[Federal Register Volume 59, Number 110 (Thursday, June 9, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-14029]
[[Page Unknown]]
[Federal Register: June 9, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34156; File No. SR-NASD-94-14]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by National Association of Securities Dealers, Inc., Relating to
Application for Membership in the Association
June 3, 1994.
Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on May 4, 1994, the National
Association of Securities Dealers, Inc. (``NASD'' or ``Association'')
filed with the Securities and Exchange Commission (``SEC'' or
``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been prepared by the NASD.\2\ The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
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\1\15 U.S.C. 78s(b)(1) (1988).
\2\The NASD amended the proposed rule change once subsequent to
its original filing on March 11, 1994. This amendment changes the
requirement that an applicant for membership in the NASD submit a
copy of its ``current submission to the Securities and Exchange
Commission pursuant to Rule 15b1-2(c) under the Securities Exchange
Act of 1934'' to require that the applicant submit ``Form BD filed
with the Central Registration Depository.'' This amendment is
technical in nature in that it corrects a deficiency that arose out
of the 1992 amendments to the broker-dealer registration process
which deleted Rule 15b1-2(c) and requires that Form BD be submitted
to the NASD. See Securities Exchange Act Release No. 31660 (Dec. 28,
1992), 58 FR 11 (Jan. 4, 1993) (adoption of rule amendments to
broker-dealer registration and reporting requirements).
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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 sections 1(b) and 1(c) to Article
III of the NASD By-Laws and Schedule C to the By-Laws to modify the
process by which an applicant applies for membership in the
Association. Below is the text of the proposed rule change. Proposed
new language is italicized and deleted language is bracketed.
By-Laws Article III Membership
Application for Membership
Sec 1. (a) Application for membership in the Corporation, properly
signed by the applicant, shall be made to the Corporation, on the form
to be prescribed by the Corporation, and shall contain:
(1) An acceptance of and an agreement to abide by, comply with, and
adhere to, all the provisions, conditions, and covenants of the
Certificate of Incorporation, the By-Laws, the rules and regulations of
the Corporation as they are or may from time to time be adopted,
changed or amended, and all rulings, orders, directions and decisions
of, and sanctions imposed by, the Board of Governors or any duly
authorized committee, the provisions of the federal securities laws,
including the rules and regulations adopted thereunder, including the
rules of the Municipal Securities Rulemaking Board and the Treasury
Department, provided, however, that such an agreement shall not be
construed as a waiver by the applicant of any right to appeal as
provided in the Act;
(2) An agreement to pay such dues, assessments, and other charges
in the manner and amount as shall from time to time be fixed by the
Board of Governors pursuant to these By-Laws;
(3) An agreement that neither the Corporation, nor any officer or
employee thereof, nor any member of the Board of Governors or of any
district or other committee, shall be liable, except for willful
malfeasance, to the applicant or to any member of the Corporation or to
any other person, for any action taken by such officer or member of the
Board of Governors or of any district or other committee, in his
official capacity, or by any employee of the Corporation while acting
within the scope of his employment or under instruction of any officer,
board, or committee of the Corporation, in connection with the
administration or enforcement of any of the provisions of the rules of
the Corporation as they are or may from time to time be adopted, or
amended, or any ruling, order, directive, decision of, or penalty
imposed by, the Board of Governors or any duly authorized committee,
the provisions of the federal securities laws, including the rules and
regulations adopted thereunder, including the rules of the Municipal
Securities Rulemaking Board and the Treasury Department; and
(4) Such other reasonable information with respect to the applicant
as the Board of Governors may require.
(b) Any application received by the Corporation shall be referred
to the District Committee of the [d]District in which the applicant has
his principal place of business, and if [a majority of the members of]
such District Committee or a Subcommittee designated by such District
Committee determines that the applicant has satisfied all of the
admission requirements of the [By-Laws] Corporation, it shall
[recommend the applicant's admission to the membership and promptly
notify the Secretary of the Corporation of such recommendation]
promptly notify the Association's Membership Department of its
determination.
(c) If [a majority of the members of] such District Committee or a
Subcommittee designated by such District Committee determines that the
applicant fails to satisfy all of the admission requirements of the
[By-Laws] Corporation, it shall promptly notify the [Secretary of the
Corporation who shall thereafter take appropriate action as of the date
when posted to the membership roll] Association's Membership Department
of its determination.
(d) Each member shall ensure that this membership application with
the Corporation is kept current at all times by supplementary
amendments to the original application.
