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90-36 Proposed Amendments to the NASD By-Laws Implementing the Recommendations of the Special Committee on NASD Structure and Governance; Last Voting Date: July 5, 1990
*These are suggested departments only. Others may be appropriate for your firm.
NASD members are invited to vote on amendments to the NASD By-Laws implementing the recommendations of the Special Committee on NASD Structure and Governance ("Special Committee"). The amendments were previously submitted to the membership for comment. They provide for a reduction in the size of the Board and changes to its composition. In addition, they provide for changes in the number and configuration of the NASD districts. The amendments have been adopted by the Board of Governors ("Board") and now require membership approval. Prior to becoming effective, the amendments must be filed with, and approved by, the Securities and Exchange Commission (SEC). The full text of the amendments follows this notice.
The By-Laws of the NASD govern the composition of the Board and the number and configuration of the districts. The amendments are necessary to implement the recommendations of the Special Committee relating to the Board and the districts. These recommendations result from an intensive study conducted by the Special Committee of the structure and governance of the NASD and its subsidiaries. The amendments are designed to ensure that the NASD's governance process fairly represents the increased diversity of the securities industry and continues to command the respect and confidence of investors, issuers, and our members.
The recommendations of the Special Committee were approved for comment by the Board in March 1990. Proposed amendments implementing the recommendations were submitted to the membership for comment as part of Notice to Members 90-19.1 Comment letters were received from 11 members and from one association representing the life insurance industry. A number of these comments were general endorsements of the amendments and the recommendations of the Special Committee, while others raised concerns about specific aspects of the amendments. After careful consideration of the comments received, the Board approved and adopted the amendments as originally proposed.
The proposed amendments to the By-Laws address the size and composition of the Board and the number and configuration of the districts.
The Board of Governors
The By-Laws currently provide for a Board of 31 Governors. The amendments would give the Board the authority to adjust its size between 25 and 29 Governors.2 The Board has resolved to reduce its size to 29 Governors upon approval of the amendments.
Under the current By-Laws, the Board is composed of 21 Governors elected from the districts; nine Governors elected by the Board from the securities industry, issuers, and the public; and the President. The amendments implement the Special Committee recommendation that a greater proportion of Governors be elected by the Board based on:
- The need to fairly and effectively represent the many types of participants in the securities industry,3 some of which traditionally have not been represented through the district election process.
- The need to recruit candidates with a broad range of backgrounds and with specialized expertise in the international, technology, and other diverse issues that must be addressed effectively by the Board to fulfill the mission of the NASD.
- The desire to improve the NASD's ability to recruit candidates who may be able to make significant contributions to the Board and to the NASD's mission, but who are unable to commit the time required for service at both the Board and district level.
- The need for domestic and overseas issuer representation in the heightened competitive environment in which the NASDAQ® market operates.
- The need for substantial public representation on the Board.
- The practical limitations on the size of the Board.
The amendments decrease the number of Governors elected from the districts. The amendments also incorporate two recommendations of the Special Committee to ensure that this would not jeopardize fair representation of local and regional firms â€" which both distinguishes the NASD from other self-regulatory organizations and is necessary for effective nationwide regulation and enforcement. First, each district will be represented on the Board by at least one Governor; and second, the number of Governors elected from the districts will constitute an absolute majority of the Board.
Some commenters expressed concern that the reduction in the proportion of industry Governors would reduce the level of industry expertise and experience on the Board and would make the Board less representative of the industry. The Special Committee addressed these concerns in making its recommendations and concluded that they were outweighed by the need for additional issuer and investor representation on the Board. In addition, the amendments insure that industry Governors elected from the districts will constitute an absolute majority of the Board and that all industry Governors combined would constitute at least two-thirds of the Board.4
The amendments provide for continued representation on the Board of the insurance and investment company sectors of the securities industry.5 One commenter urged the Board to increase insurance industry representation on the Board in light of the increasing impact of NASD actions on the insurance industry.6 The Special Committee considered whether to expand the number of Governors representative of specified sectors of the securities industry. It rejected such an approach as inconsistent with the objectives of providing the Board with increased flexibility to determine its composition and of enhancing its opportunity to elect the best candidates for Governor to the Board. Instead, the amendments provide that the Board shall elect at least three Governors representative of members in addition to those elected by the districts. These three Governors can be elected from any sector of the securities industry. The substance of this comment can therefore be addressed by the Board and its National Nominating Committee during the nominating process.7
The amendments give the Board of Governors the authority to provide for compensation of Governors, the Chairman of the Board, and members of committees. The Special Committee considered the issue of compensation and found that the lack of compensation has not to date adversely affected the recruitment of highly qualified candidates for service as Chairman or on the Board or its committees. Consequently, the Special Committee did not recommend, and the Board does not envision, providing compensation at this time. The Special Committee did recommend, however, that the Board be given the flexibility to provide for such compensation in the event the Board finds it necessary to ensure the successful recruitment of highly qualified candidates for service as Chairman or on the Board or its committees.8
The NASD's district structure, and its role in the selection of Governors, is an essential element of the governance of the NASD that distinguishes the NASD from other self-regulatory organizations in the securities industry. The Special Committee found that changes to the existing district structure, consistent with fair and effective district representation on the Board, were necessary to address significant demographic shifts in the NASD's membership as well as the revisions to the composition of the Board recommended by the Special Committee.
