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85-27 Approval of Recodified By-Laws and New Code of Procedure

IMPORTANT

OFFICERS, PARTNERS AND PROPRIETORS

TO: All NASD Members and Other Interested Persons

The Securities and Exchange Commission has approved a recodification of the NASD By-Laws 1/ and a revised Code of Procedure. 2/ The text of these amendments, which were effective upon approval by the Commission, 3/ is attached.

Over the past several years, the Association's Ad Hoc Committee on Rules and By-Law Amendments has been working to revise the NASD By-Laws, Code of Procedure and Rules of Fair Practice to clarify language, delete obsolete passages, codify new procedures, and incorporate changes necessitated by amendments to the Securities Exchange Act of 1934. The intention of these revisions has not been to make major substantive changes but to clarify all NASD regulations and make the NASD Manual easier to understand and use. There are, however, several key changes that merit attention.

The amended Code of Procedure provides for the establishment of a new Market Surveillance Committee to review examinations conducted by the NASD Market Surveillance Section 4/ The Committee will have many of the same functions as a District Business. Conduct Committee and will conduct hearings, render decisions, and impose appropriate disciplinary actions. The NASD established this Committee for two principal reasons:

  • to ensure that cases involving market-type violations are reviewed by members of a committee with expertise and experience in handling such matters; and
  • to ensure that all investigations, including those that do not uncover any apparent rule violations, are presented to a member-controlled committee for disposition.

The Market Surveillance Committee will review alleged violations involving such things as market manipulation, improper trade reporting, and insider trading irrespective of where the alleged violation occurs throughout the country.

The Code of Procedure has also been expanded to cover most of the proceedings conducted by the Association. Part XI of Schedule C and Parts VI, VII, VIII, IX, and X of Schedule D have been deleted and the substance of these provisions has been included in the Code of Procedure. 5/ The Code therefore now deals with not only disciplinary proceedings but also proceedings related to the NASDAQ System and NASD membership and qualification requirements. Hearings under the Interpretation of the Board of Governors—Review of Corporate Financing, Schedule E to the By-Laws, and Article III, Section 34 of the Rules of Fair Practice are not included, however. The latter group of hearings are dealt with in the new corporate financing rule which is awaiting SEC approval-Proceedings under the Uniform Practice Code and the Code of Arbitration Procedure also remain intact.

All of these changes will be reflected in the April 1985 supplement to the NASD Manual to be published by Commerce Clearing House during the last week of April. The attached text of these changes is effective immediately and should be retained until the manual is updated. Additional copies of this notice to members may be obtained by sending a self-addressed mailing label to;

Office of Administrative Services
National Association of Securities Dealers, Inc.
1735 K Street, N.W.
Washington, D.C. 20006.

Comments or questions concerning these changes may be directed to Dennis C. Hensley, Vice President and Deputy General Counsel, or Edward R. Venit, Senior Attorney, Office of General Counsel at (202) 728-8294.

Very truly yours,

Frank J.Wilson
Executive Vice President and General Counsel

Attachments

TABLE OF CONTENTS

BY-LAWS

   

Page

ARTICLE I

DEFINITIONS

1

ARTICLE II

QUALIFICATIONS OF MEMBERS AND ASSOCIATED PERSONS

Section

   

1.

Persons Eligible to Become Members and Associated Persons of Members

3

2.

Authority of Board to Adopt Qualification Requirements

3

3.

Ineligibility of Certain Persons for Membership or Association

3

4.

Definition of Disqualification

5

ARTICLE III

MEMBERSHIP

Section

   

1.

Application for Membership

6

2.

Similarity of Membership Names

7

3.

Executive Representative

7

4.

Membership Roll

8

5.

Resignation of Members

8

6.

Transfer and Termination of Membership

8

7.

Registration of Branch Offices

9

8.

Vote of Branch Offices

9

9.

District Committees' Right to Classify Branches Branches

9

ARTICLE IV

REGISTERED REPRESENTATIVES AND ASSOCIATED PERSONS

Section

   

1.

Qualification Requirements

9

2.

Application for Registration

9

3.

Notification by Member to Corporation of Termination

10

4.

Retention of Jurisdiction

10

ARTICLE V

AFFILIATES

Section

   

1.

Qualifications for Affiliation

11

2.

Application for Admission as Affiliate

11

3.

Agreement of Affiliate

11

4.

Conditions of Affiliation

12

5.

Approval of Admission as an Affiliate

12

6.

Suspension or Cancellation of Affiliation

12

7.

Exclusion of Territory Covered by Affiliated Association

12

ARTICLE VI

DUES, ASSESSMENTS AND OTHER CHARGES

Section

   

1.

Power of Board to Fix and Levy Assessments

13

2.

Reports of Members

13

3.

Suspension or Cancellation of Membership for Non-Payment of Dues

13

4.

Reinstatement of Membership

13

ARTICLE VII

BOARD OF GOVERNORS

Section

   

1.

Powers and Authority of Board of Governors

14

2.

Authority to Suspend for Failure to Submit Required Information

15

3.

Composition of Board

15

4.

Term of Office of Governors

16

5.

Succession to Office

16

6.

Election of Board Members

16

7.

Filling of Vacancies on Board

18

8.

Meetings of Board

18

9.

Offices of Corporation

18

ARTICLE VIII

DISTRICT COMMITTEES

Section

   

1.

Administrative Districts

18

2.

District Committees and District Business Conduct Committees

19

3.

Term of Office of District Committee Members

19

4.

Election of District Committee Members

19

5.

Filling of Vacancies on District Committees

20

6.

Meetings of District Committees

21

7.

Election of Chairmen and Other District officers

21

8.

Advisory Council

21

9.

Expenses of District Committees

21

10.

District Committees Agencies of Corporation

21

11.

Certain Functions of District Committees

22

ARTICLE IX

NOMINATING COMMITTEES

Section

   

1.

Composition of Nominating Committees

22

2.

Term of Office of Nominating Committee Members

22

3.

Election of Nominating Committees

22

4.

Filling of Vacancies for Nominating Committees

24

5.

Meetings of Nominating Committees

24

6.

Election of Chairman and Other Nominating Committee Officers

24

ARTICLE X

OFFICERS AND EMPLOYEES

Section

   

1.

Election of Officers of the Board

24

2.

Officers of the Corporation

25

3.

Absence of President

25

4.

Employment of Counsel

25

5.

Administrative Staff

25

6.

Restrictions on Compensation of Board and Committee Members

25

ARTICLE XI

COMMITTEES

Section

   

1.

National Standing Committees

26

2.

District Standing Committees

26

3.

Removal of Committee Member

26

4.

Executive Committee

26

ARTICLE XII

RULES OF FAIR PRACTICE

26

ARTICLE XIII

DISCIPLINARY PROCEEDINGS

27

ARTICLE XIV

POWER OF BOARD TO PRESCRIBE SANCTIONS

28

ARTICLE XV

UNIFORM PRACTICE CODE

Section

   

1.

Authority to Adopt Code

29

2.

Administration of Code

29

3.

Transactions Subject to Code

29

ARTICLE XVI

LIMITATION OF POWERS

Section

   

1.

Prohibitions

29

2.

Use of Name of Corporation by Members

30

3.

Unauthorized Expenditures

30

4.

Conflicts of Interest

30

5.

Municipal Securities

30

ARTICLE XVII

PROCEDURE FOR ADOPTING AMENDMENTS TO BY-LAWS

30

ARTICLE XVIII

CORPORATE SEAL

31

ARTICLE XIX

CHECKS

31

ARTICLE XX

ANNUAL FINANCIAL STATEMENT

31

BY-LAWS *

ARTICLE I

DEFINITIONS

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

(a) "Act" means the Securities Exchange Act of 1934, as amended;
(b) "bank" means (1) a banking institution organized under the laws of the United States, (2) a member bank of the Federal Reserve System, (3) any other banking institution, whether incorporated or not, doing business under the laws of any state or of the United States, a substantial portion of the business of which consists of receiving deposits or exercising fiduciary powers similar to those per mitted to national banks and which is supervised and examined by a State or Federal authority having supervision over banks, and which is not operated for the purpose of evading the provisions of the Act, and (4) a receiver, conservator, or other liquidating agent of any institution or firm included in clauses (1), (2) or (3) of this subsection;
(c) "branch office" means an office located in the United States which is owned or controlled by a member, and which is engaged in the investment banking or securities business;
(d) "broker" means any individual, corporation, partnership, asso ciation, joint stock company, business trust, unincorporated organization or other legal entity engaged in the business of effecting transactions in securities for the account of others, but does not include a bank;
(e) "Commission" means the Securities and Exchange Commission;
(f) "Corporation" means the National Association of Securities Dealers, Inc.;
(g) "dealer" means any individual, corporation, partnership, associ ation, joint stock company, business trust, unincorporated organization or other legal entity engaged in the business of buying and selling securities for his own account, through a broker or otherwise, but does not include a bank, or any person insofar as he buys or sells securities for his own account, either individually or in some fiduciary capacity, but not as part of a regular business;
(h) "investment banking or securities business" means the business, carried on by a broker, dealer, or municipal securities dealer (other than a bank or department or division of a bank) of underwriting or distributing issues of securities, or of purchasing securities and offering the same for sale as a dealer, or of purchasing and selling securities upon the order and for the account of others;
(i) "member" means any broker or dealer admitted to membership in the Corporation;
(j) "municipal securities" means securities which are direct obligations of, or obligations guaranteed as to principal or interest by, a State or any political subdivision thereof, or any agency or instrumentality of a State or any political subdivision thereof, or any municipal corporate instrumentality of one or more States, or any security which is an industrial development bond as defined by Section 3(a)(29) of the Act;
(k) "municipal securities broker" means a broker, except a bank or department or division of a bank, engaged in the business of effecting transactions in municipal securities for the account of others;
(l) "municipal securities dealer" means any person, except a bank or department or division of a bank, engaged in the business of buying and selling municipal securities for his own account, through a broker or otherwise, but does not include any person insofar as he buys or sells securities for his own account either individually or in some fiduciary capacity but not as a part of a regular business;
(m) "person associated with a member" or "associated person of a member" means every sole proprietor, partner, officer, director, or branch manager of any member, or any natural person occupying a similar status or performing similar functions, or any natural person engaged in the investment banking or securities business who is directly or indirectly controlling or controlled by such member, whether or not any such person is registered or exempt from registration with the Corporation pursuant to these By-Laws;
(n) "registered broker or dealer" or "municipal securities broker or dealer" means any broker, dealer or municipal securities broker or dealer which is registered with the Commission under the Act;
(o) "rules of the Corporation" means all rules of the Corporation including the Certificate of Incorporation, By-Laws, Rules of Fair Practice, Code of Procedure, Uniform Practice Code, and any Interpretations thereunder.

ARTICLE II

QUALIFICATIONS OF MEMBERS AND ASSOCIATED PERSONS

Persons Eligible to Become Members and Associated Persons of Members

Sec. 1. (a) Any registered broker, dealer or municipal securities broker or dealer authorized to transact, and whose regular course of business consists in actually transacting, any branch of the investment banking or securities business in the United States, under the laws of the United States, shall be eligible for membership in the Corporation, except such registered brokers, dealers or municipal securities brokers or dealers which are excluded under the provisions of Sections 3(a) or (b) of this Article.

(b) Any person shall be eligible to become an associated person of a member, except such persons who are excluded under the provisions of Section 3(b) of this Article.

Authority of Board to Adopt Qualification Requirements

Sec. 2. (a) The Board of Governors shall have authority to adopt rules and regulations applicable to applicants for membership, members and persons associated with applicants or members establishing specified and appropriate standards with respect to the training, experience, competence and such other qualifications as the Board of Governors finds necessary or desirable, and in the case of an applicant for membership or a member, standards of financial responsibility or operational capability.

(b) In establishing and applying such standards, the Board of Go vernors may classify members and persons associated with such members, taking into account relevant matters, including the nature, extent and type of business being conducted and of securities sold, dealt in, or otherwise handled. The Board of Governors may specify that all or any portion of such standards shall be applicable to any such class and may require the persons in any such class to be registered with the Corporation.
(c) The Board of Governors may from time to time make changes in such rules, regulations and standards as it deems necessary or appropriate. Neither the adoption nor any change in such standards needs be submitted to the member ship for approval and such rules, regulations and standards as adopted or amended shall become effective at such time as the Board of Governors may prescribe.