* * * * *
Schedule C
* * * * *
Part I--Applications For Membership
(1) Pre-Membership Interviews
(a) An applicant for membership in the Corporation shall furnish to
the District Office staff for the District in which it has or intends
to have its principal place of business:
(1) A copy of its [current submission to the Securities and
Exchange Commission pursuant to Rule 15b1-2(c) under the Securities
Exchange Act of 1934] Form BD filed with the Central Registration
Depository;
(2) Its most recent trial balance, balance sheet, supporting
schedules and computation of new capital;
(3) A copy of its written supervisory procedures;
(4) A list of all officers, directors, general partners, employees
and other persons who will be associated with it at the time of
admission to membership;
(5) A description of business activities in which it intends to
engage; and
(6) Such other relevant information and documents as may be
requested by the District Office staff.
Unless otherwise determined by a Subcommittee designated by the
District [c]Committee, an applicant's failure to respond or a
materially inadequate response to a request for information by the
District Office staff within sixty (60) days of the request shall
result in the termination of that application.
(b) Before an applicant shall be admitted to membership in the
Corporation, and within a reasonable period of time after receipt of
the foregoing information, the District Office staff shall schedule a
pre-membership interview at which responsible personnel of the
applicant, as determined by the District Office staff, shall personally
appear at the District Office. At such interview, the applicant shall
demonstrate, in accordance with the criteria listed in section (1)(c)
hereof, the appropriateness of its admission to membership in the
Corporation to conduct the type of business intended in the manner
specified in its submission. Unless otherwise determined by a
Subcommittee designated by the District (c)Committee, an applicant
shall have twelve (12) months, from the date of application made in
accordance with section 1(a) above, to complete the premembership
review process. Failure to complete requirements for review by a
Subcommittee designated by the District [c]Committee by that date shall
result in the termination of that application.
(c) The pre-membership interview shall address the applicant's
business plans to determine their adequacy and consistency with the
federal securities laws and the rules of the Corporation; good business
practices in the investment banking or securities business; a member's
fiduciary obligation to its customers; and the public interest and the
protection of investors. The pre-membership interview and shall review,
among other things,
(1) The nature, adequacy, source and permanence of applicant's
capital and its arrangements for additional capital should a business
need arise;
(2) The applicant's proposed recordkeeping system;
(3) The applicant's proposed internal procedures, including
compliance procedures;
(4) The applicant's familiarity with applicable NASD rules and
federal securities laws;
(5) The applicant's capability to properly conduct the type of
business intended in view of the:
A. Number, experience and qualifications of the persons to be
associated with it at the time of its admission to membership,
B. Its planned facilities,
C. Arrangements, if any, with banks, clearing corporations and
others, to assist it in the conduct of its securities business,
D. Supervisory personnel, methods and procedures; and
(6) Other factors relevant to the scope and operation of its
business.
(d) Within thirty (30) days after the conclusion of such pre-
membership interview, or if further information and/or documents are
requested, within thirty (30) days of the receipt of such information
or documents, [the District Office] a Subcommittee designated by the
District Committee shall consider the application and shall notify the
applicant in writing whether its application has been granted, denied,
or granted subject to restrictions on its business activities, and
provide the rationale for such determination.
(e) In all cases where restrictions are placed on its business
activities, the applicant shall, prior to approval of membership,
execute a written agreement with the Corporation agreeing to abide by
the restrictions specified in the determination and agreeing not to
modify its business activities in any way inconsistent with such
agreement without first notifying the Corporation and receiving its
written approval. These restrictions shall remain in effect and are
binding on the applicant and all successors to the ownership or control
of the applicant until modified pursuant to [paragraph] section (3)
below.
(2) Procedures for Review by the District Committee and the Board
of Governors
(a) The [District Office's] Subcommittee's determination shall be
[reviewed] subject to review by the relevant District Committee upon
request made by the applicant, filed within 15 calendar days after the
date [of receipt] of the notification. Until completion of the District
Committee's review, an applicant denied membership shall not be
admitted to membership, and an applicant admitted to membership subject
to restrictions on its business activities may engage in business
consistent with such restrictions only after it has executed the
agreement required by [paragraph] section (1)(e) hereof.
