[Federal Register Volume 61, Number 139 (Thursday, July 18, 1996)]
[Notices]
[Pages 37515-37518]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-18169]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37424; File No. SR-NASD-96-20]
Self-Regulatory Organizations; Order Granting Temporary
Accelerated Approval to Proposed Rule Change by National Association of
Securities Dealers, Inc. Relating to Changes in the Structure of the
NASD Board of Governors
July 11, 1996.
On May 28, 1996,\1\ 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'') \2\ and Rule 19b-4 thereunder.\3\ The rule change amends the
NASD By-Laws to conform them to the ``Plan of Allocation and Delegation
of Functions by NASD to Subsidiaries'' (``Delegation Plan'').\4\
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\1\ On June 5, 1996, the NASD filed Amendment No. 1 to the
proposed rule change. Amendment No. 1 amends Article VI, Section 5
to clarify that, in a contested election, the term of office of a
candidate certified by the National Nominating Committee for
inclusion on the ballot for the election of Governors pursuant to
Article VI, Section 7(c) would be identical to the term of office of
a candidate nominated by the National Nominating Committee pursuant
to Article VI, Section 7(c). Amendment No. 1 also amends Article VI,
Section 7(a) to clarify that any person elected to the Board of
Governors must be nominated or certified by the National Nominating
Committee. See Letter from Suzanne E. Rothwell, Associate General
Counsel, NASD to Katherine A. England, Assistant Director, Division
of Market Regulation, Commission (dated June 4, 1996).
On July 2, 1996, the NASD filed Amendment No. 2 to the proposed
rule change. Amendment No. 2 provides the final report of the NASD
membership with respect to the proposed rule change. 2,227 valid
ballots were received from NASD members. 2,101 voted to approve the
proposed rule change, 117 voted to disapprove the proposed rule
change and 9 did not vote.
On July 10, 1996, the NASD filed Amendment No. 3 to the proposed
rule change. Amendment No. 3 requests temporary approval of the
proposed rule change for a period of 120 days. See Letter from T.
Grant Callery, Senior Vice President and General Counsel, NASD to
Katherine A. England, Assistant Director, Division of Market
Regulation, Commission (dated July 10, 1996).
\2\ 15 U.S.C. 78s(b)(1).
\3\ 17 CFR 240.19b-4.
\4\ See Securities Exchange Act Release No. 37107 (April 11,
1996), 61 FR 16948 (April 18, 1996) (``Release 34-37107'').
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Notice of the proposed rule change, together with the substance of
the proposal, was provided by issuance of a Commission release
(Securities Exchange Act Release No. 37282, June 6, 1996) and by
publication in the Federal Register (61 FR 29777, June 12, 1996). One
comment letter was received. This order grants accelerated approval to
the proposed rule change for a period of 120 days.
I. Background
In 1995, the NASD Board of Governors (``Board'') appointed the
Select Committee on Structure and Governance (``Select Committee'') to
examine the corporate structure, governance, and functions of the NASD
and to recommend changes and improvements to enable the NASD to meet
its regulatory and business obligations. In September 1995, the Select
Committee recommended, among other things, that the NASD establish two
distinct subsidiaries; one to perform the regulatory functions of the
NASD and the other to run The Nasdaq Stock Market (``Nasdaq''). The
Select Committee recommended that each subsidiary have an independent
Board of Directors with at least 50% public representation and that the
NASD remain as parent corporation overseeing the operations of both
subsidiaries. The Select Committee recommended that the NASD Board of
Governors be composed of a majority of public directors.
In January 1996, the NASD created a new subsidiary, NASD
Regulation, Inc. (``NASD Regulation'') to provide regulation and member
and constituent services, with the NASD retaining responsibility for
general oversight over the effectiveness of the self-regulatory and
business operations of the NASD and its major subsidiaries, Nasdaq and
NASD Regulation, and final policymaking authority for the association
as a whole. The NASD also adopted Select Committee proposals to
restructure and reduce the size of the NASD Board and to implement
policies to ensure a balance of non-industry and industry
representation on the Nasdaq and NASD Regulation Boards.