Ineligibility of Certain Persons for Membership or Association

Sec. 3. (a) No registered broker, dealer or municipal securities broker or dealer shall be admitted to membership, and no member shall be continued in membership, if such broker, dealer,or municipal securities broker or dealer or member fails or ceases to satisfy the qualification requirements under Section 2 of this Article, or if such broker, dealer, municipal securities broker or dealer or member is or becomes subject to a disqualification under Section 4 of this Article.

(b) No person shall become associated with a member, or continue to be associated with a member, or transfer association to another member, if such person fails or ceases to satisfy the qualification requirements under Section 2 of this Article, or if such person is or becomes subject to a disqualification under Section 4 of this Article; and no broker, dealer or municipal securities broker or dealer shall be admitted to membership, and no member shall be continued in membership if any person associated with it is ineligible to be an associated person under this subsection.
(c) If it deems it appropriate, the Board of Governors, upon notice and opportunity for a hearing, may cancel the membership of a member if it be comes ineligible for continuance in membership under subsection (a) hereof, may suspend or bar a person from continuing to be associated with any member if such person is or becomes ineligible for association under subsection (b) hereof, and may cancel the membership of any member who continues to be associated with any such ineligible person.
(d) Any broker, dealer or municipal securities dealer which is ineli gible for admission into membership, or any member which is ineligible for con tinuance in membership, may file with the Board of Governors an application requesting relief from the ineligibility, pursuant to procedures adopted by the Board of Governors and contained in the Corporation's Code of Procedure. The Board of Governors may, in its discretion, approve the admission or continuance of an appli cant or member, or the association of any person, if the Board determines that such . approval is consistent with the public interest and the protection of investors. Any approval hereunder may be granted unconditionally or on such terms and conditions as the Board considers necessary or appropriate. In the exercise of the authority granted hereunder, the Board of Governors may:
(1) conduct such inquiry or investigation into the relevant facts and circumstances as it, in its discretion, considers necessary to its determination, which, in addition to the background and circumstances giving rise to the failure to qualify or disqualification may include the proposed or present business of an appli cant for membership or of a member and the conditions of association of any pro spective or presently associated person, among other matters;
(2) permit, in limited types of situations, a membership or association with a member pending completion of its inquiry or investigation, and its final determination, based upon a consideration of relevant factors, and may classify situations taking into account the status of brokers, dealers and municipal securities brokers and dealers as applicants or existing members and of persons as prospective or presently associated persons of members; the type of disqualification or failure to qualify; whether a member or associated person has been the subject of a previous approval and the terms and conditions thereof; and any other relevant factors; and
(3) delegate any of its functions and authority under this sub section (d) to appropriate committees of the Corporation or to Corporation staff members.
(e) An application filed under subsection (d) hereof shall not fore close any action which the Board of Governors is authorized to take under subsec tion (c) hereof until approval has been granted.
(f) Approval by the Board of Governors of an application made under subsection (d) shall be subject to whatever further action the Commission may take pursuant to authority granted to the Commission under the Act.

Definition of Disqualification

Sec. 4. A person is subject to a "disqualification" with respect to membership, or association with a member, if such person:

Commission and Self-Regulatory Organization Disciplinary Sanctions

(a) has been and is expelled or suspended from membership or participation in, or barred or suspended from being associated with a member of, any self-regulatory organization;
(b) is subject to an order of the Commission denying, suspending or revoking its registration as a broker, dealer, or municipal securities dealer (in cluding a bank or department or division of a bank) or barring or suspending him from being associated with a broker, dealer, or municipal securities dealer (in cluding a bank or department or division of a bank);
(c) by his conduct while associated with a broker, dealer, or muni cipal securities dealer (including a bank or department or division of a bank) has been found to be a cause of any effective suspension, expulsion or order of the character described in subsections (a) or (b) of this Section; or
(d) has associated with him any person who is known, or in the exer cise of reasonable care should be known, to him to be a person described in subsec tions (a), (b), or (c) of this Section.

Misstatements

(e) has willfully made or caused to be made in any application for membership in the Corporation, or to become associated with a member of the Corporation, or in any report required to be filed with the Corporation, or in any proceeding before the Corporation, any statement which was at the time, and in light of the circumstances under which it was made, false, or misleading with respect to any material fact, or has omitted to state in any such application, report or proceeding any material fact which is required to be stated therein;

Convictions

(f) has been convicted within ten years preceding the filing of any application for membership in the Corporation, or to become associated with a member of the Corporation, or at any time thereafter of any felony or misde meanor which;
(1) involves the purchase or sale of any security, the taking of a false oath, the making of a false report, bribery, perjury, burglary, or conspiracy to commit any such offense;
(2) arises out of the conduct of the business of a broker, dealer, municipal securities dealer, investment adviser, bank insurance company or fidu ciary;
(3) involves the larceny, theft, robbery, extortion, forgery, counterfeiting, fraudulent concealment, embezzlement, fraudulent conversion, or misappropriation of funds or securities; or
(4) involves the violation of Sections 152, 1341, 1342, or 1343 or Chapters 25 or 47 of Title 18, United States Code; or

Injunctions

(g) is permanently or temporarily enjoined by order, judgment, or decree of any court of competent jurisdiction from acting as an investment adviser, underwriter, broker, dealer, or municipal securities dealer (including a bank or department or division of a bank), or as an affiliated person or employee of any investment company, bank, or insurance company, or from engaging in or continuing any conduct or practice in connection with any such activity, or in connection with the purchase or sale of any security.

ARTICLE III

MEMBERSHIP

Application for Membership

Sec. 1. (a) Application for membership in the Corporation, properly signed by the applicant, shall be made to the Corporation, on the form to be prescribed by the Corporation, and shall contain:

(1) an acceptance of and an agreement to abide by, comply with, and adhere to, all the provisions, conditions, and covenants of the Certificate of Incorporation, the By-Laws, the rules and regulations of the Corporation as they are or may from time to time be adopted, changed or amended, and all rulings, orders, directions and decisions of, and sanctions imposed by, the Board of Gover nors or any duly authorized committee, the provisions of the federal securities laws, including the rules and regulations adopted thereunder, and the rules of the Municipal Securities Rulemaking Board, provided, however, that such an agreement shall not be construed as a waiver by the applicant of any right to appeal as pro vided in the Act;
(2) an agreement to pay such dues, assessments, and other charges in the manner and amount as shall from time to time be fixed by the Board of Governors pursuant to these By-Laws;
(3) an agreement that neither the Corporation, nor any officer or employee thereof, nor any member of the Board of Governors or of any district or other committee, shall be liable, except for willful malfeasance, to the applicant or to any member of the Corporation or to any other person, for any action taken by such officer or member of the Board of Governors or of any district or other committee, in his official capacity, or by any employee of the Corporation while acting within the scope of his employment or under instruction of any officer, board, or committee of the Corporation, in connection with the administration or enforcement of any of the provisions of the rules of the Corporation as they are or may from time to time be adopted, or amended, or any ruling, order, directive, decision of, or penalty imposed by, the Board of Governors or any duly authorized committee, the provisions of the federal securities laws, including the rules and regulations adopted thereunder, and the rules of the Municipal Securities Rule-making Board; and
(4) such other reasonable information with respect to the applicant as the Board of Governors may require.
(b) Any application received by the Corporation shall be referred to the District Committee of the district in which the applicant has his principal place of business, and if a majority of the members of such District Committee deter mine that the applicant has satisfied all of the admission requirements of the By- Laws, it shall recommend the applicant's admission to membership and promptly notify the Secretary of the Corporation of such recommendation.
(c) If a majority of the members of such District Committee deter mine that the applicant fails to satisfy all of the admission requirements of the By- Laws, it shall promptly notify the Secretary of the Corporation who shall thereafter take appropriate action as of the date when posted to the membership roll.
(d) Each member shall ensure that its membership application with the Corporation is kept current at all times by supplementary amendments to the original application.

Similarity of Membership Names

Sec. 2. (a) No person or firm shall be admitted to or continued in membership in the Corporation having a name which is identical to the name of another member appearing on the membership roll of the Corporation or a name so similar to any such name as to tend to confuse or mislead;

(b) No member may change its name without the prior approval of the Corporation.

Executive Representative

Sec. 3. Each member shall appoint and certify to the Secretary of the Corporation one "executive representative" who shall represent, vote and act for the member in all the affairs of the Corporation, except that other executives of a member may also hold office in the Corporation, serve on the Board of Governors or committees of the Corporation, or otherwise take part in the affairs of the Corporation. A member may change its executive representative upon giving written notice thereof to the Secretary, or may, when necessary, appoint, by written notice to the Secretary, a substitute for its executive representative. An executive representative of a member or a substitute shall preferably be an executive officer of the member, if a corporation, a partner in case of a partnership, and the member himself if an individual, but he may be an employee of the member, if given authority to act for the member in the course of the Corporation's activities.

Membership Roll

Sec. 4. The Secretary of the Corporation shall keep a currently accurate and complete membership roll, containing the name and address of each member, and the name and address of the executive representative of each member. In any case where a membership has been terminated, such fact shall be recorded, together with the date on which the membership ceased. The membership roll of the Corporation shall at all times be available to all members of the Corporation, to all governmental authorities, and to the general public.

Resignation of Members

Sec. 5. (a) Membership in the Association may be voluntarily terminated only by formal resignation. Resignations of members must be in writing and addressed to the Corporation which shall immediately notify the appropriate District Committee. Any member may resign from the Corporation at any time. Such resignation shall not take effect until thirty (30) days after receipt thereof by the Corporation and until all indebtedness due the Corporation from such member shall have been paid in full and so long as any complaint or action is pending against the member and so long as any examination of such member is in process. The Corporation, however, may in its discretion declare a resignation effective at any time.

(b) A resigned member shall continue to be subject to the filing of a complaint under the Code of Procedure based upon conduct which commenced prior, to the effective date of the member's resignation from the Corporation. Any such" complaint, however, shall be filed within one year after the effective date of the resignation.

Transfer and Termination of Membership

Sec. 6. (a) Except as provided hereinafter, no member of the Corporation may transfer its membership or any right arising therefrom and the membership of a corporation, partnership or any other business organization which is a member of the Corporation shall terminate upon its liquidation, dissolution or winding up, and the membership of a sole proprietor which is a member shall terminate at death, provided that all obligations of membership under the By-Laws and Rules of Fair Practice have been fulfilled.

(b) The consolidation, reorganization, merger, change of name, or similar change in any corporate member shall not terminate the membership of such corporate member provided that the member or surviving organization, if any, shall be deemed a successor to the business of the corporate member, and the member or the surviving organization shall continue in the investment banking and securities business, and shall possess the qualifications for membership in the Corporation. The death, change of name, withdrawal of any partner, the addition of any new partner, reorganization, consolidation or any change in the legal structure of a partnership member shall not terminate the membership of such partnership member provided that the member or surviving organization, if any, shall be deemed a successor to the business of the partnership member, and the member or surviving organization shall continue in the investment banking and securities business and shall possess the qualifications for membership in the Corporation. If the business of any predecessor member is to be carried on by an organization deemed to be a successor organization by the Corporation, the membership of such predecessor member shall be extended to the successor organization; otherwise any surviving organization shall be required to satisfy all of the requirements of the By-Laws.

Registration of Branch Offices

Sec. 7. (a) Each branch office of a member of the Corporation shall be registered with and listed upon the membership roll of the Corporation, and shall pay such dues, assessments and other charges as shall be fixed from time to time by the Board of Governors pursuant to Article VI of the By-Laws.

(b) Each member of the Corporation shall promptly advise the Corporation of the opening or closing of any branch office of such member.

Vote of Branch Offices

Sec. 8. Each member of the Corporation having a registered branch office shall be entitled to one vote on all matters pertaining solely to the district in which such registered branch office is located (including the election of members to the Board of Governors from such district); provided, however, that if any member of the Corporation shall have more than one registered branch office in a district, or its principal office and one or more registered branch offices in a district, such member shall be entitled to only one vote in such district.

District Committees' Right to Classify Branches

Sec. 9. A District Committee may classify any branch of a member not meeting the definition of Article I(c) of the By-Laws as a "branch office" if such Committee is satisfied that the definition of Article I(c) of the By-Laws is substantially met and that the business of said branch in the district is of sufficient importance to justify such a classification.

ARTICLE IV

REGISTERED REPRESENTATIVES AND ASSOCIATED PERSONS

Qualification Requirements

Sec. 1. No member shall permit any person associated with such member to engage in the investment banking or securities business unless the member determines that such person has complied with the applicable provisions under Article II of the By-Laws.

