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90-19 Proposed Amendments to the NASD By-Laws and Code of Procedure to Implement The Recommendations of the Special Committee on NASD Structure and Governance; Last Date for Comment: April 30, 1990

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REQUEST FOR COMMENTS

EXECUTIVE SUMMARY

The Board of Governors ("Board") has approved the recommendations of the Special Committee on NASD Structure and Governance ("Special Committee"). The Board now requests comments on proposed amendments to the NASD By-Laws and Code of Procedure to implement the Special Committee's recommendations with respect to modifications in the size and composition of the Board, the number and configuration of the NASD districts and the review of disciplinary cases by the National Business Conduct Committee and the Board.

BACKGROUND

The Special Committee was established by the 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 over the last 10 months and developed a series of recommendations designed to enhance the ability of the NASD to meet its increasing responsibilities. The recommendations were also 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 are set forth in the final report ("Report") of the Special Committee that was submitted to the Board in early March. A copy of this Report accompanies this Notice to Members. Additional copies of the Report are available by calling the NASD Corporate Communications Department at (202) 728-6900. The Board has approved all the recommendations of the Special Committee and submits the following proposed amendments to the NASD By-Laws and Code of Procedure necessary to implement those recommendations for your comment.1

The Board encourages you to comment on these important proposed amendments. The Board intends to consider your comments at its next regularly scheduled meeting in May and to approve final proposed amendments to the By-Laws (incorporating such revisions, if any, as may be approved by the Board in response to the comments it receives and upon further consideration of the proposed amendments). These final proposed amendments to the By-Laws then will be submitted for approval by a vote of the members.

PROPOSED AMENDMENTS

The proposed amendments to the By-Laws and the Code of Procedure implement recommendations of the Special Committee relating to the size and composition of the Board, the number and configuration of the districts, and the review of disciplinary cases by the National Business Conduct Committee and the Board.

The Board of Governors

The By-Laws currently provide for a Board of 31 Governors. The proposed amendments implement the Special Committee recommendations that the size of the Board be reduced to enhance the participation of individual Governors and the efficiency of the Board and that the Board be given the authority to adjust its size between 25 and 29 Governors. The Special Committee recommended that the Board be no smaller than 25 Governors since the Board must represent a variety of interests and experience and much of its work is assisted by a large number of committees on which Governor service is highly desirable. The Special Committee recommended that the Board consist of 29 Governors at this time.

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 proposed 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,2 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; and
  • the practical limitations on the size of the Board.

This recommendation decreases the number of Governors elected from the districts. The Special Committee made two recommendations 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 should be represented on the Board by at least one Governor; and second, the number of Governors elected from the districts should constitute an absolute majority of the Board.

The Special Committee considered the issue of compensation for Governors, the Chairman of the Board and members of committees 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 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.3

Districts

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.

Although the NASD membership has expanded substantially during the past 10 years, the number of large general securities firms has declined. The growth in membership has generally been attributable to smaller firms that specialize in direct participation programs, variable contracts, mutual funds or other special products and, to a large extent, is the natural result of federal legislation adopted in 1984 requiring all broker-dealers conducting a public securities business to become NASD members, including those firms formerly registered only with the SEC. While total membership in the past decade has grown from 2,981 firms in December 1980, to an all-time high of more than 6,700 firms in August 1987, and currently consists of 6,153 firms, the number of regional and national general securities firms has fallen from 667 to 558 firms.4 For example, the combined membership of District 10 (Washington, D.C.) and District 11 (Philadelphia) has more than doubled from 1980 to the present, but the two districts have experienced a reduction of almost 50 percent in the number of regional and national general securities members headquartered in their districts during the same time period.5

Changes in the demographics of the membership have also led to substantial disparities in the number of members and the scope of the regulatory responsibilities among the various districts. As an example, District 9 (Cleveland) and District 7 (Atlanta) are each 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. The Report contains a table and map showing the existing configuration of the districts, the number of members in each district and the number of Governors representing each district.6

The Board approved the changes to the districts recommended by the Special Committee 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 Governors7 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.8 The reconfiguration yields somewhat fewer, but larger districts which the Board believes will benefit the NASD by lessening the disparities among districts in terms of number 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 Special Committee also recommended that the Board have the authority to change the number and borders of the districts and the number of Governors nominated from each district,9 in view of its statutory and By-Law obligations to ensure the fairness of representation of the various districts on the Board.

