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90-64 Amendments to the NASD By-Laws and to Schedule B Thereof to Modify the Size and Composition of the Board of Governors and the Number and Configuration of the Districts, Effective September 4, 1990

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EXECUTIVE SUMMARY

The Securities and Exchange Commission has approved amendments to the NASD By-Laws and Schedule B thereof that restructure the size and composition of the NASD Board of Governors and the number and configuration of the NASD districts.

The amendments also give the Board the authority to make subsequent modifications in its composition and size and in the number and configuration of the NASD's districts.

In addition, the amendments implement other recommendations of the Special Committee on NASD Structure and Governance that were approved by the Board and the membership.

The text of the amendments follows this notice.

BACKGROUND

The Special Committee on NASD Structure and Governance ("Special Committee") was established by the Board of Governors ("Board") to review the corporate structure and governance of the NASD and its subsidiaries in light of the far-reaching changes that have occurred in the securities markets and the industry serving those markets in recent years.

The Special Committee conducted an intensive study and developed a series of recommendations designed to ensure that the NASD's governance process fairly represents the increased diversity of the securities industry, that the volunteer members of the industry and the public who serve on the Board and its committees can address problems knowledgeably and efficiently, and that the process continues to command respect and confidence.

The recommendations of the Special Committee were set forth in a final report that was issued to the membership in Notice to Members 90-19 (April 1990).

On September 4, 1990, the SEC approved an NASD rule change to restructure the size and composition of the Board and the number and configuration of the NASD districts. Also, the rule change gives the Board the authority to make subsequent modifications in its composition and size and in the number and configuration of the NASD's districts.

SUMMARY OF AMENDMENTS

The Board of Governors

Prior to these amendments, Article VII, Section 4(a) of the NASD By-Laws provided for a Board of 31 Governors. As amended, the provision gives the Board the authority to adjust its size to between 25 and 29 Governors in order to enhance the participation of individual Governors in the Board's deliberations and the Board's overall efficiency. Pursuant to this authority, the Board has resolved to reduce its size during the next two years to 29 Governors.

The composition of the Board has also been modified. Prior to the amendments, Article VII, Section 4 of the NASD By-Laws provided that the Board be comprised of 21 Governors elected from the districts; nine Governors elected by the Board from the securities industry, issuers and the public; and the President of the NASD. The amendments to Article VII, Section 4 require that the Board be comprised of 13 to 15 Governors elected from the districts; 11 to 13 Governors elected by the Board from the securities industry, issuers and public; and the NASD's President.

They also require that each district be represented on the Board by at least one Governor and that the total number of Governors elected from the districts constitute a majority of the Board. In addition, the Board has the authority to determine which districts shall elect more than one Governor so as to provide for fair representation of the NASD's members and of its various districts.

Of the Governors elected by the Board, one must represent the insurance industry, one must represent the investment company industry, at least three must represent investors, at least three must represent issuers, and at least three must be chosen from the members of the NASD. The amendments permit the Board to consider candidates for Governor to represent the insurance industry and the investment company industry who are not directly associated with a member.

Article X, Section 6 of the By-Laws has been amended to give the Board the authority to provide for compensation to Governors, the Chairman of the Board, and members of any committee of the Board or any district committee. Although the Board does not currently plan on providing such compensation, this amendment provides the Board with the authority to do so if it becomes necessary to ensure successful recruitment of highly qualified candidates for services as Chairman or member of the Board, its committees, or the district committees.

Districts

Amendments to Article VII, Section 4(b), authorize the Board to consider from time to time the fairness of the representation of members by the current district structure. Whenever the Board finds any unfairness in such representation, it now is authorized to change the number and the boundaries of districts.