The amendments give the Board the authority to change the number and borders of the districts and the number of Governors nominated from each district to ensure fair representation of members and districts on the Board.9
The Board has adopted, subject to member and SEC approval of the amendments, the changes to the districts recommended by the Special Committee.10 The Board has determined that these changes are necessary in view of the NASD's obligation under the Securities Exchange Act of 1934, as amended ("Exchange Act"), to ensure fair representation of its members in the selection of Governors11 and the requirement of the By-Laws that the Board consider from time to time the fairness of the representation of the various districts on the Board.12 The changes yield somewhat fewer, but larger, districts which the Board believes will benefit the NASD by lessening the disparities among districts in terms of members and regulatory responsibilities, providing a larger pool of candidates from which to elect District Committee and Board members, and improving the NASD's ability to administer and supervise the districts.
The number of districts would be reduced from 13 to 11. These 11 districts would be represented on the Board by 15 of its 29 Governors. The 11 new districts would be as follows:13
- New District 1 — This district would comprise the portion of existing District 2 referred to as District 2N. It would include 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. It would elect one Governor.
- New District 2 — This district would comprise the portion of existing District 2 referred to as District 2S. It would include 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). It would elect one Governor.
- New District 3 — This district would comprise existing Districts 1 (Seattle) and 3 (Denver). It would include Alaska, Arizona, Colorado, Idaho, Montana, New Mexico, Oregon, Utah, Washington, and Wyoming. It would elect one Governor.
- New District 4 — This district would comprise most of existing District 4 (Kansas City) and certain neighboring states. It would include Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota, and South Dakota. This district would elect one Governor.
- New District 5 — This district would comprise most of existing District 5 (New Orleans) and certain neighboring states. It would include Alabama, Arkansas, Kentucky, Louisiana, Mississippi, Oklahoma, and Tennessee. This district would elect one Governor.
- New District 6 — This district would comprise existing District 6 (Dallas), consisting of Texas. It would elect one Governor.
- New District 7 — This district would comprise most of existing District 7 (Atlanta) and one neighboring state. It would include Florida, Georgia, North Carolina, South Carolina, Puerto Rico, the Canal Zone, and the Virgin Islands. This district would elect two Governors.
- New District 8 — This district would comprise most of existing Districts 8 (Chicago) and 9 (Cleveland) and part of upstate New York. It would include 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). This district would elect two Governors.
- New District 9 — This district would comprise most of existing Districts 10 (Washington, D.C.) and 11 (Philadelphia). It would include 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). This district would elect one Governor.
- New District 10 — This district would comprise existing District 12 (New York) and northern New Jersey. It would include the five boroughs of New York City and the adjacent Counties in New York (the counties of Nassau, Orange, Putnam, Rockland, Suffolk, 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). This district would elect three Governors.
- New District 11 — This district would comprise existing District 13 (Boston), with the exception of part of upstate New York. It would include 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; the remainder of the state west of such counties; and the five boroughs of New York City). This district would elect one Governor.
The reconfiguration of the districts drew the most comments from members. One commenter suggested that Oklahoma should be part of District 6 (Dallas) instead of new District 5 (New Orleans). This suggestion was not accepted because it would result in a less even distribution of members among the districts. Another commenter suggested eliminating new District 5 (New Orleans) and reconfiguring new Districts 4 (Kansas City), 6 (Texas), and 8 (Chicago), including dividing new District 8 into two districts. This comment was not accepted since it would require significant additional changes to the district configuration without substantially improving the fairness of district representation.
A number of commenters criticized the formation of new Districts 3 (Denver/Seattle) and 9 (Philadelphia/Washington, D.C.). These commenters generally expressed the concern that there would be a reduction in service to members from the district offices and a loss of the working relationships that they have developed with the district office staff. The concerns expressed are best answered by the NASD's continuing commitment to provide all members, regardless of location, with superior service from its district offices. Further, the elimination of a district does not necessarily mean that its local NASD office will be closed. The NASD does not intend to close any of its offices at this time. Accordingly, the Board determined not to change the proposed amendments in response to these comments.
Commenters also criticized the geographic size of new District 3 (Denver/Seattle) and the burdens this may impose on District Committee members. The Board decided not to change proposed new District 3 as its size is largely a result of the relatively low density of members in the area and the high density of members on the West Coast. To address the concerns regarding caseload and travel burdens on members, the District Committees in the merged districts (new Districts 3, 8, and 9) will consider establishing subcommittees of their District Committees and the District Business Conduct Committees as an effective means of improving representation at the district level and reducing travel time for committee members.14
REQUEST FOR VOTE
The complete text of the proposed amendments to the By-Laws follows. These proposed amendments merit members' immediate attention. Prior to becoming effective, the proposed amendments must be approved by the NASD membership and thereafter by the SEC.
