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94-24 SEC Approves Amendments To Remove The Member Vote Requirement For Amendments To The Rules Of Fair Practice And Incorporate Appendices Into Rules Of Fair Practice

SUGGESTED ROUTING

Senior Management
Legal & Compliance

Executive Summary

The Securities and Exchange Commission (SEC) has approved amendments, effective March 8, 1994, to remove the member vote requirement for adoption of, or amendment to, the Rules of Fair Practice, to incorporate Appendices A, B, C, E, and F into Sections 30 through 34 of the Rules of Fair Practice, and to eliminate the authorization provision for ITS/CAES in Article III, Section 37 of the Rules of Fair Practice.

Description Of Amendments

The SEC has approved amendments to the NASD By-Laws and the Rules of Fair Practice that eliminate the requirement for a member vote in connection with the adoption of, or amendment to, the Rules of Fair Practice. As described previously in Notice to Members 93-15 (March 1993), the amendments are the first of a multi-part program, the purpose of which is to make rule approval and amendment procedures for the Rules of Fair Practice, and other NASD Rules, uniform and to make the NASD Manual easier to use. Previously, the Rules of Fair Practice needed full membership approval for adoption, whereas the Appendices to the Rules of Fair Practice and other NASD rules (e.g., the Code of Procedure, Uniform Practice Code, and Code of Arbitration Procedure) only require NASD Board of Governors approval for amendment. The amendments make the NASD's procedures consistent with those of other self-regulatory organizations in the securities industry, which do not require member votes for rule changes. This will not only reduce delays in making rule changes effective, but will also result in administrative cost savings. A member vote is still needed for rule changes to the NASD By-Laws, and the Board has specifically provided in these By-Law amendments that it may seek a member vote on any rule change whenever it feels such a vote is desirable.

In approving the amendments, which were approved by over 77 percent of votes received from NASD members, the SEC found that the changes do not alter the substance of the NASD Rules of Fair Practice, but rather simplify the NASD's ability to amend its rules.

The SEC noted that mechanisms remain for members to participate in the formulation of, and comment on, NASD proposed rule changes. These include member representation on the Board of Governors and all Standing and District Committees, the opportunity to comment on proposed rule changes filed with the SEC, the receipt of periodic summaries of actions taken at Board of Governors meetings, and the opportunity to comment on significant proposed rule changes that the NASD may elect to circulate prior to riling with the SEC.

The SEC has also approved amendments to the Rules of Fair Practice that incorporate the Appendices under Article III, Sections 30 through 34 into the Rules of Fair Practice they were adopted under. Thus, Appendix A is now in Section 30; Appendix B is in Section 31; Appendix C is in Section 32; Appendix E is in Section 33; and Appendix F is in Section 34, Article III of the Rules of Fair Practice.

The SEC also approved deletion of Section 37, Article III, which authorizes the ITS/CAES and CAES Operating Rules, because such authorization is contained in new Subsections 1(a)(3), (8), and (9) to Article VII of the By-Laws.

Questions concerning this Notice should be directed to T. Grant Callery, Vice President and Deputy General Counsel, (202) 728-8285.

Below is the text of the changes to the By-Laws approved by the SEC. Members are directed to Notice to Members 93-15 (March 1993) for the text of the changes to the Rules of Fair Practice.

Text Of Amendments To Article VII And Article XII, NASD By-Laws

(Note: New language is underlined; deletions are in brackets.)

Board of Governors

Powers and Authority of Board of Directors

Sec. 1.