Pursuant to this authority, the Board has adopted specific changes to the districts set forth in Schedule B to the NASD By-Laws. Specifically, the Board has determined that the number of districts should be reduced from 13 to 11. These 11 districts will be represented on the Board by 15 of its 29 Governors. The 11 new districts will be as follows:

  • New District 1 — The portion of existing District 2 referred to as District 2N (San Francisco), including northern California (the counties of Monterey, San Benito, Fresno, and Inyo, and the remainder of the state north or west of such counties), northern Nevada (the counties of Esmeralda and Nye, and the remainder of the state north or west of such counties), and Hawaii. Board representation: one Governor.
  • New District 2 — The portion of existing District 2 referred to as District 2S (Los Angeles), including southern California (that part of the state south or east of the counties of Monterey, San Benito, Fresno, and Inyo) and southern Nevada (that part of the state south or east of the counties of Esmeralda and Nye). Board representation: one Governor.
  • New District 3 — Existing Districts 1 (Seattle) and 3 (Denver), including Alaska, Arizona, Colorado, Idaho, Montana, New Mexico, Oregon, Utah, Washington, and Wyoming. Board representation: one Governor.
  • New District 4 — Most of existing District 4 (Kansas City) and certain neighboring states, including Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota, and South Dakota. Board representation: one Governor.
  • New District 5 — Most of existing District 5 (New Orleans) and certain neighboring states, including Alabama, Arkansas, Kentucky, Louisiana, Mississippi, Oklahoma, and Tennessee. Board representation: one Governor.
  • New District 6 — Existing District 6 (Dallas), consisting of Texas. Board representation: one Governor.
  • New District 7 — Most of existing District 7 (Atlanta) and one neighboring state, including Florida, Georgia, North Carolina, South Carolina, Puerto Rico, the Canal Zone, and the Virgin Islands. Board representation: two Governors.
  • New District 8 — Most of existing Districts 8 (Chicago) and 9 (Cleveland), including Illinois, Indiana, Michigan, Ohio, and Wisconsin, and part of upstate New York (the counties of Monroe, Livingston, and Steuben, and the remainder of the state west of such counties). Board representation: two Governors.
  • New District 9 — Most of existing Districts 10 (Washington, DC) and 11 (Philadelphia), including the District of Columbia, Delaware, Maryland, Pennsylvania, Virginia, West Virginia, and southern New Jersey (the counties of Atlantic, Burlington, Camden, Cape May, Cumberland, Gloucester, Mercer, Ocean, and Salem). Board representation: one Governor.
  • New District 10 — Existing District 12 (New York) and northern New Jersey, including the five boroughs of New York City and the adjacent counties in New York (the counties of Nassau, Orange, Putnam, Rockland, Suffolk, and Westchester) and northern New Jersey (the state of New Jersey except for the counties of Atlantic, Burlington, Camden, Cape May, Cumberland, Gloucester, Mercer, Ocean, and Salem). Board representation: three Governors.
  • New District 11 — Existing District 13 (Boston), with the exception of part of upstate New York, including Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, Vermont, and New York (except for the counties of Nassau, Orange, Putnam, Rockland, Suffolk, and Westchester; the counties of Monroe, Livingston, and Steuben, and the remainder of the state west of such counties; and the five boroughs of New York City). Board representation: one Governor.

Transition Plan

The amendments to the By-Laws and Schedule B to the By-Laws became effective September 4, 19901. Pursuant to its authority under Article VIII of the By-Laws, as amended, the Board has approved a transition plan to govern the administration of the election and nomination process for the remainder of calendar year 1990 and to provide for the transition from the existing 13 District Committees and District Business Conduct Committees (DBCCs) to the District Committees and DBCCs of the 11 new and reconfigured districts.

For all matters and purposes relating to the districts (including for purposes of the Code of Procedure and for filing complaints, holding hearings and all other matters relating to the disciplinary process) other than the nomination and election process, the existing 13 District Committees and DBCCs shall maintain responsibility until the end of calendar year 1990 for all members located within the boundaries of the existing 13 Districts.

Miscellaneous Technical Amendments

The text of the amendments contains further miscellaneous technical amendments that the NASD encourages members to review.

Questions concerning this notice may be directed to P. William Hotchkiss, Director, Surveillance, at (202) 728-8235.

TEXT OF PROPOSED RULE CHANGE

(Note: New text is underlined; deleted text is in brackets.)

AMENDMENTS TO THE NASD BY-LAWS

ARTICLE I

Definitions

When used in these By-Laws, and any rules of the Corporation, unless the context otherwise requires, the term:

* * * * *

(r) "Board" means the Board of Governors of the Corporation.
(s) "Governor" means a member of the Board.

