Fifty (50) percent of its members directly
engaged in market making activity or employed by a member firm whose
revenues from market making activity exceed 10% of its total revenues.
c. Firm Operations and Clearance Committee (``FOCC'')
(1) The FOCC shall be a committee appointed by the Nasdaq Board and
shall have the following functions:
(i) To issue interpretations or rulings with respect to Sections 4-
10, 12, 46, 67-68 and 71 of the UPC, as well as any other provision of
the UPC pertaining to transactions and post execution processing.
(ii) To advise the Nasdaq Board with respect to modifications to
the UPC dealing with the transactions and post execution processing.
d. Nasdaq Listing and Hearing Review Committee (``Listing Committee'')
(1) The Listing Committee shall be a committee appointed by the
Nasdaq Board and shall have the following functions:
(i) To advise the Nasdaq Board on the formulation or modification
of initial or maintenance eligibility criteria and fees applicable to
securities listed on The Nasdaq Stock Market or traded on other markets
operated by The Nasdaq Stock Market.
(ii) To exercise the functions set forth in Article IX of the Code
of Procedure, in accordance with the procedures specified therein.
(2) The Listing Committee shall be appointed by resolution of the
Nasdaq Board and shall have no more than Fifty (50) percent of its
members directly engaged in market making activity or employed by a
member firm whose revenues from market making activity exceed 10% of
its total revenues.
2. Other Committees
With respect to any other committees that may be formed pursuant to
this Section D for purposes other than those set forth in (1) above,
such committee shall be created in accordance with the By-laws by
resolution or resolutions adopted by a majority of the whole Nasdaq
Board.
E. Stockwatch
The Stockwatch section handles the trading halt functions for The
Nasdaq Stock Market and exchange-listed securities traded in the over-
the-counter market (i.e., the Third Market). Review of all questionable
market activity, possible rule infractions or any other matters that
require any type of investigative or regulatory follow-up will be
referred to and conducted by NASDR, which will assume sole
responsibility for the matter until resolution. This responsibility
will include examinations, investigations, document requests, and any
enforcement actions that the NASDR may deem necessary. NASDR staff at
all times will have access to all records and files of the Stockwatch
function.
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 rule change. The
text of these statements 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
In order to implement a reorganization of the NASD and to create
two new operating subsidiaries, NASD Regulation, Inc. (``NASDR'') and
The Nasdaq Stock Market, Inc. (``Nasdaq''), the NASD is proposing to:
(1) adopt a new rule delegating to the NASD's subsidiaries, NASDR and
[[Page 16954]]
Nasdaq, the authority to act on behalf of the Association as set forth
in a Plan of Allocation and Delegation adopted by the Board of
Governors and approved by the Securities and Exchange Commission
pursuant to its authority under the Act; and, (2) adopt a Plan of
Allocation and Delegation setting forth the purpose, function,
governance, procedures and responsibilities of the NASD, NASDR, and
Nasdaq, following the reorganization of the NASD.
The proposed Plan is organized in three principal parts, one each
of the three major entities that will constitute the reorganized NASD:
the parent corporation, National Association of Securities Dealers,
Inc.; the regulatory subsidiary, NASD Regulation, Inc.; and the stock
market operating subsidiary, The Nasdaq Stock Market, Inc. \3\ The
Plan, the contents of which are self-explanatory, describes the
purposes, functions, governance, procedures and responsibilities of
each entity.
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\3\ The Plan does not discuss other wholly owned subsidiary
corporations of the NASD, such as the Securities Dealers Risk
Purchasing Group, Inc. and Securities Dealers Insurance Co., Ltd.
These and any other wholly owned subsidiaries of the NADS not
described in the Plan do not perform any of the Association's
regulatory functions or the operating functions related to the
operation of the Nasdaq Stock Market. In addition, the Plan does not
address the NADS's ownership role in corporations such as the
National Securities Clearing Corporation or the Depository Trust
Company.
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The first part of the Plan describes the parent corporation,
National Association of Securities Dealers, Inc. The Plan sets forth
the purpose and function of the NASD; the composition of the Board of
Governors, including provisions relating to the qualifications for
Governors, election procedures, term of office, vacancies and removal
from office; the function, composition and reporting structure of the
Audit Committee and the Office of Internal Review; the function and
composition of the Management Composition Committee; and the SEC's
access to and status of officers, directors, employees, books, records
and premises of the subsidiaries.
The second part of the Plan describes the regulatory subsidiary,
NASD Regulation, Inc. The Plan sets forth the delegation of authority
to the NASDR by the NASD; the purpose, function and authority of the
NASDR; the composition of the qualifications for members of the Board
of Directors from 1997 forward, including, provisions relating to
election procedures; the function and composition the National Business
Conduct Committee; the Board's procedures for reviewing disciplinary
actions, statutory disqualification decisions and proposed rule change
recommendations; and the Board's procedures for initiating actions.