The proposed amendments implement the recommendations of the Special Committee by amending the By-Laws and Schedule B to the By-Laws. The total number of districts are reduced from 13 to 11 by:

  • Merging District 8 and District 9 into a single new district.
  • Merging District 10 and District 11 into a single new district.
  • Merging District 1 and District 3 into a single new district.
  • Dividing District 2 into two new, separate districts, the first of which would comprise the portion of District 2 referred to as District 2N and the second of which would comprise the portion of District 2 referred to as District 2S.
  • Changing the borders of two of the three merged districts and most of the other districts to obtain a more equal distribution of members by district.

The new districts would be represented on the proposed 29 member Board by a total of 15 Governors as follows:

  • Three Governors elected from new District 10 (comprising New York City, its adjacent counties, and northern New Jersey).
  • Two Governors elected from revised District 7 (Florida, Georgia, South Carolina, North Carolina, Puerto Rico, Canal Zone and the Virgin Islands).
  • Two Governors elected from revised District 8 (Illinois, Indiana, Michigan, Wisconsin, Ohio and part of upstate New York).
  • One Governor elected from each of the other new or revised districts.

The Report 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.10

The District Committees in the merged districts will consider whether establishing subcommittees of the District Committee and the District Business Conduct Committee is an effective means of improving representation at the district level and reducing travel time for committee members. The Board does not envision closing any of the existing NASD offices at this time.

National Business Conduct Committee

The proposed amendments make two primary changes to the Code of Procedure to implement Special Committee recommendations to improve the disciplinary process and to reduce the burden that this process imposes on the National Business Conduct Committee ("NBCC") and the Board.11 The NBCC, a committee of the Board composed solely of Governors, is responsible for reviewing formal actions12 of the District Business Conduct Committees ("DBCCs") and the Market Surveillance Committee ("MSC"), developing enforcement policy and recommending to the Board the adoption or amendment of rules relating to the business conduct of NASD members.

Although the existing NBCC structure works well, the increasing workload of the NBCC poses serious challenges. In the period from 1985 to 1988 alone, the number of formal actions filed by the DBCCs increased by 81 percent (from 476 to 865). Also in this period, the MSC became a significant source of disciplinary actions.13 In 1985, the MSC filed 14 formal actions; in 1988, it filed 42 formal actions. The NBCC held 50 hearings in 1985; by 1988 this figure had more than doubled. While some of this increase in volume, particularly in the case of the MSC, reflects events surrounding the market break of October 1987, partial figures for 1989 indicate that the trend is still upward compared with the years before 1987.

The increased workload of the NBCC poses a number of problems. Since the time that each member of the NBCC can contribute is limited, there are constraints on the time available for the NBCC to address increasingly complex policy issues relating to enforcement and the business conduct of members. Further, it is hard to expect members of the NBCC to have much additional time to give to other committees and the increasingly demanding work of the Board itself. The heavy workload of NBCC service may discourage some valuable prospective industry and public candidates from serving on the Board.

Under current practice, the NBCC normally appoints a Governor serving on the NBCC and a recent former Governor as a hearing panel.14 Service on hearing panels is a substantial burden on the time of members of the NBCC.15 The Board agrees with the Special Committee that this allocation of the time of members of the NBCC to the hearing panels could detract from the ability of the NBCC to effectively address regulatory policy issues. Accordingly, the NBCC, in the cases it deems appropriate, should use its discretion to appoint hearing panels consisting of a current Governor and a recent former Governor and also should have the discretion to appoint hearing panels consisting exclusively of recent former Governors. Panels so constituted would provide respondents a hearing before experienced and respected members of the industry. In addition, all cases, regardless of the composition of the hearing panel, would continue to be reviewed by the NBCC.