ARTICLE VII

Board of Governors

* * * * *

Composition of Board

Sec. 4. (a) The management and administration of the affairs of the Corporation shall be vested in a Board of Governors composed of from twenty-five to twenty-nine Governors [thirty-one members], as determined from time to time by the Board. The Board shall consist of: (i) at least thirteen but not more than fifteen Governors [twenty-one] to be elected by the members of the various districts in accordance with the provisions of sub-section[s] (b) [(1) through (5)] hereof;[,] (ii) at least eleven but not more than thirteen Governors [nine] to be elected by the Board [of Governors] in accordance with the provisions of subsection[s] (c) [(b)(6), (7) and (8)] hereof;[,] and (iii) the President of the Corporation to be selected by the Board [of Governors] in accordance with the provisions of Article X, Section 2 of the By-Laws. The Board, in exercising its power to determine its size and composition under this subsection (a), shall be required to select its members in a manner such that when all vacancies, if any, are filled, the number of Governors elected by the members of the various districts in accordance with subsection (b) hereof shall exceed the number of Governors (including the President) not so elected.

(b) The several districts shall be represented on the Board [of Governors]. Each district shall elect at least one Governor. The Board shall determine from time to time which districts, if any, shall elect more than one Governor, so as to provide fair representation of the Corporation's members and of its various districts on the Board. The determination of which districts shall elect more than one Governor need not be submitted to the membership for approval and shall become effective at such time as the Board may prescribe. [The elected members of the Board of Governors shall be chosen as follows:] The Board shall, from time to time, consider the fairness of the representation of members and of the various districts on the Board. Whenever the Board finds any unfairness in such representation to exist, it shall make appropriate changes in the number or boundaries of the districts or the number of Governors elected by each district to provide fair representation of members and districts.
[(1) Three members of the Board of Governors shall be elected from and by the members of the Corporation eligible to vote in District No. 2;
(2) Two members of the Board of Governors shall be elected from and by the members of the Corporation eligible to vote in District No. 8;
(3) Five members of the Board of Governors shall be elected from and by the members of the Corporation eligible to vote in District No. 12;
(4) Two members of the Board of Governors shall be elected from and by the members of the Corporation eligible to vote in District No. 13;
(5) One member of the Board of Governors shall be elected from and by the members of the Corporation eligible to vote in each of the remaining districts not referred to in Subsections (1), (2), (3) and (4) of this Section;]
(c) The Board shall elect (i) at least three Governors representative of investors, none of whom are associated with a member or any broker or dealer; (ii) at least three Governors representative of issuers, at least one of whom is not associated with a member or any broker or dealer; (iii) at least three Governors chosen from members; (iv) at least one Governor representative of the principal underwriters of investment company shares or affiliated members; and (v) at least one Governor representative of insurance companies or insurance company affiliated members.
[(6) One member of the Board of Governors shall be elected by the Board of Governors from among the principal underwriter members of investment company shares, and he shall be designated a Governor-at-Large;
(7) One member of the Board of Governors shall be elected by the Board of Governors from among insurance company members or insurance company affiliated members of the Corporation and he shall be designated a Govemor-at-Large;
(8) Seven members of the Board of Governors shall be elected by the Board of Governors and they shall be designated Governors-at-Large. Any Governor-at-Large initially filling a Governor-at-Large office shall be elected at such time as the Board of Governors in its discretion deems appropriate;
(9) At least one member of the Board of Governors shall be representative of issuers and not be associated with a member, broker or dealer and at least one member of the Board of Governors shall be representative of investors and not be associated with a member, broker or dealer;
(10) The Board of Governors shall, from time to time, consider the fairness of the representation of the various districts on the Board of Governors, and whenever it finds any unfairness in such representation to exist, it shall recommend appropriate changes in these By-Laws to assure fair representation of all districts.]

Term of Office of Governors

Sec. 5. Each [elected] Governor [member of the Board of Governors, including the Governors-at-Large], except as otherwise [herein] provided by these By-Laws or the Certificate of Incorporation, shall hold office for a term of three years, and until his successor is elected and qualified, or until his death, resignation or removal. The President of the Corporation shall serve as a member of the Board [of Governors] until his successor is selected and qualified, or until his death, resignation or removal.