(a) The Board of Governors shall be the governing body of the Corporation and, except as otherwise provided by these By-Laws, shall be vested with all powers necessary for the management and administration of the affairs of the Corporation and the promotion of the Corporation's welfare, objects and purposes. In the exercise of such powers, the Board of Governors, shall have the authority to:
(1) adopt for submission to the membership, as hereinafter provided, such By-Laws[, Rules of Fair Practice] and changes or additions thereto as it deems necessary or appropriate;
(2) adopt such Rules of Fair Practice and changes or additions thereto as it deems necessary or appropriate, provided, however, that the Board may at its option submit to the membership any such adoption, change, or addition to the Rules of Fair Practice:
[(9)] (3) (a) adopt [for submission to the membership] such rules as the Board of Governors deems appropriate to implement the provisions of the Act as amended [by the Government Securities Act of 1986] and the rules and regulations promulgated thereunder, and (b) make such regulations, issue such orders, resolutions, interpretations, including interpretations of the rules adopted pursuant to this Section, and directions, and make such decisions as it deems necessary or appropriate.
[(2)] (4) Unchanged.
[(3)] (5) prescribe a code of arbitration procedure providing for the required or voluntary arbitration of controversies between members and between members and customers or others as it shall deem necessary or appropriate and neither the adoption nor any amendments to the code need be submitted to the membership for approval and the code and any amendments thereto shall become effective as the Board of Governors may prescribe];
[(4)] (6) establish rules and procedures to be followed by members in connection with the distribution of securities issued by members and affiliates thereof [, and neither the adoption nor any amendments to such rules and procedures need be submitted to the membership for approval and such rules and procedures and any amendments thereto shall become effective as the Board of Governors may prescribe];
[(5)] (7) Unchanged.
[(6)] (8) organize and operate automated systems to provide qualified subscribers with securities information and automated services. The systems may be organized and operated by a division or subsidiary company of the Corporation or by one or more independent firms under contract with the Corporation as the Board of Governors may deem necessary or appropriate. The Board of Governors may adopt rules for such automated systems, establish reasonable qualifications and classifications for members and other subscribers, provide qualification standards for securities included in such systems, require members to report promptly information in connection with securities included in such systems, and establish charges to be collected from subscribers and others [. The Board of Governors shall have power to adopt, amend, supplement or modify such rules, qualifications, classifications, standards and charges from time to time without recourse to the membership for approval, and such rules, qualifications, classifications, standards and charges shall become effective as the Board of Governors may prescribe; and,];
[(7)] (9) require the prompt reporting by members of such original and supplementary trade data as the Board deems appropriate. Such reporting requirement may be administered by the Corporation, a division or subsidiary thereof, or a clearing agency registered under the [Securities Exchange] Act [of 1934.1: and
[(8)] (10) engage in any activities or conduct necessary or appropriate to carry out the Corporation's purposes under its Certificate of Incorporation and the federal securities laws.
(b) Unchanged.

Article XII

Rules of Fair Practice

Sec. 1. To promote and enforce just and equitable principles of trade and business, to maintain high standards of commercial honor and integrity among members of the Corporation, to prevent fraudulent and manipulative acts and practices, to provide safeguards against unreasonable profits or unreasonable rates of commissions or other charges, to protect investors and the public interest, to collaborate with governmental and other agencies in the promotion of fair practices and the elimination of fraud, and in general to carry out the purposes of the Corporation and of the Act, the Board of Governors is hereby authorized to adopt [for submission to the members of the Corporation] such Rules of Fair Practice for the members and persons associated with members, and such amendments thereto as it may, from time to time, deem necessary or appropriate. [The Board of Governors, upon the adoption of any such Rules of Fair Practice of amendments thereto, shall forthwith cause copies thereof to be sent to each member of the Corporation to be voted upon.] If any such Rules of Fair Practice or amendments thereto [are approved by a majority of the members voting, within thirty (30) days after the date of submission to the membership, and] are approved by the Commission as provided in the Act, they shall become effective Rules of Fair Practice of the Corporation as of such date as the Board of Governors may prescribe. [In any case, however, where a particular provision of a Rule of Fair Practice provides that membership approval is not required, the Board may amend that provision without submission to the membership for a vote as hereinbefore required. In addition, where the Board of Governors by resolution finds an emergency to exist, such Rules of Fair Practice of amendments thereto, if adopted by a two-thirds vote of the Board of Governors, may become effective as of such time as the Board of Governors may prescribe, without submission to the members for a vote as hereinbefore required. An emergency which is found by the Board of Governors to exist shall continue until the Board of Governors by resolution terminates such but in no event shall an emergency continue for a period in excess of six months. The Board of Governors shall have the authority, however, after, in each instance, reassessing the facts and circumstances which gave rise to the emergency, by resolution to declare, if it deems such appropriate under the facts and circumstances then existing, the emergency to continue to exist for successive six-month periods as required. All emergency rules adopted during the period of the emergency shall cease to be effective upon the termination of the emergency as hereinbefore provided.] The Board of Governors is hereby authorized, subject to the provisions of the By-Laws and the Act, to administer, enforce, suspend, or cancel any Rules of Fair Practice adopted hereunder.


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