The proposed amendments implement this Special Committee recommendation by revising the Code of Procedure to remove the restriction that at least one current industry member of the Board serve on NBCC hearing panels. This would permit, in appropriate cases, hearing panels to be composed exclusively of recent former industry Governors.

The Code of Procedure would also be revised to provide that the decisions of the NBCC are the final decisions of the NASD in disciplinary cases and would not require action of the full Board to become effective. The Board would review only those specific decisions of the NBCC that the Board calls for review on the request of one or more Governors.

This would limit the time commitment required from all Governors with respect to decisions of the NBCC without limiting the right of the Board to review an NBCC decision when one or more Governors believe such review is appropriate. The change reflects the importance of the NBCC and recognizes the quality and consistency of its decisionmaking. It would, however, make appeal to the SEC the sole recourse for respondents seeking to challenge a decision of the NBCC (unless a Governor requested review by the Board). The Board believes that since a significant number of Governors would have participated in the NBCC decision, the elimination of mandatory review by the full Board would not reduce the overall fairness of the NASD disciplinary process.

The NASD encourages all members and interested persons to comment on the proposed amendments. Comments should be directed to:

Mr. Lynn Nellius
National Association of Securities Dealers, Inc.
1735 K Street, NW
Washington, DC 20006-1506

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.

Comments must be received no later than April 30, 1990. Changes to the NASD By-Laws must be approved by a vote of the NASD membership and filed with, and approved by, the SEC before becoming effective. Changes to the NASD Code of Procedure must be approved by the Board of Governors of the NASD and filed with, and approved by, the SEC before becoming effective.

TEXT OF PROPOSED AMENDMENTS

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

By-Laws

ARTICLE I

Definitions

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

"Board" means the Board of Governors of the Corporation.

"Governor" means a member of the Board.

(The defined terms under Article I will be alphabetized and the subsection letters will be deleted.)

ARTICLE VII

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.

(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 to provide fair representation of its members and of the various districts. 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, and whenever it 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 assure 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 members who are the principal underwriters of investment company shares; and (v) at least one Governor representative of insurance companies or insurance company affiliated member.
[(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 Governor-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

Sec. 5. Each Governor [elected 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 subsections (c)(i) through (c)(v) [(6), (7) and/or (8)] of Section 4 [3(b)] of the 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:

Procedure for Nominations by Nominating Committees

(a) Before June 1 of each year, the Secretary of the Corporation shall notify in writing the Chairman of the respective District Committees of the expiration of the term of office of any member of the Board [of Governors] elected under subsection [(1) through (5)] (b) of Section 4[3(b)] of this Article which will expire during the next calendar year. The said Chairman shall thereupon notify the Nominating Committee elected for such District pursuant to the provisions of Section 3 of Article IX of the By-Laws and such Nominating Committee shall proceed to nominate a candidate from such District for the office of each such member of the Board [of Governors] whose term is to expire. Nominating Committees in nominating candidates for the office of [member of the Board of] Governor[s] shall endeavor, as nearly as practicable, to secure appropriate and fair representation on the Board [of Governors] of all classes and types of members engaged in the investment banking and securities business. No Nominating Committee shall nominate an incumbent member of the Board [of Governors] to succeed himself unless it first takes appropriate action by a written ballot sent to the entire membership within the District to ascertain that such nomination is acceptable to a majority of the members voting on such ballot in the District except where the incumbent member of the Board [of Governors] is serving pursuant to the provisions of Section 8 [7](a) of this Article. Each candidate nominated by the Nominating Committee shall be certified to the District Committee by September 1 and within five (5) days thereafter 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."

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)(l) 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.

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 the District Committee and/or on the Board [of Governors] and shall[,] [insofar as practicable,] include at least one current or former [member of the Board of] Governor[s].

ARTICLE X

[Restrictions on] Compensation of Board and Committee Members

Sec. 6. [No member of t]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 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.

ARTICLE XIV Powers of Board to Prescribe Sanctions

(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] exercising [acting within its] powers delegated [appropriate authority] 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 delegated by the Board or any District Business Conduct Committee.