Succession to Office

Sec. 6.(a) The office of a retiring Governor [member of the Board of Governors] elected under subsection[s (1) through (5)] (b) of Section 4 [3(b)] of this Article shall be filled by the election of a Governor [member] from the same district as that of the retiring Governor [member]. The office of a retiring Governor [-at-Large] elected under subsection (c) of Section 4 of this Article shall be filled by election by the Board [of Governors] as provided in subsection[s] (c) [(6), (7) and/or (8)] of Section 4 [3(b)] of this[e] Article[, as the case may be].

(b) Notwithstanding subsection (a) of this Section 6, the Board shall prescribe the succession of office in cases affected by a change in the number of Governors constituting the Board, the composition of the Board, the number or boundaries of districts, or the number of Governors elected by a district.

Election of Board Members

Sec. 7. The [elected members of the Board of] Governors elected under subsection (b) of Section 4 of this Article shall be chosen as follows:

* * * * *

Transitional Procedures

(d) Notwithstanding subsections (a), (b) and (c) of this Section 7, the Board shall prescribe the nomination and election procedures in cases affected by a change in the number of Governors constituting the Board, the composition of the Board, the number or boundaries of districts, or the number of Governors elected by a district.

Filling of Vacancies on Board

Sec. 8. All vacancies in the Board [of Governors] other than those caused[s] by the expiration of a Governor's term of office, shall be filled as follows:

(a) If the unexpired term of a Governor elected under subsection[s] (b) [(1) through (b)(5)] of Section 4 [3] of this Article[,] is for less than twelve months, such vacancy shall be filled by appointment by the District Nominating Committee of a representative of a member of the Corporation eligible to vote in the same district.
(b) If the unexpired term of a Governor[,] elected under subsection[s] (b) [(1) through (b)(5)] of Section 4 [3] of this Article[,] is for twelve months or more, such vacancy shall be filled by election, which shall be conducted as nearly as practicable in accordance with the provisions of Section 7 [6] of this Article.
(c) If the unexpired term is that of a Governor[-at-Large] elected by the Board, such vacancy shall be filled in accordance with the provisions of subsections (c)(i) through (c)(v) [(b)(6), (b)(7), and/or (b)(8)] of Section 4 [3] of this Article as the case may be.

ARTICLE VIII

District Committees Administrative Districts

Sec. 1. For the purpose of administration, the United States is hereby divided into districts, the boundaries of which shall be established by the Board [of Governors]. The Board [of Governors] may from time to time make such changes in the number or boundaries of such districts as it deems necessary or appropriate. Neither the establishment nor any change in the number or boundaries of such districts need be submitted to the membership for approval, and the number or boundaries, as established or changed, shall become effective at such time as the Board [of Governors] may prescribe. The Board shall prescribe such policies and procedures as are necessary or appropriate to address the implementation of a new district configuration in the event of a change in the number or boundaries of the districts.

District Committees and District Business Conduct Committees

Sec. 2. (a) For the purpose of effectuating a maximum degree of local administration of the affairs of the Corporation, each of the districts created under Section 1 of this Article shall elect a District Committee, as hereinafter provided. Each such District Committee shall determine the number of its members so to be elected, but [in] no [event shall any] District Committee shall consist of more than twelve members[;] unless otherwise provided[,] [however, that] by resolution of the Board. [of Governors by resolution may increase, upon request, any such District Committee to a larger number.]

* * * * *

Transitional Provisions

Sec. 12. The Board, by resolution amending or supplementing the provisions of this Article and Article IX, shall have the authority to establish the policies and procedures applicable to District Committees affected by a change in the number or boundaries of the districts, including, without limitation, prescribing the procedures for nomination and election of District Committee members.

ARTICLE IX

Nominating Committees Composition of Nominating Committees

Sec. 1. (a) Each of the Districts created under Section 1 of Article VIII of the By-Laws shall elect a Nominating Committee, as provided in Section 3 of this Article. Each such Nominating Committee shall consist of five members; provided, however, that the Board [of Governors] by resolution may increase any such Nominating Committee to a larger number. Members of the Nominating Committee in each District shall be members of the Corporation having places of business in the respective District, but shall not be members of the District Committee. All Nominating Committees shall include a majority of persons who have previously served on a [the] District Committee [and/] or who are current or former [on the Board of] Governors, and shall [, insofar as practicable,] include at least one current or former [member of the Board of] Governors].