Application for Registration

Sec. 2. (a) Application by any person for registration with the Corporation, properly signed by the applicant, shall be made to the Corporation, on the form to be prescribed by the Board of Governors and shall contain:

(1) an acceptance of and an agreement to comply with all the provisions of the rules of the Corporation as they are or may from time to time be adopted or amended, all rulings, orders, directions and decisions of, and penalties imposed by, the Board of Governors or any duly authorized committee, the provisions of the federal securities laws, including the rules and regulations adopted thereunder, and the rules of the Municipal Securities Rulemaking Board; provided, however, that such an agreement shall not be construed as a waiver by the applicant of any right to appeal as provided in the Act;
(2) an agreement that neither the Corporation, nor any officer or employee thereof, nor any member of the Board of Governors or of any District or other Committee, shall be liable except for willful malfeasance, to the applicant or to any member of the Corporation or to any other person, for any action taken by such officer, member of the Board of Governors or of any District or other Committee in his official capacity, or by any employee of the Corporation while acting within the scope of his employment, or under instruction of any officer, board or committee of the Corporation, in connection with the administration or enforcement of any of the provisions of the By-Laws, any rules of the Corporation as they are or may from time to time be adopted or amended, any ruling, order, direction, decision of, or penalty imposed by, the Board of Governors or any duly authorized committee, the provisions of the federal securities laws, including the rules and regulations adopted thereunder, or the rules of the Municipal Securities Rulemaking Board; and
(3) such other reasonable information with respect to the applicant as the Corporation may require.
(b) The Corporation shall not approve an application for registration"' of any person who is not eligible to be an associated person of a member under the provisions of Section 3(b) of Article II of these By-Laws.
(c) Every application for registration filed with the Corporation shall be kept current at all times by supplementary amendments to the original application.

Notification by Member to Corporation of Termination

Sec. 3. Following the termination of the association with a member of a person who is registered with it, such member shall promptly, but in no event later than (30) calendar days after such termination, give written notice to the Association on a form designated by the Board of Governors of the termination of such association. A member who does not submit such notification in writing within the time period prescribed shall be assessed a late filing fee as specified by the Board of Governors. Termination of registration of such person associated with a member shall not take effect so long as any complaint or action is pending against a member and to which complaint or action such person associated with a member is also a respondent, or so long as any complaint or action is pending against such person individually or so long as any examination of the member or person associated with such member is in process. The Corporation, however, may in its discretion declare the termination effective at any time.

Retention of Jurisdiction

Sec. 4. A person whose association with a member has been terminated and is no longer associated with any member of the Corporation shall continue to be subject to the filing of a complaint under the Code of Procedure based upon conduct which commenced prior to the termination, but any such complaint shall be filed within one (1) year after the effective date of termination of registration pursuant to Section 3 above or, in the case of an unregistered person, within one (1) year after the date upon which such person ceased to be associated with the member.

ARTICLE V

AFFILIATES

Qualifications for Affiliation

Sec. 1. Any association of brokers or dealers, registered with the Commission as an affiliated securities association under the provisions of Section 15A of the Act, may become an affiliate of the Corporation as hereinafter provided in this Article.

Application for Admission as Affiliate

Sec. 2. Application for admission as an affiliate shall be made to the Board of Governors in writing, in such form as the Board of Governors may prescribe, and shall contain a certified copy of the application to the Commission for registration as an affiliated securities association, a certified copy of the order of the Commission granting such registration, and such other reasonable information as the Board of Governors may require.

Agreement of Affiliate

Sec. 3. No applicant may become an affiliate of the Corporation unless it agrees:

(a) That it will classify its members, for purposes of levying dues and assessments, on the same basis as that applicable to members of the Corporation and that the amount of dues or assessments payable by each of its members for any given period, based on such classification, shall not be lower than that payable by a member of the Corporation in the same class for the comparable period; provided, however, that if by reason of the special type of business conducted by members of an applicant, the foregoing agreement is impracticable of application to such applicant, such applicant shall agree that it will fix and levy dues or assessments payable by its members on some other basis to be agreed upon by the applicant and the Board of Governors of the Corporation, which shall be fair and equitable in view of the dues and assessments payable by members of the Corporation;
(b) That it will pay the Corporation annually, in the form of dues or otherwise, for services to be rendered by the Corporation to the applicant, the amount to be agreed upon by the applicant and the Board of Governors of the Corporation annually in advance, and that should the applicant and the Corporation be unable to reach an agreement as to an appropriate amount, the applicant will consent to the submission of the controversy to the Commission for arbitration, and that if submitted, it will abide by the Commission's decision thereon;
(c) That, after affiliation, it will at all times keep its charter, by laws, rules of fair practice and code of procedure so integrated with the corres ponding Charter, By-Laws, Rules of Fair Practice and Code of Procedure of the Corporation as not to conflict in any way therewith; and
(d) That the Board of Governors, in accordance with the provisions of Section 6 of this Article, may at any time suspend or cancel its affiliation with the Corporation.

Conditions of Affiliation

Sec. 4. No applicant may become an affiliate of the Corporation unless it appears to the Board of Governors:

(a) That such applicant is so organized and is of such a character as to comply with and carry out its purposes, and those of the Corporation and of the Act; and
(b) That the charter, by-laws, rules of fair practice and code of procedure of the applicant are so integrated with the corresponding Charter, By- Laws, Rules of Fair Practice and Code of Procedure of the Corporation as not to conflict in any way therewith.

Approval of Admission as an Affiliate

Sec. 5. If it appears to the Board of Governors that the foregoing requirements of this Article are met by the applicant, it shall approve such applicant's admission as an affiliate; otherwise, after appropriate notice and opportunity for hearing, it shall disapprove such applicant in writing and shall set forth therein the specific grounds upon which such disapproval is based.

Suspension or Cancellation of Affiliation

Sec. 6. The Board of Governors may at any time suspend or cancel the affiliation of an affiliate with the Corporation if the Board of Governors finds that the affiliate has ceased to be of such a character as to be able to or has failed to carry out its purposes or the purposes of the Act, or has failed to carry out any of the conditions of affiliation. In any proceeding, however, under this Section to determine whether the affiliation of an affiliate should be suspended or canceled, specific charges shall be brought; such affiliate shall be notified of, and be given an opportunity to defend against, such charges; a record shall be kept; and any determination that the affiliation of an affiliate shall be suspended or canceled shall be in writing and shall set forth therein the specific grounds upon which such determination is based. Such suspension or expulsion shall take effect upon the 60th day after the filing with the Commission of notice thereof and a copy of the record of the proceedings before the Board of Governors, unless within thirty days after such filing such suspension or cancellation is disapproved by the Commission.

Exclusion of Territory Covered by Affiliated Association

Sec. 7. The Board of Governors shall, if it deems such action to be in the interest of efficient and economical administration and desirable in carrying out the purposes of the Act, recommend appropriate changes in the By-Laws to exclude the territory covered by an affiliate association from the geographical area covered by the Corporation.

ARTICLE VI

DUES, ASSESSMENTS AND OTHER CHARGES

Power of Board to Fix and Levy Assessments

Sec. 1. The Board of Governors shall prepare an estimate of the funds necessary to defray reasonable expenses of administration in carrying on the work of the Corporation each fiscal year, and on the basis of such estimate, shall fix and levy the amount of admission fees, dues, assessments and other charges to be paid by members of the Corporation and issuers and any other persons using any facility or system which the Corporation operates or controls. Fees, dues, assessments and other charges shall be called and payable as determined by the Board of Governors from time to time, provided, however, that such admission fees, dues, assessments and other charges shall be equitably allocated among members and issuers and other persons using any facility or system which the Corporation operates or controls. The Board of Governors may from time to time make such changes in such fees, dues, assessments and other charges as it deems necessary or appropriate to assure equitable allocation of dues among members. Neither the adoption nor any change in such fees, dues, assessments and other charges need be submitted to the membership for approval and such fees, dues, assessments and other charges as adopted or amended shall become effective at such time as the Board of Governors may prescribe. In the event of termination of membership or the extension of any membership to a successor organization during any fiscal year for which an assessment has been levied and become payable, the Board of Governors may make such adjustment in the fees, dues, assessments or other charges payable by any such member or successor organization or organizations during such fiscal years as it deems fair and appropriate in the circumstances.

Reports of Members

Sec. 2. Each member, issuer or other person shall promptly furnish all information or reports requested by the Corporation in connection with the determination of the amount of admission fees, dues, assessments or other charges.

Suspension or Cancellation of Membership for Non-Payment of Dues

Sec. 3. The Corporation, after fifteen (15) days notice in writing, may suspend or cancel the membership of any member in arrears in the payment of any fees, dues, assessments or other charges or for failure to furnish any information or reports requested pursuant to Section 2 of this Article.

Reinstatement of Membership

Sec. 4. Any membership suspended or canceled under this Article may be reinstated by the Corporation upon such terms and conditions as it shall deem just; provided, however, that any applicant for reinstatement shall possess the qualifications required for membership in the Corporation.

ARTICLE VII

BOARD OF GOVERNORS

Powers and Authority of Board of Governors

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) make such regulations, issue such orders, resolutions, inter pretations, including interpretations of the Rules of Fair Practice, and directions, and make such decisions as it deems necessary or appropriate;
(3) 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 tha. membership for approval and the code and any amendments thereto shall become effective as the Board of Governors may prescribe;
(4) 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) require all over-the-counter transactions in securities between members to be cleared and settled through the facilities of a clearing agency registered with the Commission pursuant to the Act, which clears and settles such over-the-counter transactions in securities;
(6) organize and operate automated systems to provide quali fied subscribers with securities information and automated services. The systems may be organized and operated by a division or subsidiary company of the Corpora tion 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 of such automated systems, establish reasonable qualifi cations 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) 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) In the event of the refusal, failure, neglect or inability of any member of the Board of Governors to discharge his duties, or for any cause affecting the best interests of the Corporation the sufficiency of which the Board of Governors shall be the sole judge, the Board shall have the power, by the affirmative vote of two-thirds of the Governors then in office, to remove such member and declare his position vacant and that it shall be filled in accordance with the provisions of Section 6 of this Article.

Authority to Suspend for Failure to Submit Required Information

Sec. 2. (a) The Board of Governors shall have authority, upon notice and opportunity for a hearing, to cancel or suspend the membership of any member or suspend the association of any person associated with a member for failure to file, or to submit on request, any report, document or other information required to be filed with or requested by the Corporation.

(b) The Board of Governors is authorized to delegate the authority hereinabove granted to the President of the Corporation; provided, however, that the Executive Committee of the Board of Governors shall be notified in writing of any such contemplated action by the President.

Composition of Board

Sec. 3. (a) The management and administration of the affairs of the Corporation shall be vested in a Board of Governors composed of thirty-one members, twenty-one to be elected by the members of the various districts in accordance with the provisions of subsection (b)(l) through (5) hereof, nine to be elected by the Board of Governors in accordance with the provisions of subsections (b)(6),(7) and (8) hereof, and 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.

(b) The several districts shall be presented on the Board of Governors. The elected members of the Board of Governors shall be chosen as follows:
(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;
(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 represen tation of all districts.

Term of Office of Governors

Sec. 4. Each elected member of the Board of Governors, including the Governors-at-Large, except as otherwise herein provided, shall hold office for a term of three years, and until his successor is elected and qualified, or until his death, resignation or rernovaL 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. 5. The office of a retiring member of the Board of Governors elected under subsections (1) through (5) of Section 3(b) of this Article shall be filled by the election of a member from the same district as that of the retiring member. The office of a retiring Governor-at-Large shall be filled by election by the Board of Governors as provided in subsections (6), (7) and/or (8) of Section 3(b) of this Article, as the case may be.

Election of Board Members

Sec. 6. The elected members of the Board of Governors 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 subsections (1) through (5) of Section 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 Governors 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 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."

Nomination of Additional Candidates

(b) An additional candidate or candidates may be nominated for the office of any member elected under subsections (1) through (5) of Section 3(b) of this Article, and whose term is to expire, if written notice of the nomination, signed by at least ten percent of the members of the Corporation eligible to vote in the district, is filed with the District Committee within thirty (30) days from the date of the notice of the action taken by the Nominating Committee. If no addi tional candidate or candidates are nominated within such thirty-day period, the candidate or candidates nominated by the Nominating Committee shall be con sidered duly elected, and the District Committee shall certify the election to the Board of Governors.