Schedule B to 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. 1

State 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. 2

In 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, Nebraska1 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. 9

The 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. 10

In 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.]

Code of Procedure

ARTICLE II Disciplinary Actions by the District Business Conduct Committees, the Market Surveillance Committee and Others

Complaints Directed by the Board [of Governors] or the National Business Conduct Committee

Sec. 12. The National Business Conduct Committee and the Board [of Governors] shall each have the authority when (on the basis of information and belief) [it is] of the opinion that any act, practice or omission of any member of the Corporation or of any person associated with a member of the Corporation is in violation of any rule, regulation or statutory provision, to file a complaint with a Committee against such member or such person associated with a member or to instruct any Committee to do so, and any such complaint shall be handled in accordance with this Article.

ARTICLE III

Review of Disciplinary Actions [and Hearings Before] by the National Business Conduct Committee and the Board of Governors

Sec. l.(a) If a Committee shall take any disciplinary action against any member, or shall dismiss any complaint, as herein provided, such action or dismissal shall be subject to review by the National Business Conduct Committee [Board of Governors] on its own motion within 45 calendar days after the date of the decision. Any such action or dismissal shall also be subject to review upon application by any person aggrieved thereby, filed within 15 calendar days after the date of the decision. Application to the National Business Conduct Committee [Board of Governors] for review, or the institution of review by the National Business Conduct Committee [Board of Governors] on its own motion, shall operate as a stay of any such action or dismissal, until a decision is rendered by the National Business Conduct Committee [Board of Governors] upon such review as hereinafter provided.

(b) If a respondent or any aggrieved person who has made application to the National Business Conduct Committee [Board of Governors] for a review shall withdraw the appeal without a determination by the National Business Conduct Committee [Board of Governors] on the merits thereof, the National Business Conduct Committee [Board of Governors] shall have an additional period of 45 calendar days subsequent to the withdrawal in which to determine whether it shall review the matter on its own motion.

Hearing[s] Panels [Before the Board]

Sec. 2.(a) In the case of an appeal or call for review, the complainant, if other than the Committee, or the respondent may request a hearing before a hearing panel of the National Business Conduct Committee [Board of Governors]. If a request is made, a hearing shall be granted. In the absence of a request for a hearing, the National Business Conduct Committee [Board of Governors] may have any matter set down for a hearing. A notice stating the date, time and place of the hearing shall be mailed to the complainant, if other than the Committee and respondent at least 10 calendar days before the hearing. The notice period may be waived in writing by the respondent or a shorter notice given where extraordinary circumstances require.

(b) Upon consideration of the length of expected testimony, the volume and complexity of documentary evidence, and other factors it may deem material, the National Business Conduct Committee may determine that a matter shall be set for an Extended Hearing. Notice of an Extended Hearing shall be given as provided in Section 2(a).
(c) Unless otherwise consented to by the parties, all hearings shall be held before a hearing panel appointed by the National Business Conduct Committee consisting of two or more persons, all of whom are associated with members of the Corporation, and either (i) at least one of whom shall also be a current [member of the Board of] Governor[s] or (ii) all of whom shall also have served as Governors.
(d) All Extended Hearings shall be held before an Extended Hearing Committee appointed by the National Business Conduct Committee consisting of two or more persons, all of whom previously shall have served as [members of the Board of] Governors; provided, however, that the Chairman of the National Business Conduct Committee shall have the discretion to appoint to an Extended Hearing Committee one or more current [members of the Board of] Governors and to compensate any or all members of the Extended Hearing Committee at the rate then in effect for arbitrators appointed under the Code of Arbitration Procedure.
(e) If a hearing is held, the hearing panel shall consider the record before the Committee and any new material submitted by the complainant and the respondent. If respondent has waived a hearing and the National Business Conduct Committee [Board] does not order a hearing on its own motion, the panel shall consider the matter on the record, which may include new evidence as long as all parties have previously been tendered the new evidence.
(f) The hearing panel shall present its recommended findings and sanctions to the National Business Conduct Committee[. The National Business Conduct Committee shall make its recommended findings and sanctions to the Board of Governors] which shall make the final determination.