* * * * *

Transitional Provisions

Sec. 7. The Board, by resolution amending or supplementing the provisions of this Article and Article VIII, shall have the authority to establish the policies and procedures applicable to District Nominating Committees affected by a change in the number or boundaries of the districts, including, without limitation, prescribing the procedures for nomination and election of District Nominating Committee members.

ARTICLE X

Officers and Employees

* * * * *

[Restrictions on] Compensation of Board and Committee Members

Sec. 6. [No member of] The Board [of Governors (except the President of the Corporation or the President pro tern), no member of any District Committee and no member of any other Committee, other than an Extended Hearing Committee as defined in Article I of the Corporation's Code of Procedure shall be entitled to] may provide for reasonable [received any] compensation of the Chairman of the Board, Governors, and the members of any committee of the Board or any District Committee from the Corporation, [for any work done in connection with his duties as a member of the Board of Governors, any District Committee or any other committee. However, such persons shall be entitled to] The Board may also provide for reimbursement of [for] reasonable expenses incurred by such persons in connection with the business of the Corporation.

ARTICLE XI

Committees

National [Standing] Committees

Sec. 1. The Board [of Governors] may appoint such [standing and other] committees or subcommittees as it deems necessary or desirable, and it shall fix their powers, duties and terms of office. Any such committee or subcommittee consisting of one or more Governors, to the extent provided by these By-Laws or by resolution of the Board, shall have and may exercise all powers and authority of the Board in the management of the business and affairs of the Corporation.

[District Standing]

Committees of the Districts

Sec. 2. Each District Committee, in the exercise of its powers and performance of its duties as provided in the By-Laws, may, except as otherwise herein provided, appoint such [standing or other] committees or subcommittees as it deems necessary or desirable, and shall fix their powers, duties and terms of office.

Removal of Committee Member

Sec. 3. Any member of any committee or sub-committee appointed pursuant to [Sections 1 or 2 of] this Article XI may be removed from office, after appropriate notice from the District Committee appointing such member, or from the Board [of Governors], if it is the appointing authority, for refusal, failure, neglect or inability to discharge his duties, or for any cause the sufficiency of which shall be decided by the District Committee or the Board [of Governors], whichever is the appointing authority.

ARTICLE XIV

Powers of Board to Prescribe Sanctions

The Board [of Governors] is hereby authorized to prescribe appropriate sanctions applicable to members, including censure, fine, suspension or expulsion from membership, suspension or barring from being associated with all members, limitation of activities, functions and operations of a member, or any other fitting sanction, and to prescribe appropriate sanctions applicable to persons associated with members, including censure, fine, suspension or barring a person associated with a member from being associated with all members, limitation of activities, function and operations of a person associated with a member, or any other fitting sanction, for:

* * * * *

(d) refusal by a member or person associated with a member to abide by an official ruling of the Board [of Governors] or any committee [Uniform Practice Committee acting within its appropriate authority] exercising powers assigned [delegated] by the Board with respect to any transaction which is subject to the Uniform Practice Code; or
(e) failure by a member or a person associated with a member to adhere to any ruling, order, direction or decision of, or to pay any penalty, fine or costs, imposed by, the Board [of Governors], the National Business Conduct Committee, the Market Surveillance Committee, any other committee exercising powers assigned [delegated] by the Board or any District Business Conduct Committee.