Contested Elections

(c) If any additional candidate or candidates are nominated, as pro vided in subsection (b) of this Section, the District Committee shall forthwith cause the names of the regular candidate and of all other duly nominated candidates for each office to be placed upon a ballot, which shall be sent to all members of the Corporation eligible to vote in the district. Each member of the Corporation having its principal place of business in the district shall be entitled to one vote, and each member having one or more registered branch offices in the district shall be entitled to vote as provided in Section 8 of Article III. The District Committee shall fix a date before which ballots must be returned to be counted. All ballots shall be opened and counted by such officer or employee of the Corporation as the Chairman of the District Committee may designate and in the presence of a repre sentative of each of the candidates if such representation is requested in writing by any candidate named on the ballot. The candidate for each office to be filled receiving the largest number of votes cast shall be declared elected to membership on the Board of Governors, and certification thereof shall be made forthwith to the Board of Governors. In the event of a tie, there shall be a run-off election. In all elections held under this subsection voting shall be made by secret ballot, the procedure for which shall be prescribed by the Board of Governors.

Filling of Vacancies on Board

Sec. 7. All vacancies in the Board of Governors other than those caused 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 subsections (b)(l) through (b)(5) of Section 3 of this Article, is for less than twelve months, such vacancy shall be filled by appointment by the District Committee of a represen tative of a member of the Corporation eligible to vote in the same district.
(b) If the unexpired term of a Governor, elected under subsections (b)(l) through (b)(5) of Section 3 of this Article, is for twelve months or more, such vacancy shall be filled by election, which shall be conducted as nearly as prac ticable in accordance with the provisions of Section 6 of this Article.
(c) If the unexpired term is that of a Governor-at-Large, such vacancy shall be filled in accordance with the provisions of subsections (b)(6), (b)(7), and/or (b)(8) of Section 3 of this Article, as the case may be.

Meetings of Board

Sec. 8. Meetings of the Board of Governors shall be held at such times and places, upon such notice, and in accordance with such procedure as the Board of Governors in its discretion may determine. A quorum of the Board of Governors shall consist of a majority of the members, and any action taken by a majority vote at any meeting at which a quorum is present, except as otherwise provided in these By-Laws, shall constitute the action of the Board. Meetings of the Board of Governors may be held by mail, telephone or telegraph, in which case any action taken by a majority vote of the Board of Governors shall constitute the action of the Board. Any action taken by telephonic vote shall be confirmed in writing at a regular meeting of the Board of Governors.

Offices of Corporation

Sec. 9. The Corporation shall maintain such offices as the Board of Governors may from time to time deem necessary or appropriate.

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 boundaries as it deems necessary or appropriate. Neither the establishment nor any change in the boundaries need be submitted to the membership for approval and the boundaries, as established or changed, shall become effective at such time as the Board of Governors may prescribe.

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 consist of more than twelve members; provided, however, that the Board of Governors by resolution may increase, upon request, any such District Committee to a larger number.

(b) In the event of the refusal, failure, neglect or inability of any member of any District Committee to discharge his duties, or for any cause affecting the best interests of the Corporation the sufficiency of which shall be decided by the District Committee, the District Committee shall have the power by the affirmative vote of two-thirds of the members of the District Committee then in office, to remove such member and declare his position vacant and that it shall be filled in accordance with the provisions of Section 5 of this Article; provided, however, that any member of any District Committee who has had his position declared vacant in the manner provided herein shall have the right to appeal the determination of the District Committee to the Board of Governors within 30 days after the date he is notified of the action of the District Committee. The Board of Governors shall thereafter have the authority to affirm, reverse or modify the determination of the District Committee. Any such action by the Board shall be by the affirmative vote of at least two-thirds of the governors then in office.
(c) The District Committees shall also serve as the District Business Conduct Committees for their respective districts.

Term of Office of District Committee Members

Sec. 3. Each regularly elected member of a District Committee shall hold office for a term of three (3) years, and until his successor is elected and qualified, or until his death, resignation or removal.

Election of District Committee Members

Sec. 4. Members of the District Committees shall be elected 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 each respective District Committee of the expiration of the term of office of any member of that District Committee which shall expire during the next calendar year. The said Chairman shall thereafter, but not later than July 1, advise the Nominating Committee, which shall proceed to nominate a candidate from their District for the office of each member of the District Committee whose term is to expire. Nominating Committees in nominating candidates for the office of member of the District Committee shall endeavor, as nearly as practicable, to secure appropriate and fair representation on the District Committee of the various sections of the District and of all classes and types of members engaged in the investment banking or securities business within such District. No Nominating Committee shall nominate an incumbent member of the District Committee to succeed himself unless it first takes appropriate action by a written ballot of the entire membership within the District to ascertain that such nomination is acceptable to a majority of the members in the District except where the incumbent member of the District Committee is serving pursuant to the provisions of Section 5(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."

Nomination of Additional Candidates

(b) An additional candidate or candidates may be nominated for the office of any member whose term is to expire or for any new office created by the District Committee pursuant to Section 2 of this Article, if written notice of the nomination, signed by at least ten percent of the members of the Corporation eligible to vote in the district, is filed with the District Committee within thirty (30) days from the date of the notice of the action taken by the Nominating Com mittee. If no additional candidate or candidates are nominated within such thirty- day period, then the candidate or candidates nominated by the Nominating Com mittee shall be considered duly elected and the District Committee shall certify the election to the Board of Governors.

Contested Elections

(c) If an additional candidate or candidates are nominated, as provided in paragraph (b) of this Section, the District Committee shall forthwith cause the names of the regular candidate for any contested office and of all other candi dates for such office to be placed upon a ballot, which shall be sent to all members of the Corporation eligible to vote in the district. Each member of the Corporation having its principal place of business in the district shall be entitled to one vote, and each member having one or more registered branch offices in the district shall be entitled to vote as provided in Section 8 of Article III. The District Committee shall fix the date before which ballots must be returned to be counted. All ballots shall be opened by such officer or employee of the Corporation as the Chairman of the District Committee may designate, and in the presence of a representative of each of the candidates if such representation is requested in writing by any candi date named in the ballot. The candidate for each office to be filled receiving the largest number of votes cast shall be declared elected to membership on the Dis trict Committee, and certification thereof shall be made forthwith to the Board of Governors. In the event of a tie, there shall be a run-off election. In all elections held under this Section, voting shall be by secret mail ballot, the procedure for which shall be prescribed by the Board of Governors.

Filling of Vacancies on District Committees

Sec. 5. All vacancies on any District Committee other than those caused by the expiration of a member's term of office, shall be filled as follows:

(a) If the unexpired term of the member causing the vacancy is for less than twelve months, such vacancy shall be filled by appointment by the remaining members of the District Committee of some member of the Corporation having a place of business in the same district.
(b) If the unexpired term of the member causing the vacancy 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 4 of this Article.

Meetings of District Committees

Sec. 6. Meetings of each District Committee shall be held at such times and places, upon such notice, and in accordance with such procedure as each District Committee in its discretion may determine. A quorum of a District Committee shall consist of a majority of its members, and any action taken by a majority at any meeting at which a quorum is present, except as otherwise provided in the By-Laws, shall constitute the action of the Committee. Action by a District Committee may be taken by mail, telephonic and telegraphic vote, in which case any action taken by a majority of the Committee shall constitute the action of the Committee. Any action taken by telephonic vote shall be confirmed in writing at a regular meeting of the District Committee.

Election of Chairmen and Other District Officers

Sec. 7. Following the annual election of members of the District Committees pursuant to Section 4 of this Article, each District Committee shall elect from its members a Chairman and such other officers as it deems necessary for the proper performance of its duties under these By-Laws, and shall prescribe their powers and duties.

Advisory Council

Sec. 8. (a) The Chairmen of the District Committees, elected pursuant to Section 7 of this Article, shall constitute an Advisory Council to the Board of Governors.

(b) Such Advisory Council shall be advised of and entitled to attend such meetings of the Board of Governors as the Board may designate and the Board shall designate at least one such meeting annually. The Advisory Council shall not be entitled to vote at meetings of the Board of Governors.

Expenses of District Committees

Sec. 9. Funds to meet the regular expenses of each District Committee, elected pursuant to Section 4 of this Article, shall be provided by the Board of Governors out of funds collected by it under the provisions of Article VI hereof, and all such expenses shall be subject to the approval of the Board of Governors.

District Committees Agencies of Corporation

Sec. 10. The District Committees shall act as the agencies of the Corporation for the administration of its affairs in their respective districts and as such shall have such powers and duties as are provided in the By-Laws or from time to time delegated by the Board of Governors.

Certain Functions of District Committees

Sec. 11. The District Committees shall endeavor, in such manner as they deem appropriate, to educate members and other brokers and dealers in their respective districts as to the objects, purposes and work of the Corporation in order to foster their interest and cooperation. District Committees shall consider the practical operation of all provisions of the rules of the Corporation and shall report to the Secretary any which the District Committees believe do not work satisfactorily in their respective 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 anQ" shall, insofar as practicable, include at least one former member of the Board of Governors.

(b) In the event of the refusal, failure, neglect or inability of any member of any Nominatng Committee to discharge his duties, or for any cause affecting the best interest of the Corporation, the sufficiency of which shall be decided by the Nominating Committee, the Nominating Committee shall have the power, by the affirmative vote of three-fifths of the members of the Nominating Committee then in office, to remove such member and declare his position vacant and that it shall be filled in accordance with the provisions of Section 3 of this Article; provided, however, that any member of any Nominating Committee who has had his position declared vacant in the manner provided herein shall have the right to submit a written appeal in respect to the determination of the Nominating Committee to the Board of Governors within thirty (30) days after the date he is notified in writing of the action of the Nominating Committee. The Board of Governors shall thereafter have the authority to affirm, reverse or modify the determination of the Nominating Committee. A vote of two-thirds of the Governors then in office shall be required to reverse or modify the action of the Nominating Committee.

Term of Office of Nominating Committee Members

Sec. 2. Each regularly elected member of a Nominating Committee shall hold office for a term of one (1) calendar year, and until his successor is elected and qualified, or until his death, resignation or removal.

Election of Nominating Committees

Sec. 3.Members of the Nominating Committee shall be elected as follows:

Procedures for Nominations by Nominating Committees

(a) Before June 1 of each year the Secretary of the Corporation shall notify in writing the Chairmen of the respective District Committees as to those members of the District Nominating Committee who were elected for the present year and as to the offices of that Committee that are to be filled by the next election. The said Chairman shall thereupon notify the Nominating Committee elected for such District and the Nominating Committee shall proceed to nominate a candidate from such District for the offices of that Committee which are to be filled by the next election. The Nominating Committee in nominating candidates for the office of member of the Nominating Committee shall endeavor, as nearly as practicable, to secure appropriate and fair representation on the Nominating Committee of the various sections of the District and of all classes and types of mem bers engaged in the investment banking or securities business within such District and shall assure that the composition of the Nominating Committee meets the standards contained in Section l(a) of this Article. No Nominating Committee shall nominate more than two incumbent members of the Nominating Committee to succeed themselves. No member of any Nominating Committee may serve more than two consecutive terms. Each candidate nominated by the Nominating Com mittee 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."

Nomination of Additional Candidates

(b) Additional candidates may be nominated for the office of any member whose term is to expire or for any new office created by the Board of Governors pursuant to Section l(a) of this Article, provided that election of such candidates would be consistent with the requirements of Section l(a) of this Article, if written notice of the nomination, signed by at least ten percent of the members of the Corporation eligible to vote in the district, is filed with the District Com mittee within thirty (30) days from the date of the notice to the members of the action taken by the Nominating Committee. If no additional candidate or candi dates are nominated within such thirty-day period, then the candidate or candidates nominated by the Nominating Committee shall be considered duly elected and the District Committee shall certify the election to the Board of Governors.

Contested Elections

(c) If additional candidates are nominated, as provided in paragraph (b) of this section, the District Committee shall forthwith cause the names of the regular candidate and all other candidates for any contested office to be placed upon a ballot, which shall be sent to all members of the Corporation eligible to vote in the District. Each member of the Corporation having its principal place of business in the District shall be entitled to one vote, and each member having one or more registered branch offices in the District shall be entitled to vote as pro vided in Section 8 of Article III. The District Committee shall fix the date before which ballots must be returned to be counted. All ballots shall be opened by such officer or employee of the Corporation as the Chairman of the District Committee may designate, and in the presence of a representative of each of the candidates, if such representation is requested in writing by any candidate named in the ballot. The candidate for each office to be filled receiving the largest number of votes cast shall be declared elected to membership on the Nominating Committee and certification thereof shall be made forthwith to the Board of Governors. In the event of a tie, there shall be a run-off election. In all elections held under this Section, voting shall be by secret mail ballot, the procedure for which shall be prescribed by the Board of Governors.