The third part of the Plan describes the stock market operating
subsidiary, the Nasdaq Stock Market, Inc. The Plan sets forth the
delegation of authority to Nasdaq; the purpose and function of Nasdaq;
the composition of and qualifications for members of the Board of
Directors, including, provisions relating to election procedures and
the authority of the Board; the Board's procedures for reviewing
listing/delisting decisions, and rule change recommendations; the
Board's procedures for initiating actions; the functions and
composition of the Quality of Markets Committee; and functions of the
Stockwatch Department.
In connection with establishing the composition of and
qualifications for members of the Boards, Parts I.A.2.(c) and (d) of
the Plan provides for an alternative definition of ``Non-Industry''
Governors, Directors or Committee Members. The alternative definition
would include as ``Non-Industry:''
persons affiliated with brokers and dealers that operate solely to
assist the securities-related activities of the business of non-
member affiliates (such as a broker or dealer established to (i)
distribute an affiliate's securities which are issued on a
continuous or regular basis, or (ii) process the limited buy and
sell orders of the shares of employee owners of the affiliate);
[and] employees of an entity that is affiliated with a broker or
dealer that does not account for a material portion of the revenues
of the consolidated entity, and who are primarily engaged in the
business of non-member entity. * * *.
This provision is intended to recognize that certain individuals
represent primarily non-industry constituencies, even though their
company has an affiliated or subsidiary member firm where the member
engages in the securities business solely or primarily to assist in the
non-securities activities of its affiliates. For examples, certain
large industrial corporations engage in nearly continuous distributions
of debt securities to enable them to do business and do so through an
affiliated member firm. In addition, insurance companies and investment
companies (or their sponsors) often have an affiliated member firm that
engages solely or primarily in the distribution of their affiliate's
securities. In these and similar instances, the NASD does not believe
that employees of the member's affiliate should be categorized as
``industry'' Governors, Directors or Committee Members on the basis
that their primary constituency is non-industry and their involvement
with the securities industry is only incidental to their non-industry
responsibilities.
The NASD believes that the proposed rule change is consistent with
the provisions of Section 15A(b)(2) of the Act \4\ in that the terms of
the Plan will provide for the organization of the Association in a
manner that will permit the Association, through its operating
subsidiaries, to carry out the purposes of the Act, to comply with the
Act, and to enforce compliance by Association members and persons
associated with members with the Act, the rules and regulations
thereunder, the rules of the Association and the federal securities
laws.
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\4\ 15 U.S.C. Sec. 78o-3.
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(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, 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
The NASD has requested that the Commission find good cause pursuant
to Section 19(b)(2) for approving the proposed rule change prior to the
30th day after publication in the Federal Register.
IV. Discussion
The Commission finds that the proposed rule change is consistent
with the requirements of the Act and the rules and regulations
thereunder applicable to the NASD and, in particular, the requirements
of Section 15A and the rules and regulations thereunder. The Commission
believes that the proposed rule change will allow the NASD to be able
to carry out the purposes of the Act to comply with, and enforce
compliance by its members and associated persons, with the provisions
of the Act, the rules and regulations thereunder, and the rules of the
NASD. Furthermore, the amendments are designed (subject to further
changes consistent with the NASD Plan of Allocation and Delegation of
Functions by NASD to Subsidiaries to be submitted to the NASD
membership) to assure a fair representation of the NASD's members, in
the selection of its
[[Page 16955]]
directors and administration of its affairs as well as comply with the
public and non-industry participant requirements of the Act. It is
envisioned that these temporary rules and subsequent changes that may
be implemented from time-to-time will enable the NASD to better comply
with the requirements of Section 15A(b)(6) in particular and the Act in
general.
The Commission finds good cause for temporarily approving the
proposed rule change prior to the 30th day after the date of
publication of notice of filing thereof in that accelerated approval
will enhance the NASD's ability to carry out its regulatory obligations
under the Act. The Commission believes that the proposed rule change is
intended to accomplish certain allocations and delegations of authority
necessary to reorganize the NASD, and establish as separate
subsidiaries the NASDR and Nasdaq in accordance with the
recommendations of The Select Committee on Structure and Governance in
order to enable the NASD to meet its regulatory and business
obligations. The Plan, which is part of this proposed rule change sets
forth the purpose, functions, governance, procedures, and
responsibilities of the NASD, the NASDR and Nasdaq following the
reorganization of the NASD. The NASD's Board of Governors, which has
been reorganized to be consistent with the proposed rule change, will
hold its first meeting on April 11, 1996. The reorganization of the
NASD Board of Governors is also reflected in proposed rule changes to
the NASD By-Laws submitted in a separate rule filing and which the
Commission is approving on an accelerated basis. Accordingly, the
Commission believes that accelerating the approval of the proposed rule
change will benefit members and the public interest by permitting the
NASD Board of Governors to conduct business at its meeting on April 11,
1996.
V. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing. 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 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 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 the file number in the caption
above and should be submitted by May 9, 1996.
It is Therefore Ordered, pursuant to Section 19(b)(2) of the Act,
that the proposed rule change be, and hereby is, approved and effective
through July 10, 1996.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\5\
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\5\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-9512 Filed 4-17-96; 8:45 am]
BILLING CODE 8010-01-M