On April 11, 1996, the Commission granted temporary approval for a
period of 90 days to: (i) Amendments to Article VII of the NASD By-Laws
to create a national nominating committee to nominate persons to serve
on the Board of Governors and reconstitute the Board as a majority non-
industry Board; \5\ (ii) NASD Rule 130 providing for the delegation of
the authority to act on behalf of the NASD to NASD Regulation and
Nasdaq pursuant to the Delegation Plan; and (iii) the Delegation
Plan.\6\ The Delegation Plan sets forth the purposes,
[[Page 37516]]
functions and governance procedures of the three corporations working
together.
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\5\ Securities Exchange Act Release No. 37106 (April 11, 1996),
61 FR 16944 (April 18, 1996) (``Release 34-37106'').
\6\ Release 34-37107.
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The rule change approved today is intended to ensure that the NASD
possesses the requisite corporate authority to continue the
restructuring necessary to implement the principles articulated in the
report of the Select Committee.
II. Description of Proposed Rule Change
The rule change approved today amends the NASD By-Laws to make the
By-Laws consistent with the Delegation Plan granted temporary approval
today by the Commission \7\ by providing for the creation of a national
nominating committee to identify and nominate for election industry and
non-industry persons to serve on the Board and by deleting sections and
language now unnecessary or inappropriate as a result of the Delegation
Plan. Included in the proposed rule change is the deletion of nearly
all references to the Districts and local administration, because
responsibility for the local administration of regulatory affairs under
the Delegation Plan has been assigned to NASD Regulation.\8\ The
amended By-Laws also conform terms and rule citations to those used in
the reorganized NASD Manual, including, for example, replacing the term
``Code of Procedure'' with ``Procedural Rules,'' \9\ and make various
miscellaneous clarifying corrections to the By-Laws. Finally, all
references to the NASD ``Certificate of Incorporation'' are being
changed to the ``Restated Certificate of Incorporation'' to reflect
that the Certificate of Incorporation has been amended to be consistent
with the changes previously adopted and proposed herein to the By-Laws.
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\7\ See Securities Exchange Act Release No. 37425 (July 11,
1996) (granting accelerated approval to amended Delegation Plan for
120 days) (``Release 34-37425'').
\8\ In recognition of this assignment of responsibility, the
Board of Directors of NASD Regulation adopted a resolution at its
May 13, 1996, meeting to appoint the Districts and District
Committees as Districts and District Committees of NASD Regulation.
\9\ The new version of the NASD Manual is divided into four
sections (Administrative, Corporate Organization, Rules of the
Association, and SEC Rules and Regulation T) and includes an
expanded key word index. See Notice to Members 96-25 (April 1996).
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A. Definitions
``Delegation Plan'' is the term by which the ``Plan of Allocation
and Delegation of Functions by NASD to Subsidiaries'' will be known.
``Corporations'' and ``Boards'' are the terms that will refer to the
NASD, its subsidiaries and their boards of directors.
In addition, the definition of ``Act'' is revised to match the
definition in the Delegation Plan, and the definition of ``rules of the
Corporation'' is revised to be consistent with the various references
to rules in the reorganized NASD Manual.\10\
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\10\ The definition published for member vote in Special Notice
to Members 96-35, attached as Exhibit 2 to the proposed rule change,
has been modified to eliminate certain rule language that would not
have been consistent with the reorganized NASD Manual.
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Finally, the definition of ``bank'' is reviewed to expand the
reference to national banks to include the citation that such banks are
included in the definition that are ``under the authority of the
Comptroller of the Currency pursuant to the first section of Public Law
87-722 (12 U.S.C. 92a) * * *.''
B. Applications for Membership
Article III, Section 1(a)(3) is amended to extend to the Nasdaq and
NASD Regulation Boards, committee members, officers, and employees
protection from liability for action taken within the scope of their
authority, except for willful malfeasance. See also Article IV, Sec.
2(a)(2) of the By-Laws.
C. Affiliated Securities Associations
The NASD has deleted Article V governing the affiliation of other
Registered Securities Associations with the NASD. Such affiliations
remain authorized by Section 15A of the Act.