Filling of Vacancies for Nominating Committees

Sec. 4. All vacancies in any Nominating Committee other than those caused by the expiration of a member's term of office shall be filled as follows:

(a) If the unexpired term of the member causing the vacancy is for less than six months, such vacancy shall be filled by appointment by the remaining members of the Nominating Committee of a representative of a member of the Corporation eligible to vote in the same District.
(b) If the unexpired term of the member causing the vacancy is for six months or more, such vacancy shall be filled by election, which shall be con ducted as nearly as practicable in accordance with the provisions of Section 3 of this Article.

Meetings of Nominating Committees

Sec. 5. Meetings of each Nominating Committee shall be held at such times and places, upon such notice, and in accordance with such procedure as each Nominating Committee in its discretion may determine. A quorum of a Nominating Committee shall consist of a majority of its members, and any action taken by a majority of the entire Committee at any meeting, except as otherwise provided in the By-Laws, shall constitute the action of the Committee. Action by a Nominating Committee may be taken by mail, telephonic or telegraphic vote, in which case any action taken by a majority of the Committee shall constitute the action of the Committee. Any action taken by telephonic vote shall be confirmed in writing at a regular meeting of the Nominating Committee.

Election of Chairman and Other Nominating Committee Officers

Sec. 6. Following the annual election of members of the Nominating Committees pursuant to Section 3 of this Article, each Nominating Committee shall elect from its members a Chairman and such other officers as it deems necessary for the proper performance of its duties under these By-Laws.

ARTICLE X

OFFICERS AND EMPLOYEES

Election of Officers of the Board

Sec. 1. As soon as practicable, following the annual election of members to the Board of Governors, the Board of Governors shall elect from its members a Chairman, one or more Vice Chairmen, and such other officers as it shall deem necessary or advisable, to serve until the next annual election or until their successors are chosen and qualify. The officers so elected shall have such powers and duties as may be determined from time to time by the Board of Governors. The Board of Governors, by affirmative vote of a majority of its members, may remove any such officer at any time.

Officers of the Corporation

Sec. 2. The Board of Governors shall select a chief executive officer, to be designated President of the Corporation, who shall be responsible for the management and administration of its affairs and shall be the official representative of the Corporation in all public matters and shall be ex officio a member of any committee authorized by the Board of Governors. The Board may provide for other executive or administrative officers as it shall deem necessary or advisable, including, but not limited to, Executive Vice President, Senior Vice President, Vice President, General Counsel, Secretary and Treasurer of the Corporation. All such officers shall have such titles, such powers and duties and shall be entitled to such compensation as shall be determined from time to time by the Board of Governors. The terms of office of such officers shall be at the pleasure of the Board of Governors, which by affirmative vote of a majority of the members, may remove any such officer at any time.

Absence of President

Sec. 3. In the case of the absence or inabiliy to act of the President of the Corporation, or in case of a vacancy in such office, the Board of Governors may appoint its Chairman or such other person as it may designate to act as such officer pro tern, who shall assume all the functions and discharge all the duties of the President.

Employment of Counsel

Sec. 4. The Board of Governors may retain or authorize the employment of counsel, with such powers, titles, duties and authority as it shall deem necessary or advisable.

Administrative Staff

Sec. 5. The Board of Governors may employ or authorize the employment and prescribe the powers and duties of such an administrative staff as it deems necessary or advisable. The employment and compensation of such administrative staff of the Corporation shall be at the pleasure of the Board of Governors.

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, shall be entitled to receive any compensation 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 reimbursement for reasonable expenses incurred 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 as it deems necessary or desirable, and it shall fix their powers, duties and terms of office.

District Standing Committees

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 appointed pursuant to Sections 1 or 2 of this Article 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.

Executive Committee

Sec. 4. By resolution passed not less than annually by a majority of the entire Board of Governors, there may be created an Executive Committee, consisting of five or more members of the Board which shall exercise such of the powers of the Board in the management of the Corporation between meetings of the Board of Governors as may be delegated to it from time to time by the Board. The Executive Committee created hereunder shall keep minutes of its meetings and shall report its proceedings to the Board of Governors at the next meeting thereof.

ARTICLE XII

RULES OF FAIR PRACTICE

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 or 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 or 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.

ARTICLE XIII

DISCIPLINARY PROCEEDINGS

Sec. 1. The Board of Governors shall have authority to establish procedures relating to disciplinary proceedings involving members and their associated persons, and neither the adoption nor any amendment to such procedures need be submitted to the membership for approval and such procedures and any amendments thereto shall become effective as the Board of Governors may prescribe.

Sec. 2. Except as otherwise permitted under these By-Laws or the Act, in any disciplinary proceeding before the Corporation, any member or person associated with a member shall be given the opportunity to have a hearing at which he shall be entitled to be heard in person and/or by counsel. Such persons may present any relevant material. In any such proceeding against a member or against a person associated with a member to determine whether the member and/or the person associated with a member shall be disciplined:

(a) specific charges shall be brought;
(b) such member or person associated with a member shall be noti fied of and be given an opportunity to defend against such charges;
(c) a record shall be kept; and
(d) any determination shall include a statement setting forth:
(1) any act or practice, in which such member or person associated with a member may be found to have engaged or which such member or person associated with a member may be found to have omitted;
(2) the rule, regulation or statutory provision of which any such act or practice, or omission to act, is deemed to be in violation;
(3) the basis upon which any findings are made; and
(4) the penalty imposed.

ARTICLE XIV

POWER 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 revocation of registration, if any, suspension or barring a person associated with a member from being associated with all members, limitation of activities, functions and operations of a person associated with a member, or any other fitting sanction, for:

(a) breach by a member or a person associated with a member of any covenant with the Corporation or its members;
(b) violation by a member or a person associated with a member of any of the terms, conditions, covenants, and provisions of the rules of the Corpora tion, the federal securities laws, including the rules and regulations adopted there under, and the rules of the Municipal Securities Rulemaking Board;
(c) failure by a member or person associated with a member to submit a dispute for arbitration under the Code of Arbitration Procedure ("Code") as required by the Code, or to fail to appear or to produce any document in their possession or control as directed pursuant to provisions of the Code, or to fail to honor an award of arbitrators properly rendered pursuant to the Code where a timely motion has not been made to vacate or modify such award pursuant to applicable law;
(d) refusal by a member or person associated with a member to abide by an official ruling of the Board of Governors or Uniform Practice Committee acting within its appropriate authority, 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 or any District Business Conduct Com mittee.

ARTICLE XV

UNIFORM PRACTICE CODE

Authority to Adopt Code

Sec. 1. The Board of Governors is hereby authorized to adopt a Uniform Practice Code and amendments, interpretations and explanations thereto, designed to make uniform, where practicable, custom, practice, usage, and trading technique in the investment banking and securities business with respect to such matters as trade terms, deliveries, payments, dividends, rights, interest, reclamations, exchange of confirmations, stamp taxes, claims, assignments, powers of substitution, computation of interest and basis prices, due-bills, transfer fees, "when, as and if issued" trading, "when, as and if distributed" trading, marking to the market and close-out procedure, all to the end that the transaction of day-to-day business by members may be simplified and facilitated, that business disputes and misunderstandings, which arise from uncertainty and lack of uniformity in such matters, may be eliminated, and that the mechanisms of a free and open market may be improved and impediments thereto removed. Neither the adoption nor any change in the Uniform Practice Code need be submitted to the membership for approval and the Code as adopted or amended shall become effective at such time as the Board of Governors may prescribe.

Administration of Code

Sec. 2. The administration of any Uniform Practice Code, or any amendment thereto, adopted by the Board of Governors pursuant to Section 1 of this Article, shall be vested in the Board of Governors, and the Board is hereby granted such powers as are reasonably necessary to achieve its effective operation. In the exercise of such powers, the Board may issue explanations and interpretations and make binding rulings with respect to the applicability of the provisions of this Code to situations in which there is no substantial disagreement as to the facts involved. The Board may delegate to appropriate committees such of its powers, hereunder as it deems necessary and appropriate to achieve effective administration and operation of the Code.

Transactions Subject to Code

Sec. 3. All over-the-counter transactions in securities by members, except transactions in securities which are exempted under Section 3(a)(12) of the Act, or are municipal securities as defined in Section 3(a)(29) of the Act, are subject to the provisions of the Uniform Practice Code and to the provisions of Section 2 of this Article unless exempted therefrom by the terms of the Code.

ARTICLE XVI

LIMITATION OF POWERS

Prohibitions

Sec. 1. Under no circumstances shall the Board of Governors or any officer, employee or member of the Corporation have power to:

(a) make any donation or contribution from the funds of the Corporation or to commit the Corporation for the payment of any donations or contributions for political or charitable purposes; or
(b) use the name or facilities of the Corporation in aid of any political party or candidate for any public office.

Use of Name of Corporation by Members

Sec. 2. No member shall use the name of the Corporation except to the extent that may be authorized by the Board of Governors.

Unauthorized Expenditures

Sec. 3. No officer, employee, member of the Board of Governors or of any District or other Committee, shall have any power to incur or contract any liability on behalf of the Corporation not authorized by the Board of Governors. The Board may delegate to the President of the Corporation, or his delegate, such authority as it deems necessary to contract on behalf of the Corporation or to satisfy unanticipated liabilities during the period between Board meetings.

Conflicts of Interest

Sec. 4. No member of the Board of Governors or of any committee of the-Corporation shall directly or indirectly participate in any adjudication of the interests of any party which would at the same time substantially affect his interest or the interests of any person in whom he is directly or indirectly interested. In any such case, the member shall disqualify himself or shall be disqualified by the Chairman of the Board or Committee.

Municipal Securities

Sec. 5 The provisions of the By-Laws conferring rulemaking authority upon the Board of Governors shall not be applicable to the municipal securities activities of members or persons associated with members to the extent that the application of such authority would be inconsistent with Section 15B of the Act.

ARTICLE XVII

PROCEDURE FOR ADOPTING AMENDMENTS TO BY-LAWS

Any member of the Board of Governors by resolution, any District Committee by resolution, or any twenty-five members of the Corporation by petition signed by such members, may propose amendments to these By-Laws. Every proposed amendment shall be presented in writing to the Board of Governors and a record shall be kept thereof. The Board of Governors may adopt any proposed amendment to these By-Laws by affirmative vote of a majority of the members of the Board of Governors then in office. The Board of Governors, upon adoption of any such amendment to these By-Laws, except as otherwise provided in these By-Laws shall forthwith cause a copy to be sent to and voted upon by each member of the Corporation. If such amendment to these By-Laws is approved by a majority of the members voting within thirty (30) days after the date of submission to the membership, and is approved by the Commission as provided in the Act, it shall become effective as of such date as the Board of Governors may prescribe.

ARTICLE XVIII

CORPORATE SEAL

The corporate seal shall have inscribed thereon the name of the Corporation, the year of its organization and the words "Corporate Seal, Delaware." Said seal may be used by causing it or a facsimile thereof to be imposed or affixed or reproduced or otherwise.

ARTICLE XIX

CHECKS

All checks or demands for money and notes of the Corporation shall be signed by such officer or officers or such other person or persons as the Board of Governors may from time to time designate.

ARTICLE XX

ANNUAL FINANCIAL STATEMENT

As soon as practicable from the end of each fiscal year, the Board of* Governors shall send to each member of the Corporation a reasonably itemized statement of receipts and expenditures of the Corporation for such preceding fiscal year.

TABLE OF CONTENTS

CODE OF PROCEDURE

   

Page

ARTICLE I

APPLICATION AND PURPOSE OF CODE

Section

   

1.

Purpose

1

2.

Definitions

1

3.

Interpretation

2

4.

Communications Relating to Grievances

2

ARTICLE II

DISCIPLINARY ACTIONS BY DISTRICT BUSINESS CONDUCT COMMITTEES, THE MARKET SURVEILLANCE COMMITTEE AND OTHERS

Section

   

1.

Issuance of Complaints by Committees

2

2.

Form, Content, Notice and Withdrawal of Complaints

2

3.

Answers to Complaints

2

4.

Request for Hearing

3

5.

Venue

3

6.

Hearing Panels

4

7.

Evidence and Procedure in Committee Hearings

4

8.

Decision of the Committee

5

9.

Consolidation of Complaints

5

10.

Acceptance, Waiver and Consent and Summary Complaint Procedures

6

11.

Settlement Procedure

8

12.

Complaints Directed by Board of Governors

9

13.

Complaint Docket

9

ARTICLE III

REVIEW OF DISCIPLINARY ACTIONS AND HEARINGS BEFORE THE BOARD OF GOVERNORS

Section

   

1.

Review by the Board of Governors

9

2.