Powers of the National Business Conduct Committee [Board] on Review

Sec. 4. In any proceeding to review any disciplinary action taken or dismissed by a Committee, the National Business Conduct Committee [Board of Governors] may affirm, dismiss, modify or reverse dismissals with respect to each of the Committee findings or remand the matter with appropriate instructions to the Committee. The National Business Conduct Committee [Board of Governors] may affirm, increase, or reduce any sanction, or impose any other fitting sanction.

Decision of the National Business Conduct Committee [Board]

Sec. 5.(a) In any proceeding to review any disciplinary action taken by a Committee or a dismissal by a Committee if the National Business Conduct Committee [Board of Governors] determines that a violation alleged in the complaint has occurred, it shall issue a written decision which shall set forth:

(1) the act or practice which the respondent has been found to have engaged in or omitted;
(2) the rule, regulation, or statutory provision which such act or omission to act is deemed to violate;
(3) the basis upon which the findings are made; and
(4) the sanction imposed and the reason therefor.

Notification of Decision

Sec. 6. The complainant, the respondent and the member of the Corporation with whom the respondent is presently an associated person shall be promptly notified and sent a copy of any written decision rendered by the National Business Conduct Committee [Board of Governors].

Review by the Board

Sec. 7. The decisions of the NBCC are subject to review by the Board upon the request of one or more Governors. Such review shall be in accordance with resolutions of the Board governing the review of National Business Conduct Committee decisions. In reviewing any decision of the National Business Conduct Committee, the Board may affirm, dismiss, modify or reverse dismissals with respect to each of the National Business Conduct Committee findings or remand the matter with appropriate instructions to the National Business Conduct Committee or any Committee. The Board may affirm, increase, or reduce any sanction, or impose any other fitting sanction.

Application to SEC for Review

Sec. 8[7]. In any case where either the complainant or the respondent feels aggrieved by any final disciplinary action taken by the National Business Conduct Committee or Board [of Governors], such person may make application for review to the Securities and Exchange Commission in accordance with the Securities Exchange Act of 1934, as amended. The member of the Corporation with whom the respondent is presently an associated person shall be notified promptly of any application for review to the Securities and Exchange Commission.


1The Board has directed the staff to implement those recommendations of the Special Committee (relating primarily to the committees of the Board and the NASDAQ® market) that do not require changes to the By-Laws or approval by the Securities and Exchange Commission ("SEC").

2This 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.

3Members of the governing boards of other self-regulatory organizations receive compensation. 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.

4These figures include firms that are members of the NASD and one or more exchanges and are derived from records maintained by the Compliance Division that divide members into various examination categories. This consolidation of larger members has significantly reduced the pool of firms that has traditionally been a valuable source of candidates to serve on district committees and the Board.

5In 1980, these districts had a combined total of 73 such regional and national general securities members. This number has fallen to 41 such members in 1989.

6The table and map are contained in the section of the Report tilled "Districts."

7Section 15A(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."

8Article VII, Section 4(b)(10) of the By-Laws.

9Subject to the requirements that each district be represented by at least one Governor and that the number of Governors elected from the districts constitute an absolute majority of the Board.

10The table and map are contained in the section of the Report titled "Districts."

11Implementing these two primary changes will require a number of conforming changes in other articles of the Code of Procedure.

12Formal disciplinary actions consist of summary complaints; letters of acceptance, waiver and consent; offers of settlement, and decisions rendered after a DBCC or MSC hearing. Informal actions consist primarily of letters of caution, letters of future observance and compliance, and staff interviews.

13The Board authorized the establishment of the MSC in November 1984.

14Article III, Section 2(c) requires that (unless otherwise consented to by the parties) every member of a hearing panel must be currently associated with a member of the NASD. The proposed amendments do not alter this requirement.

15Each Governor that is associated with a member and who serves on the NBCC spends on average at least six full days in hearings alone during the one-year term. Preparing for the five or more cases heard at each full day of hearings, and traveling to and from the hearings, adds at least another six to twelve days of time commitment. These time demands are exacerbated by the increasing number of cases which require several days of hearings.



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