(b) In connection with review by the District Committee, the
applicant shall have the right to appear before a Hearing
[s]Subcommittee of the District Committee, or the Hearing
[s]Subcommittee may require such appearance. The applicant may present
evidence and be represented by counsel. The Hearing [s]Subcommittee may
request additional information to assist it in reaching a
determination. A record shall be kept of the proceedings. No member of
the District Committee who served as a member of the Subcommittee
designated pursuant to Section 1(d) shall participate in the
determination by the District Committee.
(c) The District Committee, after consideration of the record
before it developed by the Hearing Subcommittee and the criteria
contained in section (1)(c), above, shall within a reasonable time
after the close of the record, notify the applicant in writing that its
application has been granted, denied or granted subject to restrictions
on its business activities and provide the rationale for such
determination. The District Committee's determination shall be made
independent of the determination of the [District Office] Subcommittee
designated by the District Committee and shall not be limited thereby.
(d) The District Committee's determination shall be [reviewed]
subject to review by the [Board of Governors] National Business Conduct
Committee (NBCC) upon request made by the applicant, filed within 15
calendar days after the date [of receipt] of the notification. The
[Board of Governors] NBCC may call for review any District Committee
determination within forty-five calendar days [of] after the date of
the notification. During the pendency of such review, an applicant
denied membership shall not be admitted to membership and an applicant
admitted to membership subject to restrictions on its business
activities may engage in business consistent with such restrictions
only after it has executed the agreement required by [paragraph]
section (1)(e), above.
(e) In connection with review by the [Board of Governors] NBCC, the
applicant shall have the right to appear before a [s]Subcommittee of
the [Board of Governors] NBCC, or the NBCC [s]Subcommittee may require
such appearance. The applicant may supplement the record developed
before the District Committee and be represented by counsel. The NBCC
[s]Subcommittee may request additional information to assist the [Board
of Governors] NBCC in reaching a determination. A record shall be kept
of the proceedings.
(f) Unless a matter is called for discretionary review by the Board
of Governors (Board) pursuant to Section (2)(g), [T]the [Board of
Governors] NBCC, after consideration of the record before it developed
by the NBCC Subcommittee, and the criteria stated in Section (1)(c),
above, shall within a reasonable period of time after close of the
record before it, notify the applicant in writing that its application
has been granted, denied or granted subject to restrictions on its
business activities, provide the rationale for such determination, and
shall constitute final action for the NASD for purposes of section
(2)(h) below. The [Board of Governors'] NBCC's determination shall be
made independent of the determinations of the [District Office]
Subcommittee designated by the District Committee and District
Committee, and shall not be limited thereby. In the event of
discretionary review by the Board of Governors, the decision of the
Board shall constitute final action of the NASD for the purposes of
section (2)(h) below and the applicant shall be promptly notified in
writing that its application has been granted, denied or granted
subject to restrictions in its business activities, and shall be
provided the rationale for such determination.
(g) Determinations of the NBCC may be reviewed by the Board of
Governors solely on the request of one or more Governors. Such review,
which may be undertaken solely at the discretion of the Board, shall be
in accordance with resolutions of the Board governing the review of
NBCC determinations. In reviewing any NBCC determination of an
application for membership, the Board may affirm, reverse of modify any
decision to accept, deny or accept subject to restrictions, an
applicant. Discretionary review by the Board shall operate as a stay of
any action or denial by the Subcommittee designated by the District
Committee and any determination by the NBCC, until a decision is
rendered by the Board.
[(g)] (h) The applicant may apply for review of the NBCC's or the
Board of Governors' determination to the Securities and Exchange
Commission in accordance with Section 19 of the Securities Exchange Act
of 1934, as amended.
[(h)] (i) In any case where restrictions have been placed upon its
business activities by the Board of Governors, NBCC, [or] a District
Committee, or a Subcommittee designated by a District Committee, the
applicant shall, prior to approval of membership, execute the agreement
required by paragraph (1)(e), above.
(3) Removal of Restrictions Imposed
(a) Upon written request by the member, any restrictions on the
business activities of a member shall be reviewed and may be removed or
modified by a Subcommittee designated by the District Committee for the
District in which the member currently has its principal place of
business, when, in the [District Committee's] Subcommittee's judgement,
the member has demonstrated that such action is appropriate in light of
the criteria contained in section (1)(c), above. In doing so, the
District Committee shall consider the circumstances which gave rise to
the imposition of the restrictions, the operations of the member since
the imposition of the restrictions and any new evidence submitted in
connection with the member's request.
