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87-13 Proposed Amendments to Article II, Sections 3, 4 and 5 of the NASD By-Laws
IMPORTANT MAIL VOTE
OFFICERS, PARTNERS AND PROPRIETORS
TO: All NASD Members
LAST VOTING DATE IS MARCH 29, 1987.
NASD members are invited to vote on proposed amendments to Article II, Sections 3, 4 and 5 of the NASD By-Laws. The amendments would require controlling persons of a firm liquidated under the Securities Investor Protection Act of 1970 (SIPA) to undergo eligibility proceedings pursuant to the NASD Code of Procedure prior to approval of their registration with an NASD member firm. Such ineligible persons will be permitted, however, to commence or continue in employment with a member firm pending the outcome of an eligibility proceeding.
The proposed amendments have been approved by the NASD Board of Governors and now require the approval of the membership. Prior to becoming effective, the amendments must also be approved by the SEC. The text of the proposed amendments is attached.
In NASD Notice to Members 86-85 (December 5, 1986), the NASD Board of Governors requested comment on proposed amendments to Article II, Sections 3, 4 and 5 of the NASD By-Laws that would authorize the NASD to examine the involvement of certain controlling persons in, and their responsibility for, the activities that led to the liquidation of a broker-dealer, prior to approving the association or continued association of such persons with another NASD member firm.
As originally proposed, the amendments provided that a person who was an officer, director, general partner, financial and operations principal, owner of 10 percent or more of the voting securities, or a controlling person (or a person performing similar functions) of a broker-dealer at the time SIPA proceedings were instituted, or whose association with the broker-dealer was terminated within six months prior to institution of SIPA proceedings, would be ineligible to become associated or continue in association with an NASD member until an eligibility proceeding pursuant to Article VII of the NASD Code of Procedure had been concluded.
REVISIONS TO PROPOSED AMENDMENTS
Based on numerous comments received from members and other interested persons, the NASD Board of Governors, at the recommendation of its Qualifications Committee, revised the proposed amendments in three significant areas. These changes reflect the Board's intent to limit the universe of persons covered under the amendments, while ensuring that the regulatory scope of the amendments is adequate and includes persons most likely responsible for the broker-dealer's liquidation.
The revisions to the amendments since originally proposed are:
- The category of persons subject to the restrictions has been narrowed. In the original version, the proposed amendments applied to officers, directors, general partners, financial and operations principals, owners of 10 percent or more of the voting securities, or a controlling person (or a person performing similar functions) of a liquidated broker-dealer.
Because many officers, directors and general partners are not actively involved in the day-to-day management or operations of a broker-dealer, the NASD Board determined it appropriate to include only those officers, directors and general partners that are registered as principals. Owners of 10 percent or more of the voting securities of a broker-dealer and other controlling persons (or persons performing similar functions) would be subject to the amendments as originally proposed.
- As originally proposed, the amendments applied to certain persons associated with a broker-dealer at the time SIPA proceedings are instituted or whose associations with the firm are terminated within six months preceding the SIPA filing. The Board has reduced this period to four months from six months. Therefore, a person would be required to undergo an eligibility proceeding if SIPA proceedings are instituted against the former employer-member within four months of the person's termination.
- The Board determined that a person required to undergo an eligibility proceeding will be permitted to be employed by an NASD member firm pending the conclusion of the eligibility proceeding. If the Board determines, however, that the ineligible person's registration should not be approved, the individual's registration would be terminated immediately.
Once an ineligible person's registration with a member firm has been approved, he or she will not be required to undergo eligibility proceedings in connection with any future applications for registration in the approved capacity, assuming that the individual is not otherwise ineligible. An additional eligibility proceeding would be required if an individual who was previously approved as a registered representative requests registration in a principal capacity.
* * * * *
The Board of Governors believes that the proposed amendments to Article III, Sections 3, 4 and 5 of the NASD By-Laws are necessary and appropriate and recommends that members vote their approval.
Please mark the attached ballot according to your convictions and return it in the enclosed, stamped envelope to "The Corporation Trust Company." Ballots must be postmarked no later than March 29, 1987.
Questions concerning this notice may be directed to Craig L. Landauer, NASD Office of General Counsel, at (202) 728-8291.
Frank J. Wilson
Executive Vice President
Legal and Compliance
PROPOSED AMENDMENTS TO ARTICLE II, SECTIONS 3, 4 AND 5 OF THE NASD BY-LAWS*
Sec. 3. (a) No registered broker, dealer or municipal securities broker or dealer shall be admitted to membership, and no member shall be continued in membership, if such broker, dealer, municipal securities broker or dealer or member fails or ceases to satisfy the qualification requirements under Section 2 of this Article, or if such broker, dealer, municipal securities broker or dealer or member is or becomes subject to a disqualification under Section 5  of this Article.
(Remainder of Section 3 is unchanged.)
Sec. 4. If a person associated with a member or seeking to become associated with a member was an officer, director or general partner registered as a principal, a limited principal-financial and operations, owner of ten (10) percent or more of the voting securities, or a controlling person (or a person performing similar functions) of a member that was the subject of proceedings under the Securities Investor Protection Act of 1970 ("SIPA") instituted during such person's association with the member or within four months after the termination of such person's association with the member, then such person shall be considered ineligible for registration in any capacity. Before the registration of such ineligible person may be approved in any capacity, he shall make application for registration to the Board of Governors pursuant to Article VII of the NASD Code of Procedure; provided, however, that such person may commence or continue in employment with a member pending the outcome of his application for registration; and provided further that, once such person's registration or continued registration with a member subsequent to the institution of SIPA proceedings has been approved in a particular capacity, no additional application or approval shall be required with respect to any future application for registration in the capacity approved.
(Renumber Section 4 as Section 5.)
* New language is underlined; deleted language is bracketed.