AMENDMENTS TO SCHEDULE B OF THE BY-LAWS

Schedule B

The number and t[T]erritorial boundaries of the several districts established as provided in Section 1 of Article VIII and the number of Governors elected from the several districts established as provided in Section 4(b) of Article VII of the By-Laws of the Corporation[,] are as follows:

  • District No. 1State of Hawaii; in the State of California, the Counties of Monterey, San Benito, Fresno and Inyo, and the remainder of the State North or West of such Counties; and in the State of Nevada, the Counties of Esmeralda and Nye, and the remainder of the State North or West of such Counties. [States of Alaska, Idaho, Montana, Oregon and Washington.]
    One Governor shall be elected from and by the members of the Corporation eligible to vote in District No. 1.
  • District No. 2In the State of California, that part of the State South or East of the Counties of Monterey, San Benito, Fresno and Inyo; and, in the State of Nevada, that part of the State South or East of the Counties of Esmeralda and Nye. [States of California, Nevada and Hawaii.]
    One Governor shall be elected from and by the members of the Corporation eligible to vote in District No, 2.
  • District No. 3 — States of Alaska, Arizona, Colorado, Idaho, Montana, New Mexico, Oregon, Utah, Washington and Wyoming.
    One Governor shall be elected from and by the members of the Corporation eligible to vote in District No. 3.
  • District No. 4 — States of Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota and South Dakota [Oklahoma].
    One Governor shall be elected from and by the members of the Corporation eligible to vote in District No. 4.
  • District No. 5 — States of Alabama, Arkansas, Kentucky, Louisiana, Mississippi, Oklahoma and [in the State of] Tennessee[, the Counties of Montgomery, Dickson, Hickman, Lewis and Lawrence and the remainder of the State lying West of such Counties].
    One Governor shall be elected from and by the members of the Corporation eligible to vote in District No. 5.
  • District No. 6 — State of Texas.
    One Governor shall be elected from and by the members of the Corporation eligible to vote in District No. 6.
  • District No. 7 — States of Florida, Georgia, North Carolina, and South Carolina [, and, in the State of Tennessee, the Counties of Robertson, Cheatham, Williamson, Maury and Giles and the remainder of the State lying East of such Counties,]; Puerto Rico, Canal Zone and the Virgin Islands.
    Two Governors shall be elected from and by the members of the Corporation eligible to vote in District No. 7.
  • District No. 8 — States of Illinois, Indiana, [Iowa,] Michigan, [Minnesota,] [North Dakota,] Ohio [South Dakota] and Wisconsin, and, in the State of New York, the Counties of Monroe, Livingston and Steuben, and the remainder of the State West of such Counties.
    Two Governors shall be elected from and by the members of the Corporation eligible to vote in District No. 8.
  • District No. 9The District of Columbia, and the States of Delaware, Maryland, Pennsylvania, Virginia and West Virginia, and, in the State of New Jersey, the Counties of Atlantic, Burlington, Camden, Cape May, Cumberland, Gloucester, Mercer, Ocean and Salem [States of Kentucky and Ohio].
    One Governor shall be elected from and by the members of the Corporation eligible to vote in District No. 9.
  • District No. 10In the State of New York, the Counties of Nassau, Orange, Putnam, Rockland, Suffolk, Westchester, and the five Boroughs of New York City, and the State of New Jersey (except for the Counties of Atlantic, Burlington, Camden, Cape May, Cumberland, Gloucester, Mercer, Ocean and Salem) [The District of Columbia and the States of Maryland, North Carolina and Virginia].
    Three Governors shall be elected from and by the members of the Corporation eligible to vote in District No. 10.
  • District No. 11 — [The] States of Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, Vermont and New York (except for the Counties of Nassau, Orange, Putnam, Rockland, Suffolk, and Westchester; the Counties of Monroe, Livingston and Steuben, and the remainder of the State West of such Counties; and the five Boroughs of New York City) [Delaware, Pennsylvania, West Virginia and New Jersey, except for the Counties of Bergen, Essex, Hudson, Passaic and Union].
    One Governor shall be elected from and by the members of the Corporation eligible to vote in District No. 11.
  • [District No. 12 — In the State of New York, the Counties of Nassau, Orange, Putnam, Rockland, Suffolk, Westchester, and the five Boroughs of New York City, and, in the State of New Jersey, the Counties of Bergen, Essex, Hudson, Passaic and Union.]
  • [District No. 13 — States of Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, Vermont and New York, with the exception of the Counties of Nassau, Orange, Putnam, Rockland, Suffolk, Westchester, and the five Boroughs of New York City.]

1 SEC Release No. 34-28289 (September 4, 1990).



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