(b) Any modification of restrictions shall be subject to review by
the District Committee and the NBCC or the Board of Governors and the
SEC pursuant to the procedures provided in Section (2), above. A
refusal by a Subcommittee designated by a District Committee to remove
or modify any restrictions shall be similarly reviewed but only upon
[application] request of the member filed with the [Board of Governors]
District Committee that is filed within ten calendar days after the
date of notification of such refusal.
(c) Should the restrictions on a member's activity be modified, the
agreement required by [paragraph] section (1)(e), above, shall be
modified accordingly.
(4) Changes in Ownership or Control of Existing Members
Should the ownership or control of an existing member change, the
Corporation may, in its discretion, condition continuance in membership
in the Corporation on prompt compliance with the pre-membership
interview procedures contained in this part I.
(5) Notification to the District Office of Certain Events
Members are required to notify in writing the Corporation's
District Office for the District in which the member's main office is
located no later than ten (10) business days after any of the following
specified events; (1) Any merger of the member; (2) an acquisition by
the member; (3) an acquisition of the member or substantially all of
its assets; and (4) any change in the entity ownership or partnership
capital of the member which results in one person or entity owning 50%
or more of such equity ownership or partnership capital.
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
By-Laws
Sections 1(b) and 1(c) to Article III of the NASD By-Laws currently
provide that any application for membership in the Association shall be
referred to the District Committee of the NASD district in which the
applicant has its principal place of business, and that such District
Committee shall make the determination as to whether the applicant
satisfies or fails to satisfy all of the admission requirements of the
NASD By-Laws. However, the provisions governing pre-membership
interviews in Schedule C to the NASD By-Laws currently contemplate a
possible three-step process under which the initial determination for
Association eligibility is made by District Office staff with review,
if appropriate, by the District Committee upon request by the
applicant.
Although the provisions of Schedule C contemplate review of
applications for membership in the Association by the District Office
staff, no District, in fact, has ever made such a determination at a
staff level. Additionally, such action would be inconsistent with the
governing By-Law provision that requires that the District Committee
shall make such an initial determination. The proposed rule change,
therefore, would amend the NASD By-Laws and Schedule C to modify and
make consistent the process by which an applicant applies for
membership in the Association in that it would require all initial
applications for membership be reviewed by either the District
Committee or a Subcommittee of the District Committee, with a right of
appeal to the full District Committee.
Subsection 1(b) and 1(c) to Article III of the NASD By-Laws are
proposed to be amended to establish the authority of a District
Committee to designate a Subcommittee to make a determination of
admissibility of an applicant and to require a designated Subcommittee
to promptly notify the Association's Membership Department of its
determination. The phrase ``a majority of the members of'' is proposed
to be eliminated from Subsection 1(b) as unnecessary.
Schedule C
As an initial matter, Schedule C is proposed to be amended
throughout by referencing the phrase ``a Subcommittee designated by the
District Committee'' in place of the phrases ``District Committee'' or
``District Office'' wherever such replacement conforms the language of
Schedule C to the proposed change in the By-laws establishing the
ability for the District Committee to delegate authority to a
Subcommittee to review and determine the admissibility of an applicant.
Subsection (1)(a) to part I of Schedule C to the By-Laws is
proposed to be amended to clarify that applications for membership in
the Association are to be furnished to the District Office staff.
Subsection 1(a)(6) is proposed to be amended to clarify that the
applicant must provide in connection with its application submission
such other relevant information and documents as may be requested by
the District Office staff.
Subsection 1(b) to part I of Schedule C to the By-Laws is proposed
to be amended to clarify that the scheduling of an applicant's pre-
membership interview and the determination of which responsible
personnel shall appear on behalf of the applicant at such interview
will be determined by the District Office staff.
Subsection (1)(d) to part I of Schedule C to the By-Laws is
proposed to be amended to clarify that the District Committee's
designated Subcommittee, rather than the District Office, shall
consider the application submission.
Subsection 2(a) to part I of Schedule C to the By-Laws is proposed
to be amended to clarify that it is the determination of the designated
Subcommittee, rather than the District Office, which will be reviewed
by the District Committee upon request of the applicant. Subsection
2(a) to part I of Schedule C to the By-Laws is also proposed to be
amended to clarify that the applicant's request for review must be
filed within 15 calendar days after notification of the Subcommittee's
determination.