D. Board of Governors
A majority of the changes to the By-Laws affect the powers and
authority of the Board of Governors, its size, composition and the
manner of its selection. The NASD has added a provision to the By-Laws
setting forth the authority of the Corporation to delegate functions,
provided that such delegations are not inconsistent with the Delegation
Plan.
The NASD also is eliminating the special committee formerly
established to take action in case of emergencies or extraordinary
market conditions when the full Board is not available. The amended By-
Laws vest authority to take action under emergency conditions with the
full Board, or with any person or persons designated by the Board.
The amended By-Laws reconstitute the Board as a smaller, majority
Non-Industry \11\ Board, comprising the Chief Executive Officer, one or
more Non-Industry Governors representative of issuers and investors and
not associated with an NASD member, and one or more Industry Governors.
The Commission also is granting approval to amendments reducing the
minimum size of the Board from 25 to 5.
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\11\ The Delegation Plan defines ``Non-industry'' Governors,
Directors or Committee Members as (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 operate solely to assist
the securities-related activities of the business of non-members
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 employees 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. See Release 34-37425,
supra note 7.
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Another amendment to the By-Laws requires that the Board of
Governors be composed in a manner consistent with the Delegation Plan
and Section 15A(b)(4) of the Securities Exchange Act of 1934. This is
intended to ensure that the Board will at all times include full
representation of issuers, investors, and the securities industry, with
a Non-Industry majority.
Another amendment to the By-Laws provides that, except for the
Chief Executive Officer, no Governor may serve more than two
consecutive three-year terms except for a Governor that has been
appointed to fill a term of less than one year. Such a Governor may
serve up to two consecutive terms following the expiration of that
Governor's current term. The filling of vacancies cannot be
inconsistent with the Delegation Plan.
Consistent with Section I.C. of the Delegation Plan, which
described the procedure for the nomination and election of NASD
Governors, the By-Laws have been amended to provide that the members of
the NASD Board of Governors shall be elected by a plurality of the
votes of the members of the NASD that are present in person or
represented by proxy at the annual meeting of the NASD and entitled to
vote. The Board is further authorized to establish a National
Nominating Committee, which will consist of six or more persons meeting
qualifications to be established by the Board in conformance with the
Delegation Plan,\12\ to nominate or certify
[[Page 37517]]
one or more persons for each governorship up for election. Any person
nominated or certified for election to the Board must demonstrate to
the National Nominating Committee that that person meets the applicable
qualifications for the position.
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\12\ See Release 34-37425, supra note 7. The Delegation Plan
provides that the National Nominating Committee shall be composed of
at least 6 and not more than 9 members, equally balanced between
Industry and Non-industry Committee Members (including at least 2
Public Committee Members), with 2 members of the National Nominating
Committee selected by NASD, NASD Regulation, and Nasdaq,
respectively. 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.
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The By-Laws also have been amended to permit members of the Board
or any committee of the NASD to participate in a meeting by
communications facilities that permit the parties to hear and speak to
each other. Participation in a meeting constitutes the person's
presence at a meeting. Board members continue to be prohibited from
voting by proxy at any meeting.
E. Consistency With the Delegation Plan
The By-Laws have been amended in several places to ensure that
certain powers of the NASD Board must be exercised in a manner
consistent with the requirements of the Delegation Plan. For example,
those provisions of the By-Laws granting the Chief Executive Officer
ex-officio membership in all committees have been deleted as
inconsistent with the requirements of the Delegation Plan.
In addition, amendments to the By-Laws provide that determinations
of the NASD Board regarding the employment of administrative staff and
the establishment of committees shall not be inconsistent with the
Delegation Plan.