Hearings Before the Board

10

3.

Evidence and Procedure in Board Hearings

10

4.

Powers of Board on Review

11

5.

Decision of Board

11

6.

Notification of Decision

11

7.

Application to SEC for Review

11

ARTICLE IV

IMPOSITION OF SANCTIONS AND COSTS

Section

   

1.

Sanctions

11

2.

Costs of Proceedings

12

ARTICLE V

LIMITATION PROCEDURES UNDER ARTICLE III, SECTION 38 OF THE RULES OF FAIR PRACTICE

Section

   

1.

Board of Governors' Surveillance Committee

12

2.

District Surveillance Committee

12

3.

Written Notification

12

4.

Hearing

12

5.

Decision and Effective Date

12

6.

Review by Board

13

7.

Composition of Board of Governors' Hearing Panel

13

8.

Decision

13

9.

Application to Commission for Review

13

10.

Successive Notices

14

11.

Complaint by the Committee

14

ARTICLE VI

REVOCATION PROCEEDINGS

Section

   

1.

Purpose

14

2.

Commencement of Revocation Proceedings

14

3.

Hearings

14

4.

Decisions

15

5.

Other Action Not Foreclosed

15

ARTICLE VII

ELIGIBILITY PROCEEDINGS

Section

   

1.

Purpose

15

2.

Eligibility Proceedings

15

ARTICLE VIII

SUMMARY SUSPENSION

Section

   

1.

Summary Action

16

2.

Written Notification

16

3.

Request for Hearing

16

4.

Hearing

16

5.

Decision

17

6.

Review by Board

17

7.

Findings of Board on Review

17

8.

Application to Commission for Review

17

9.

Application to Commission for Stay of Summary Action

17

10.

Other Action Not Foreclosed

18

ARTICLE IX

PROCEDURES ON GRIEVANCES CONCERNING THE NASDAQ SYSTEM

Section

   

1.

Purpose

18

2.

Form of Application

18

3.

Request for Hearing

18

4.

Consideration of Applications

18

5.

Decision

18

6.

Review by Board

18

7.

Findings of Board on Review

19

8.

Application to Commission for Review

19

ARTICLE X

MISCELLANEOUS

Section

   

1.

Grounds of Disqualification to Participate in Proceedings

19

2.

Reports and Examination of Books and Records

19

3.

Rulings on Procedural Matters

19

4.

Service of Complaints, Decisions and Other Notices

19

5.

Amendments to Code of Procedure

20

CODE OF PROCEDURE *

ARTICLE I

APPLICATION AND PURPOSE OF CODE

Purpose

Sec. 1. (a) This Code of Procedure shall apply to proceedings relating to disciplinary actions involving members and associated persons; to proceedings relating to eligibility requirements; to proceedings relating to limitation or denial of access to services; and to any other proceeding when the Corporation deems it appropriate.

(b) Unless otherwise specified, persons associated with a member ("associated persons") shall have the same rights as members and shall be subject to the same duties and obligations under the Code of Procedure.

Definitions

Sec. 2. (a) Unless otherwise provided, terms used in the Code of Procedure shall have the meaning as defined in Article I of the By-Laws and Article n, Section 1 of the Rules of Fair Practice.

(b) The term "Committee" used in the Code of Procedure shall mean either a District Business Conduct Committee or the Market Surveillance Committee.
(c) The "Market Surveillance Committee" is a standing committee of the Board of Governors which is responsible for handling alleged violations of applicable rules of the Corporation concerning trading of securities, including applicable rules involving quotations, transaction execution and reporting, trading practices and insider trading as well as other such matters delegated to it by the Board of Governors.
(d) The "National Business Conduct Committee" is a standing committee of the Board of Governors which is authorized to exercise powers dele gated to it by the Board in connection with disciplinary and other matters.

Interpretation

Sec. 3. The provisions of the Code of Procedure shall not be construed to limit the By-Laws or Rules of the Corporation.

Communications Relating to Grievances

Sec. 4. Communications received by the Corporation from any person regarding any grievance against a member or person associated with a member need not be considered privileged communications and may be dealt with by the Corporation as it considers to be fair and proper under the circumstances.

ARTICLE II

DISCIPLINARY ACTIONS BY DISTRICT BUSINESS CONDUCT COMMITTEES, THE MARKET SURVEILLANCE COMMITTEE AND OTHERS

Issuance of Complaints by Committees

Sec. 1. If a Committee believes that the nature and extent of the probable violations require disciplinary action, the Committee may issue a complaint as set forth in Section 2 of this Article. The issuance of any complaint by any other person shall also be in accordance with Section 2 of this Article.

Form, Content, Notice and Withdrawal of Complaints

Sec. 2. (a) All complaints shall be made in writing, on the form to be supplied by the Board of Governors, and shall specify in reasonable detail the nature of the charges and the rule, regulation or statutory provision allegedly violated. The party making the complaint shall be termed the complainant and the party against whom the complaint is made shall be termed the respondent. If the complaint consists of several allegations, each such allegation shall be stated separately. All complaints must be signed by the complainant and should be directed to any Committee. A copy of the complaint shall be sent to all respondents and to the member of the Corporation with whom any respondent is presently an associated person.

(b) After prior approval by the National Business Conduct Committee, a complaint may be withdrawn by a Committee at any time prior to the issuance of a written decision. Withdrawal of a complaint shall not preclude a Committee from filing a complaint at a future date involving the same allegations.

Answers to Complaints

Sec. 3. (a) All answers to complaints shall be in writing on the form to be supplied by the Board of Governors, and shall be submitted to the Committee within 20 calendar days from the date of the complaint sent to the respondent. The Committee may extend the 20 calendar day period for good cause. The Committee, upon the receipt of the answer of the respondent, shall forthwith, on the form to be supplied by the Board of Governors, send notice in writing of the receipt of such answer, together with a copy of such answer, to the complainant, if other than a Committee.

(b) If a complaint is amended, the time period for filing an answer or amended answer shall be extended for 10 calendar days from the date of the amended complaint. If an answer has already been filed, a respondent shall have 10 calendar days from the date of the amended complaint within which to file an amended answer.
(c) If no answer is received by the Committee within the time required, the Committee shall send a second notice, on the form to be supplied by the Board of Governors, to the respondent by certified mail, return receipt re quested, requiring an answer within ten calendar days from the date of the second notice, or within such longer period as the Committee in its discretion may deter mine, stating that failure of the respondent to reply within the period specified may be treated by the Committee as an admission of the allegations of the complaint. If no answer is received by the Committee within the time required by the second notice, the Committee may consider the allegations of the complaint as admitted by the respondent.
(d) In complaints involving multiple respondents, copies of the answers submitted by each respondent shall be mailed promptly by the Corporation to all other respondents.

Request for Hearing

Sec. 4. Upon the filing of an answer and due notice thereof to the complainant, either the complainant, if other than a Committee, or the respondent may request a hearing before the Committee having jurisdiction to hear the complaint. If a request is made, a hearing shall be granted complainant and respondent. In the absence of a request for a hearing, the Committee may order any complaint set down for hearing. A notice stating the date, time and place of the hearing shall be mailed to both complainant and respondent at least 10 calendar days before the hearing, unless extraordinary circumstances require a shorter notice period, or unless the notice period is waived.

Venue

Sec. 5. (a) Normally, complaints before a District Business Conduct Committee shall be considered by the District Business Conduct Committee of the district in which the principal office of the member is located. If the act or omission which is the subject of the complaint occurred entirely or largely in a branch office of a member, the complaint shall be considered by the District Business Conduct Committee of the district in which the branch office is located. Complaints before the Market Surveillance Committee shall be considered at the time and place established by that Committee or its hearing panel established pursuant to Section 6(b), below.

(b) The Committee considering the matter may be changed, if:
(1) the respondents, in writing, consent to having the complaint considered by some other Committee and such action is approved by the Committee having jurisdiction; or
(2) the National Business Conduct Committee determines that the circumstances make it appropriate to transfer the matter to another Committee; or
(3) a respondent has requested, in writing, a change in the Committee considering the matter, specifying the basis for the request, and the National Business Conduct Committee grants the request.
(c) In the event the Committee considering a complaint is changed, the complaint shall be processed to completion by the Committee to which the complaint was transferred. In the event the boundaries of one or more districts should be changed any complaint pending in a district shall be processed to completion by the District Business Conduct Committee for the newly constituted district which would have had jurisdiction had the complaint been filed subsequent to the effective date of the boundary changes.
(d) For the purpose of proceedings under this Code, the principal office of the member shall be the office so designated in the member's application for membership.

Hearing Panels

Sec. 6. (a) The entire District Business Conduct Committee may sit as a hearing panel, or it may appoint a hearing panel of three or more persons, all of whom are associated with members of the Corporation, at least two of whom shall also be members of the District Business Conduct Committee unless otherwise directed by the National Business Conduct Committee.

(b) The entire Market Surveillance Committee may sit as a hearing panel or that committee may appoint a hearing panel consisting of three or more persons, all of whom are persons associated with members of the Corporation or with issuers whose securities are included in an automated quotation system of the Corporation, at least one of whom shall be a member of the Market Surveillance Committee.
(c) The requirements regarding composition of the hearing panel contained in Sections 6 (a) and 6 (b), above, may be waived by mutual consent of respondent and complainant.
(d) If respondents waive a hearing, and the Committee does not order a hearing on its own motion, the panel shall consider the matter on the record, which shall include all evidence submitted by the respondents and the complainant, all of which shall have been previously tendered by each party to the other.
(e) If a hearing panel is appointed, as provided in Sections 6(a) and 6(b) above, the hearing panel shall, after the hearing or upon its consideration of the record, present its recommended findings and sanctions to the full Committee, which shall make the final determination by a majority vote of those present and voting at a duly constituted meeting thereof.

Evidence and Procedure in Committee Hearings

Sec. 7. (a) The Committee staff, or the complainant, if other than a Committee, shall upon request make available to respondents and their counsel any documentary evidence the staff intends to present at the hearing within a reasonable time before the hearing.

(b) Respondents shall submit to the Committee staff or the com plainant, any documentary evidence respondents intend to present at the hearing within a reasonable time before the hearing.
(c) If a hearing is held, both the complainant and the respondent shall be entitled to be heard in person and by counsel. Formal rules of evidence shall not be applicable. Notwithstanding paragraphs (a) or (b), the parties may submit any additional documentary evidence at the hearing as the hearing panel, in its discretion, determines may be relevant and necessary for a complete record. A record of the hearing shall be kept in all cases.

Decision of the Committee

Sec. 8. (a) If the Committee 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, practice 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 therefore.
(b) If the Committee determines that no violation charged in the complaint has occurred, it shall dismiss the complaint in writing.
(c) The decision of the Committee shall become final on the next business day following the expiration of a 45 calendar day period from the date of the decision, unless appealed or called for review under Article III, Section 1 of this Code.
(d) A copy of any written decision shall be sent to all respondents and the complainant named in the complaint and to each member of the Corporation with whom a respondent is presently an associated person.

Consolidation of Complaints

Sec. 9. (a) A Committee may consolidate proceedings involving two or more complaints where common questions of law or fact are involved, the evidence offered with respect to each proceeding may have a bearing on the other, and the consolidation will result in savings of time and expense. The Committee shall send written notice of the proposed consolidation to all respondents, together with copies of the complaints to be consolidated and answers of the respondents, and allow respondents 10 calendar days from the date of notification in which to submit any written objections. If objections are received, a determination shall be made by the Committee whether, in view of such, the consolidation should be effected.

(b) If the complaints sought to be consolidated were issued by more than one Committee, the Committee that proposes to take jurisdiction of the consolidated proceeding shall submit a written proposal for consolidation to the respondents and the National Business Conduct Committee. The proposal shall include copies of the relevant complaints and the answers of respondents. The respondents shall be allowed 10 calendar days from the date of notification in which to submit any written objections to the National Business Conduct Committee. If objections are received, a determination shall be made by the National Business Conduct Committee whether in view of such, the consolidation shall be effected. If the request for consolidation is granted, the Committee given jurisdiction shall send written notice of the consolidation to respondents. Respondents may submit an answer, or amend a previous answer, 10 calendar days from the date of such notice of consolidation.

Acceptance, Waiver and Consent and Summary Complaint Procedures

Sec. 10. A Committee may, prior to issuance of a complaint under Section 1 of this Article, impose disciplinary penalties pursuant to the procedures set forth under this Section 10.