The NASD Board of Governors believes these proposed amendments to be 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 July 5, 1990.
Questions concerning this notice should be directed to Derek W. Linden, Associate General Counsel, Office of General Counsel, at (202) 728-8810, or Lynn Nellius, Secretary of the NASD, at (202) 728-8381.
TEXT OF PROPOSED AMENDMENTS TO THE BY-LAWS
(Note: New text is underlined; deleted text is in brackets.)
When used in these By-Laws, and any rules of the Corporation, unless the context otherwise requires, the term:
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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 subsection[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.
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] Articled as the case may be].
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:
Procedure for Nominations by Nominating Committees
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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:
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 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.]
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Election of District Committee Members Procedure for Nominations by Nominating Committees
Sec. 4 (a) ***** Before October 1 of each year, [E]each candidate nominated by the Nominating Committees shall be certified to the respective District Committee [by September 1 and]. W[w]ithin five (5) days [thereafter certification, a copy of such certification shall be sent by the District Committee to each member of the Corporation eligible to vote in the district. Such candidate shall be designated the "regular candidate."
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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.
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 Commitee. 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] Governor[s].
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Election of Nominating Committees Procedures for Nominations by Nominating Committees
Sec. 3(a) ***** Before October 1 of each year, [E]each candidate nominated by the Nominating Committees shall be certified to the respective District Committee [by September 1 and]. W[w]ithin five (5) days [there] after certification, a copy of such certification shall be sent by the District Committee to each member of the Corporation eligible to vote in the district. Such candidate shall be designated the "regular candidate."
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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.
[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 tem), 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 from the Corporation of the Chairman of the Board, Governors, and the members of any committee of the Board or any District Committee, [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.
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 subcommittee 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 Gov-ernors], 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.
Powers of Board to Prescribe Sanctions
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1A copy of the final Report of the Special Committee on NASD Structure and Governnance was included with Notice to Members 90-19.
2The Special Committee recommended that the size of the Board be reduced to enhance the participation of individual Governors and the efficiency of the Board. The Special Committee also recommended that the Board be no smaller than 25 Governors, since the Board must represent a variety of interests and experience and since much of its work is assisted by a large number of committees on which Governor service is highly desirable.
3This would include representation of banks, pension funds, and other institutions (both domestic and international), specialty or limited-purpose broker-dealers, and continued representation of insurance companies and underwriters of investment company shares.
4The actual proportion of industry Governors would vary with the size of the Board. It also would depend on the number of Governors elected by the Board who are not required to be associated with members under the By-Laws, but who are in fact associated with members (i.e., a Governor elected to represent issuers who may also be associated with a member).
5The By-Laws provide that one Governor elected by the Board shall be representative of the insurance sector and one Governor shall be representative of the investment company sector of the securities industry. The amendments retain these requirements, but expand the applicable provisions of the By-Laws to ensure that representatives of these sectors who are associated with affiliates of members can serve as Governors in appropriate
6This commenter also suggested that the Board establish a committee to address concerns of insurance company members. The NASD staff will be discussing the matter with the commenter with a view to active consideration of this suggestion by the Board.
7The Special Committee specifically addressed this issue on page 12 of its Report, concluding that:
"In nominating candidates from the securities industry the National Nominating Committee should be sensitive to the concern that no facet of the industry should dominate the Board and should apply the principle that the self-regulatory responsibilities of the NASD can best be carried out if there is satisfactory representation of all facets of the industry."
8One commenter opposed compensation for Governors. Compensation of members of the governing boards of self-regulatory organizations in the securities industry is not uncommon. For example, the New York Stock Exchange and the American Stock Exchange provide compensation to their directors comparable to that provided to directors of public companies.
9The amendments guarantee that each district will be represented by at least one Governor and that the number of Governors elected from the districts constitutes an absolute majority of the Board.
10The need for these changes in the districts is illustrated by a comparison of District 9 (Cleveland) and District 7 (Atlanta). Today, each district is represented by one Governor, although District 9 has only 166 members and employs 16 staff members, while District 7 has 547 members and a staff of 48.
11Section 15 A(b)(4) of the Exchange Act requires that "[T]he rules of the association [NASD] assure a fair representation of its members in the selection of its directors and administration of its affairs and provide that one or more directors shall be representative of issuers and investors and not be associated with a member of the association, broker, or dealer."
12Article VII, Section 4(b)(10) of the By-Laws. The amendments include a similar provision at Article VTI, Section 4(b).
13The Report of the Special Committee contains a table and map showing the proposed configuration of the districts, the number of members in each district, and the number of Governors representing each district. Notice to Members 90-19 contains the proposed revisions to Schedule B of the By-Laws that would implement the changesin the districts.
14These District Committees, since they will include members of the District Committees of two or more existing District Committees, will have additional members to staff subcommittees and to address transitional issues.