III. Comments Received
As noted above, the Commission received one comment concerning the
proposed rule change.\13\ The Singer Letter objects to the proposal to
require applicants for NASD membership to agree to exculpate the Nasdaq
and NASD Regulation Boards, committee members, officers, and employees
from liability for action taken within the scope of authority, except
for willful malfeasance. The By-Laws would continue to require that
applicants exculpate the NASD Board, its committee members, officers,
and employees from such liability. The Singer Letter states that ``the
NASD seeks to obtain unwarranted, virtual, absolute immunity for itself
and its staff as the price for NASD membership or registration.'' \14\
The Singer Letter states that the public interest is clearly not served
when a self-regulatory organization can insulate itself from wrongdoing
except in cases where the misconduct rises to the level of willful
malfeasance. The Singer Letter urges that the scope of exculpation from
liability be limited to action taken ``while discharging necessary and
proper prosecutorial or adjudicatory functions.'' The Commission notes
that this provision is currently a part of the NASD By-Laws, and is not
substantively amended by this filing. The Commission also notes that
the scope of conduct addressed by the provision is limited to action
taken within the scope of the actor's authority. The Commission also
notes that the standard proposed by the Singer Letter would subject
NASD, NASD Regulation and Nasdaq personnel to personal liability for
ordinary negligence in performing regulatory functions required to
carry out the purposes of the Act or required to enforce compliance by
NASD members and their associated persons with the provisions of the
Act.\15\ The Commission believes that such liability would have a
chilling effect upon the actions of such personnel and would hinder the
NASD's ability to discharge its regulatory responsibilities under the
Act.\16\
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\13\ Letter from Bill Singer, Esq., Singer, Bienenstock,
Zamansky, Ogele & Selengut, LLP. to Jonathan G. Katz, Secretary,
Commission, dated July 1, 1996 (``Singer Letter'').
\14\ See Singer Letter, supra note 13.
\15\ See 15 U.S.C. 78o-3(b) (1)-(2).
\16\ See id. In addition, the Commission notes that the Delaware
General Corporation Law (``DGCL'') permits a Delaware corporation
such as the NASD to provide its directors and officers with broad
protection from liability. The DGCL permits a corporation to either
eliminate or limit the personal liability of a director to the
corporation or its stockholders for monetary damages for breach of
fiduciary duty, provided that such provisions do not eliminate or
limit the liability of a director for, among other things, (i)
Breach of the director's duty of loyalty to the corporation and its
stockholders, or (ii) acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law. See 8
Del. Code Sec. 102(b)(7). Furthermore, the DGCL permits corporations
to indemnify officers against expenses, judgments, fines and
settlement amounts reasonably incurred if the officer acted in good
faith and in a manner he reasonably believed to be in or not opposed
to the best interest of the corporation. See 8 Del. code Sec. 145
(a)-(b).
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IV. Commission Findings
The Commission finds that the proposed rule change is consistent
with the provisions of Sections 15A(b) (2), (4), and (6) of the Act\17\
in that the restructured organization will: (1) 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; (2) provide for the fair
representation of members, issuers and investors on the Board of
Governors and in the administration of the NASD's affairs; and (3)
enhance the NASD's ability to protect investors and the public interest
in furtherance of the purposes of the Act.
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\17\ 15 U.S.C. 78o-3.
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The NASD has requested that the Commission approve the proposed
rule change on or before July 11, 1996, which is prior to the 30th day
following publication of notice of the filing of the proposed rule
change in the Federal Register, in order to permit the uninterrupted
authorization of those corporate actions necessary to effectuate the
Delegation Plan.
Pursuant to Section 19(b)(2) of the Act,\18\ the Commission finds
good cause for approving the proposed rule change, as amended, prior to
the 30th day after publication in the Federal Register. The proposed
rule change will permit the NASD to continue to carry out the functions
and organize itself in the manner contemplated by the Delegation Plan,
which is intended to enable the NASD to meet its regulatory and
business obligations. Because the Commission believes that the proposed
rule change facilitates the ability of the NASD to manage its affairs
in a manner that enhances its ability to carry out the purposes of the
Act or required to enforce compliance by NASD members and their
associated persons with the provisions of the Act, the Commission
believes that the rule filing should be approved without delay, for a
120 day period.
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\18\ 15 U.S.C. 78s(b)(2).
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V. Solicitation of Comment
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
[[Page 37518]]
number in the caption above and should be submitted by August 8, 1996.
It is therefore ordered, pursuant to Section 19(b)(2) of the Act,
that SR-NASD-96-20 be, and hereby is, approved effective immediately,
for a period of 120 days.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority, 17 CFR 200.30-3(a)(12).
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-18169 Filed 7-17-96; 8:45 am]
BILLING CODE 8010-01-M