Acceptance, Waiver and Consent of the Respondent

(a) If the Committee has reason to believe a violation has occurred and the member or associated person does not dispute the violation, the Committee may suggest that the member or associated person submit a letter containing an* acceptance of a finding of violations, a waiver of all rights of appeal to the Board of Governors, the Securities and Exchange Commission and the courts or to otherwise challenge or contest the validity of the Order issued if the letter is accepted, and a consent to the imposition of sanctions. The letter shall describe the act or practice engaged in or omitted; the rule, regulation or statutory pro vision violated; and the sanction to be imposed therefor. If the Committee then concludes that the Letter of Acceptance, Waiver and Consent is appropriate and should be accepted, it shall be submitted to the National Business Conduct Com mittee. If the letter is accepted by the National Business Conduct Committee, it shall become final and shall constitute the complaint, answer and decision in the matter. If the letter is rejected by either Committee, any acceptances, waivers and consents contained therein shall not be considered in any further complaint action which may be taken against the member or associated person.

Summary Complaint Procedure

(b)
(1) In any case in which a Committee is of the opinion that the facts are not in dispute, that the acts, practices and conduct involved constitute a violation or violations of a rule, regulation, or statutory provision and that following the complaint procedure contained in Article n, Section 1 of this Code does not appear to be appropriate, the Committee may offer the respondent an opportunity to waive a hearing and accept Summary Complaint Procedure as here inafter set forth.
(2) Summary Complaints shall be in writing on a form to be approved by the Board of Governors and shall specify in reasonable detail the nature of the charges, the rule, regulation, or statutory provision which such act, practice or omission to act is alleged to have been violated and the sanction deemed appropriate in the circumstances; provided, however, the sanction for all violations alleged shall not exceed censure and/or a fine of $2,500 as to each respondent.
(3) An offer by a Committee to follow the Summary Complaint Procedure outlined in paragraphs (1) and (2) above shall include notice to the respondent:
(i) that the respondent may reject the Summary Complaint Procedure, in which case the regular complaint procedure will be followed;
(ii) that unless an acceptance of the offer is received by the Committee within 10 business days after the date of receipt of the complaint by the respondent, and unless this period is extended by the Committee, the offer will be considered as rejected by the respondent and the Committee will follow the regular complaint procedure; and
(iii) that the respondent may accept the offer by executing and returning to the Committee the number of copies of the complaint and other related documents as specified in the form together with a remittance in the amount of any fine proposed to be imposed.
(4) Acceptance by a respondent of an offer as described above shall constitute the respondent's admission of the violations, acceptance of thl' sanction and a waiver of all rights of appeal to the Board of Governors, the Securities and Exchange Commission and the courts or to otherwise challenge or contest the validity of the decision, and the complaint and related documents shall constitute the Committee's decision and the record in the case. Receipt of re spondent's acceptance by the Committee shall conclude the proceedings as of the date the acceptance is received, without further notice to the respondent, under the conditions stated in the offer, subject to paragraphs (5) and (6).
(5) Where there is more than one respondent, and upon the rejection of such an offer by any respondent, the Committee, at its option, may terminate the proceedings as to any or all of the remaining respondents and, in the event of such termination, the Committee with jurisdiction shall file a complaint under Article n, Section 1 of this Code as to those respondents rejecting the offer and such others as are deemed necessary.
(6) The National Business Conduct Committee may institute review proceedings within 45 calendar days after receipt of respondent's acceptance by the Committee and such review shall operate as a stay of any such action. The National Business Conduct Committee may thereafter dismiss one or more charges and/or reduce the sanction or remand the matter to the Committee with instructions to institute complaint procedure under Article n, Section 1 of this Code.
(7) If it becomes necessary for the Committee having jurisdiction to file a complaint against the respondent under Article II of this Code, the respondent shall not be prejudiced in any way by the prior offer of Summary Complaint Procedure and the complaint and acceptance thereof based upon the Summary Complaint Procedure shall be of no effect and be given no consideration in any determination of the issues involved in any such complaint.

Settlement Procedure

Sec. 11. (a) A respondent in a proceeding before a Committee may at any time propose in writing an Offer of Settlement of the complaint to the Committee.

(b) Offers of Settlement must be made in conformity with the provisions of this Section and they should not be made frivolously or propose a sanction inconsistent with the seriousness of the violations to be found.
(c) Every Offer of Settlement shall be in writing and shall contain in reasonable detail:
(1) the act or practice which the member or person associated with a member is alleged to have engaged in or omitted;
(2) the rule, regulation, or statutory provision which such act, practice or omission to act is alleged to have been violated;
(3) a statement that the respondent consents to findings of fact and violations consistent with the statements contained in the Offer required by paragraphs (c)(l) and (c)(2);
(4) a proposed sanction to be imposed; and
(5) a waiver of all rights of appeal to the Board of Governors, the Securities and Exchange Commission and the courts or to otherwise challenge or contest the validity of the Order issued if the Offer of Settlement is accepted.
(d) If an Offer of Settlement is accepted by a Committee, it shall propose an Order of Acceptance of Offer of Settlement. The proposed Order shall make findings of fact, including a statement of the rule, regulation or statutory provision violated, and impose sanctions consistent with the terms of the Offer of Settlement.
(e) Before any such Order of Acceptance of Offer of Settlement shall become effective it must be submitted to and approved by the National Business Conduct Committee, which is hereby delegated authority to accept or to reject an Offer of Settlement. If the National Business Conduct Committee by a majority vote approves the Committee's Order, it shall communicate its conclusion to the Committee which shall thereafter issue such Order.
(f) The Order of Acceptance of Offer of Settlement shall constitute the Committee's decision and shall conclude the proceeding as of the date the Order is issued. If the Order includes a penalty of suspension, the suspension shall become effective on a date to be set by the President of the Association. Any other sanctions imposed shall become effective immediately.
(g) If the Offer of Settlement is rejected by a Committee or by the National Business Conduct Committee, the Offer of Settlement shall be deemed withdrawn.
(h) Where there is more than one respondent in a proceeding and one or more of the respondents submit an Offer of Settlement, the Offer may be accepted or rejected as to any one or all of the respondents submitting Offers. The proeeedings will thereafter be terminated as to those respondents whose Offers of Settlement have been accepted, but their participation may be required at any hearing. The Committee shall thereafter proceed pursuant to the regular disciplinary procedures provided for by this Code as to those respondents which did not submit Offers of Settlement.
(i) If an Offer of Settlement is not accepted and it becomes necessary for the Committee to follow the regular disciplinary procedures against the respondent, the respondent shall not be prejudiced by the prior Offer of Settlement and it shall not be given consideration in the determination of the issues involved in the pending or any other proceeding.

Complaints Directed by Board of Governors

Sec. 12. The Board of Governors shall have 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 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.

Complaint Docket

Sec. 13. Each Committee shall promptly notify the Surveillance Department of the Corporation of all complaints issued, and the Surveillance Department shall record all complaints so reported in the Complaint Docket. Committees shall also promptly notify the Surveillance Department of changes in the status of every complaint filed including respondents' answers, respondents' requests for or waiver of hearings, and the decision of the Committee, which notification shall also be entered in the Complaint Docket.

ARTICLE III

REVIEW OF DISCIPLINARY ACTIONS AND HEARINGS BEFORE THE BOARD OF GOVERNORS

Review by the Board of Governors

Sec. 1. (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 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 Board of Governors for review, or the institution of review by the 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 Board of Governors upon such review as hereinafter provided.

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

Hearings 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 Board of Governors. If a request is made, a hearing shall be granted. In the absence of a request for a hearing, the 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) 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, at least one of whom shall also be a current member of the Board of Governors.
(c) 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 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.
(d) 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.

Evidence and Procedure in Board Hearings

Sec. 3. (a) Upon request, the Corporation staff or the complainant, if other than a Committee, shall make available to respondents and their counsel any documentary evidence which was not part of the record before the Committee, within a reasonable time before the hearing.

(b) Respondents shall also make available to the Corporation staff or the complainant, any documentary evidence, which was not part of the record before the Committee, within a reasonable time before the hearing.
(c) If a hearing is held both the complainant and respondent shall be entitled to be heard in person and by counsel. Formal rules of evidence shall not be applicable. Notwithstanding paragraphs (a) or (b), the parties may submit any additional documentary evidence at the hearing as the hearing panel, in its dis cretion, determines may be relevant and necessary for a complete record. A record of the hearing shall be kept in all cases.

Powers of Board on Review

See. 4. In any proceeding to review any disciplinary action taken or dismissed by a Committee, the 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 Board of Governors may affirm, increase, or reduce any sanction, or impose any other fitting sanction.

Decision of Board

Sec. 5. (a) In any proceeding to review any disciplinary action taken by a Committee or a dismissal by a Committee if the 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 Board of Governors.

Application to SEC for Review

Sec. 7. In any case where either the complainant or the respondent feels aggrieved by any disciplinary action taken by the 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.

ARTICLE IV

IMPOSITION OF SANCTIONS AND COSTS

Sanctions

Sec. 1. In any proceeding relating to disciplinary actions involving members and associated persons, a Committee or the Board of Governors may impose any sanction it deems appropriate as set forth in Article V, Section 1, of the Rules of Fair Practice or in the applicable By-Law or Rule of the Corporation which was the subject of the complaint.

Costs of Proceedings

Sec. 2. In any disciplinary action, the member or associated person shall bear such part of the costs of the proceedings as the Committee or Board of Governors deems fair and appropriate under the circumstances.

ARTICLE V

LIMITATION PROCEDURES UNDER ARTICLE III, SECTION 38 OF THE RULES OF FAIR PRACTICE

Board of Governors' Surveillance Committee

Sec. 1. The Board of Governors shall appoint a standing Committee of the Board to be known as the Board of Governors' Surveillance Committee which is composed of such members as are from time to time determined by the Board.

District Surveillance Committee

Sec. 2. As required to implement the provisions of this rule, each District Committee shall create a District Surveillance Committee composed of two current or former District Business Conduct Committee members; two members of the Board of Governors' Surveillance Committee, and one former member of the Board of Governors.

Written Notification

Sec. 3. If the District Surveillance Committee has reason to believe that any of the conditions specified in subsections (b) or (c) of Section 38 exist, it may exercise the authority conferred by Section 38 by issuing a notice directing the member to limit its business. Such notice shall contain a statement of the specific grounds on which such action is being taken, specify in reasonable detail the nature of the limitations being imposed and inform the member that he has an opportunity to be heard, if such request is made within three business days of receipt of the notice. The District Surveillance Committee shall also provide a similar notice in writing to a member of any revision or modification of restrictions or limitations previously imposed.

Hearing

Sec. 4. If an opportunity to be heard is requested, it shall be provided by the District Surveillance Committee within five business days of the receipt of the notice. A member requesting the opportunity to be heard shall present its reasons why the notice should be withdrawn or modified and shall be entitled to be represented by counsel. A record shall be kept of the proceeding before the District Surveillance Committee.

Decision and Effective Date

Sec. 5. (a) The District Surveillance Committee shall within five business days of a hearing issue a written decision approving or modifying the limitations specified in the notice. The decision shall also provide for an appropriate sanction to be immediately imposed for failure to comply with any limitations imposed.

(b) When an opportunity to be heard is not requested, the limitations contained in the notice shall become effective three days following receipt of the notice without any written decision unless the District Surveillance Committee decides upon a later effective date or unless the matter is reviewed by the Board of Governors, subject to the provisions of subsections (6), (7) and (8) hereof, and they shall remain in effect until such time as they are removed, revised or modified by the District Surveillance Committee.

Review by Board

Sec. 6. The written decision issued pursuant to subsection (5) shall be subject to review by the Board of Governors upon application by the member aggrieved thereby filed within five business days of the date of the decision. The decision, or the notice where no opportunity to be heard was requested before the District Surveillance Committee, shall also be subject to review by the Board of Governors on its own motion within 30 calendar days of the decision or notice. Where two members of the District Surveillance Committee disagree with the determination of the Committee, the matter will automatically be reviewed by the Board of Governors. In the case of an appeal, the member shall be given an opportunity to be heard before a hearing panel of the Board within 10 business days of the written decision. If called for review, the matter shall be heard within 30 days of such action. In any hearing before the Board, a member shall be entitled to be represented by counsel. The institution of review, whether by application or on the initiative of the Board, shall operate as a stay of the action by the District Sur-. veillance Committee unless otherwise ordered by the Board.

Composition of Board of Governors' Hearing Panel

Sec. 7. The Board of Governors' hearing panel shall be composed of two members of the Board of Governors' Surveillance Committee and one current member of the Board.