Subsection 2(b) to part I of Schedule C to the By-Laws is proposed
to be amended to clarify that, in connection with review by the
District Committee, an applicant is entitled to appear before a Hearing
Subcommittee of the District Committee and that no member of the
District Committee who served as a member of the Subcommittee
originally designated to review the applicant's submission and no
member of the Hearing Subcommittee shall participate in the
determination resulting from the District Committee's review.
Subsection 2(c) to part I of Schedule C to the By-Laws is proposed
to be amended to clarify that the District Committee's determination of
the record developed before it shall be made independent of the
determination of the Subcommittee designated by the District Committee.
Subsection 2(d) to part I of Schedule C to the By-Laws is proposed
to be amended to clarify that the District Committee's determination
shall be subject to review by the National Business Conduct Committee
(``NBCC'') upon request made by the applicant filed within 15 calendar
days after the date of notification to the applicant by the District
Committee of its determination.
Subsection 2(e) to part I of Schedule C to the By-Laws is proposed
to be amended to clarify that in connection with review by the NBCC,
the applicant has the right to appear before a Subcommittee of the
NBCC.
Subsection 2(f) to part I of Schedule C to the By-Laws is proposed
to be amended to clarify that the NBCC's determination of the record
developed before it shall be made independent of the determination of
the Subcommittee designated by the District Committee, and shall
constitute final action for the NASD for purposes of Subsection (2)(h)
to part I of Schedule C to the By-Laws unless called for discretionary
review by the Board of Governors. Subsection 2(f) to part I of Schedule
C to the By-Laws is also proposed to be amended to clarify that a
decision by the Board pursuant to its power of discretionary review
shall constitute final action for purposes of Subsection (2)(h) to part
I of Schedule C to the By-Laws and that such determination and its
rationale shall be communicated to the applicant in writing.
Proposed new Subsection (2)(g) to part I of Schedule C to the By-
Laws is intended to clarify that review by the Board of Governors of
NBCC determinations is discretionary and may occur solely on the
request of one or more governors, and not at the request of the
applicant. Such discretionary review of the Board shall be in
accordance with the resolutions of the Board governing the review of
NBCC determinations. The Board may affirm, reverse or modify an NBCC
decision. The commencement of the review shall operate as a stay of any
action by the Subcommittee designated by the District Committee and any
determination by the NBCC until a decision is reached by the Board.
Old Subsection (2)(g) to part I of Schedule C to the By-Laws is
proposed to be designated Subsection (2)(h) and states that the
applicant may apply for review to the Securities and Exchange
Commission of any determination by the NBCC or the Board.
Old Subsection (2)(h) to part I of Schedule C to the By-Laws is
proposed to be designated Subsection (2)(i) and clarifies that the
requirements of the Subparagraph apply to determinations of
restrictions placed on the applicant made by the NBCC or a Subcommittee
designated by the District Committee, as well as to such determinations
made by the Board or a District Committee.
Subsection (3)(a) to part I of Schedule C to the By-Laws is
proposed to be amended to clarify that review and removal or
modification of restrictions placed on the applicant shall be done by a
Subcommittee designated by the District Committee.
Subsection (3)(b) to part I of Schedule C to the By-Laws is
proposed to be amended to clarify that modifications of restrictions
shall be subject to review by the District Committee and the NBCC, as
well as by the Board and the SEC. Subsection (3)(b) to part I of
Schedule C to the By-Laws is also proposed to be amended to clarify
that the refusal by a Subcommittee designated by the District Committee
to remove or modify restrictions shall also be subject to review, but
only upon request of the member filed with the District Committee
within ten calendar days after the date of notification of such
refusal.
The NASD believes that the proposed rule change is consistent with
the provisions of section 15A(b)(8) of the Act,\3\ which require, among
other things, that the rules of the Association provide a fair
procedure for the denial of membership to any person seeking membership
therein or the prohibition or limitation by the Association of any
person with respect to access to services offered by the Association or
a member thereof, in that the proposed rule clarifies the process by
which an applicant for membership in the Association is accepted,
denied or accepted with limitations and eliminates any ambiguity in the
Association's By-Laws and the Schedules to the By-Laws with respect to
the application and administration of such process.
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\3\15 U.S.C. 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
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 such proposed rule change, or
B. Institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing. 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 file number SR-NASD-94-14 and
should be submitted by June 30, 1994.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\4\
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\4\17 CFR 200.30-3(a)(12) (1993).
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Margaret H. McFarland,
Deputy Secretary.
[Fr Doc. 94-14029 Filed 6-8-94; 8:45 am]
BILLING CODE 8010-01-M