Decision

Sec. 8. Upon consideration of the record, the Board of Governors shall in writing affirm, modify, reverse or dismiss the decision of the District Surveillance Committee or remand the matter for further proceedings consistent with its instructions. The Board shall set forth specific grounds upon which its determination is based and shall provide for an appropriate sanction to be immediately imposed for failure to comply with any limitations imposed. If a hearing is held, a decision shall issue within five business days of the hearing and the decision shall be the final action of the Board. If no hearing is requested, the matter shall be considered on the record and a decision shall be issued promptly. Any limitation imposed as a result of Board action shall become effective immediately upon issuance of its decision and shall remain in effect until such time as removed or modified by the District Surveillance Committee.

Application to Commission for Review

Sec. 9. In any case where a member feels aggrieved by any action taken or approved by the Board of Governors, such member may make application for review to the Securities and Exchange Commission in accordance with Section 19 of the Securities Exchange Act of 1934, as amended. There shall be no stay of the Board's action upon appeal to the Commission unless the Commission determines otherwise.

Successive Notices

Sec. 10. If it appears at any time to the District Surveillance Committee that, notwithstanding an effective notice or decision under subsections (3), (5) and (8) hereof, the member is still approaching financial or operational difficulty, the District Surveillance Committee may prescribe additional limitations of a member's business in which case all of the procedures specified above shall be followed prior to the implementation thereof.

Complaint by the Committee

Sec. 11. Action by the Corporation under this Article shall not foreclose action by the Corporation under any other provisions of this Code where a violation of the Rules of the Corporation may be involved.

ARTICLE VI

REVOCATION PROCEEDINGS

Purpose

Sec. 1. This Article provides procedures, in addition to those contained for summary suspension pursuant to Article VIII of this Code of Procedure, for the Corporation to cancel or suspend the membership of a member or to bar or suspend a person from being associated with a member pursuant to Article II, Section 3, Article VI, Section 3 or Article VII, Section 2 of the By-Laws. Such actions are hereinafter referred to as "revocation proceedings."

Commencement of Revocation Proceedings

Sec. 2. (a) Should the Corporation determine to commence a revocation proceeding, it shall send notice thereof to the member or person associated with a member at least five (5) business days prior to the effective date of any action under Article II, Section 3 of the By-Laws and at least fifteen (15) days prior to the effective date of any action under Article VI, Section 3 or Article VII, Section 2 of the By-Laws.

(b) Upon written request of the member or persons associated with the member received by the Corporation prior to the expiration of the applicable notice period provided in subsection 2(a), the matter shall be presented to a hearing panel designated by the Board of Governors.
(c) A decision rendered by a hearing panel designated pursuant to subsection 2(b) shall constitute final action by the Corporation. Any cancellation, bar or suspension shall become effective on a date established by the hearing panel.

Hearings

Sec. 3. At any hearing held under this Article, a record shall be kept and the member or person associated with a member and the Corporation shall be entitled to be heard in person and be represented by counsel and to submit any relevant matter.

Decisions

Sec. 4. Following any hearing held under this Article, a written decision shall be issued setting forth the findings made and the grounds upon which that determination is based.

Other Action Not Foreclosed

Sec. 5. Action by the Corporation under this Article shall not foreclose action by the Corporation under any other provisions of this Code where a violation of the Rules of the Corporation may be involved.

ARTICLE VII

ELIGIBILITY PROCEEDINGS

Purpose

Sec. 1. This Article provides procedures for a person to become associated with a member notwithstanding the existence of a statutory disqualification as defined in Section 3(a)(39) of the Securities Exchange Act of 1934, as amended, for reinstatement after a revocation proceeding pursuant to Article VI of this Code, and to obtain relief in cases of failure to meet the eligibility or qualification requirements of the Corporation's Rules and By-Laws.

Eligibility Proceedings

Sec. 2. (a) If the Corporation has reason to believe a statutory disqualification exists or there is otherwise a failure to meet the eligibility requirements of the Corporation's By-Laws, the member or broker or dealer or person shall be notified in writing of the specific eligibility deficiencies. No such notice shall be required, however, in the case of a cancellation or suspension of membership or suspension or bar of a person associated with a member pursuant to Article VI of this Code.

(b) The member or broker or dealer or person may make application to the Corporation requesting relief and shall demonstrate why the application should be granted. Should the Corporation decline to grant such request, then if requested in writing by any party, or if directed by the Corporation, a hearing shall be held before a hearing panel designated by the Board of Governors, and a record shall be kept. At the hearing the parties shall be entitled to be heard in person and be represented by counsel and to submit any relevant matter. The hearing panel shall make a recommendation as to the application which shall be forwarded to the Board of Governors together with the record.
(c) The Board of Governors shall make a written determination upon the record before it, setting forth therein the specific grounds upon which such determination is based and the conditions, if any, as to the continuance in or ad mission to membership it considers appropriate.
(d) The Board of Governors shall promptly notify the applicant of any action taken. When required, a notification shall be filed with the Commission. Any applicant or person who is aggrieved by the action of the Board of Governors may make application for review of such action to the Commission.

ARTICLE VIII

SUMMARY SUSPENSION

Summary Action

Sec. 1. The Corporation may summarily:

(a) suspend a member or person associated with a member who has been and is expelled or is currently subject to a suspension from any self-regulatory organization or barred or suspended from being associated with a member of any self-regulatory organization;
(b) suspend a member who is in such financial or operating difficulty that the Corporation determines and so notifies the Securities and Exchange Commission that the member cannot be permitted to continue to do business as a member with safety to investors, creditors, other members, or the Corporation; and
(c) limit or prohibit any person with respect to access to the NASDAQ System or other services offered by the Corporation if, in the case of a member or person associated with a member, subsection (a) or (b) applies; or, in the case of another person, if the Corporation determines that such person does not meet the qualification requirements or other prerequisites for such access and cannot be permitted to have or to continue to have such access with safety to investors, creditors, members, or the Corporation.

Written Notification

Sec. 2. Any party against whom the Corporation takes summary action pursuant to Section 1 above shall be notified promptly in writing or otherwise of such action. In the case of a person associated with a member, the member of the Corporation with which the person is presently associated shall also be notified. Such notification shall issue only after prior approval of the Executive Committee of the Board of Governors and shall contain a statement of the specific grounds on which such action is taken and provide notice that an opportunity for a hearing is afforded pursuant to the provisions of Sections 3 and 4 hereof. Such summary action shall not be conditioned upon notification but shall be effective upon the date of the written notification.

Request for Hearing

Sec. 3. Any party against whom the Corporation has taken summary action may request an opportunity for a hearing within 10 calendar days of the date of notification pursuant to Section 2 above. Such hearing shall be held within 5 calendar days of such request. A request for a hearing shall not operate as a stay of the summary action.

Hearing

Sec. 4. If a hearing is requested pursuant to Section 3 above, it shall be held before a hearing panel designated by the Board of Governors. The party against whom the Corporation has taken summary action shall be entitled to be heard in person, to be represented by counsel and to submit any relevant matter. Counsel for the Corporation and other designated Corporation personnel may participate in the hearing and be entitled to submit any relevant matter. In any such proceeding, a record shall be kept.

Decision

Sec. 5. A written decision shall be issued by the hearing panel within 5 calendar days of the date of the hearing, and a copy shall be sent to the party against whom the Corporation has taken summary action and, in the case of a person associated with a member, the member with whom the party is presently an associated person. The decision shall contain the reasons supporting the action taken.

Review by Board

Sec. 6. (a) If the party against whom the Corporation has taken summary action does not request a hearing pursuant to Section 3, the notification of summary action shall be subject to review by the Board of Governors on its own motion within 30 calendar days of the date of the notification.

(b) If a hearing is held, the written decision issued pursuant to Section 5 shall be subject to review by the Board of Governors upon application of the party against whom the Corporation has taken summary action filed within 15 calendar days after issuance. Any such decision shall also be subject to review by the Board of Governors on its own motion within 30 calendar days after issuance.
(c) The institution of review, whether by application to, or on the initiative of, the Board shall not operate as a stay of the summary action.

Findings of Board on Review

Sec. 7. Upon consideration of the record and after further hearings as the Board of Governors shall order, the Board shall in writing affirm, modify, reverse or dismiss the decision, or remand the matter for further proceedings consistent with its instructions. The Board shall set forth specific grounds upon which its determination is based.

Application to Commission for Review

Sec. 8. Any party against whom summary action has been taken by the Board of Governors may make application for review to the Securities and Exchange Commission in accordance with Section 19 of the Securities Exchange Act of 1934, as amended.

Application to Commission for Stay of Summary Action

Sec. 9. Any party against whom summary action has been taken by the Board of Governors may apply to the Securities and Exchange Commission for a stay of such summary action as permitted by the Securities Exchange Act of 1934, as amended.

Other Action Not Foreclosed

Sec. 10. Action by the Corporation under this Article shall not foreclose action by the Corporation under any other provisions of this Code where a violation of the Rules of the Corporation may be involved.

ARTICLE IX

PROCEDURES ON GRIEVANCES CONCERNING THE NASDAQ SYSTEM

Purpose

Sec. 1. The purpose of this Article is to provide, where justified, redress for persons aggrieved by operations of the NASDAQ System and to provide procedures for the handling of qualification matters pursuant to NASDAQ rules.

Form of Application

Sec. 2. All applications shall be in writing, and shall specify in reasonable detail the nature of and basis for the redress requested. If the application consists of several allegations, each allegation shall be stated separately. All applications must be signed and shall be directed to the Corporation.

Request for Hearing

Sec. 3. Upon request, the applicant shall be granted a hearing after reasonable notice. In the absence of such request for a hearing, the Corporation may, in its discretion, have any application set down for hearing or consider the matter on the basis of the application and supporting documents.

Consideration of Applications

Sec. 4. All applications shall be considered by a hearing panel designated by the Board of Governors. The applicant shall be entitled to be heard in person and by counsel and to submit any relevant matter. In any such proceeding a record shall be kept.

Decision

Sec. 5. Decisions on applications shall be in writing and a copy sent by mail to the applicant. The hearing panel may communicate its determination to the applicant prior to the issuance of a written decision, which shall be effective as of the time of such communication. The written decision shall contain the reasons supporting the hearing panel's conclusions.

Review by Board

Sec. 6. The decision shall be subject to review by the Board of Governors on its own motion within 45 calendar days after issuance of the written decision. Any such decision shall also be subject to review upon application of any person aggrieved thereby, filed within 15 calendar days after issuance. The institution of a review, whether on application or on the initiative of the Board, shall not operate as a stay of the decision.

Findings of Board on Review

Sec. 7. Upon consideration of the record, and after such further hearings as it shall order, the Board shall affirm, modify, reverse, dismiss, or remand the decision. The Board shall set forth specific grounds upon which its determination is based.

Application to Commission for Review

Sec. 8. In any case where a person feels aggrieved by any decision of the Board of Governors taken pursuant to Section 7, the person may make application for review to the Securities and Exchange Commission in accordance with the Securities Exchange Act of 1934, as amended.

ARTICLE X

MISCELLANEOUS

Grounds of Disqualification to Participate in Proceedings

Sec. 1. No member of the Board of Governors, any Committee or any other committee or subcommittee governed by this Code shall in any manner, directly or indirectly, participate in the determination of any matter substantially affecting his interest or the interests of any person in whom he is directly or indirectly interested. In any such case the particular member shall disqualify himself, or shall* be disqualified by the Chairman of any such Board or Committee.

Reports and Examination of Books and Records

Sec. 2. For the purpose of any examination, or determination as to any proceeding pursuant to this Code, any hearing panel, Committee, or the Board of Governors, or any duly authorized agent or agents of any such hearing panel, Committee or Board shall have the right to require any member or person associated with a member to report orally or in writing with regard to any examination, determination or hearing, and to examine the books and records of any member or person associated with a member.

Rulings on Procedural Matters

Sec. 3. Except as otherwise provided by this Code, the hearing panel, Committee or Board shall have discretion to make rulings on all motions and other matters arising during the course of its proceedings (including without limitation, the presence of witnesses after completion of their testimony and of other persons not parties to the proceeding) which require resolution during the proceeding.

Service of Complaints, Decisions and Other Notices

Sec. 4. Any person shall be deemed to have received notice to which he is entitled under any section of this Code by the mailing of the notice to that person at his last known address as reflected on the Corporation's records. For purposes of computing the time for any such person to take required action under this Code, 3 calendar days shall be added to the prescribed period if service is effected by mail.

Amendments to Code of Procedure

Sec. 5. This Code of Procedure may be amended by a majority vote of the Board of Governors, subject to approval by the Securities and Exchange Commission, pursuant to the Securities Exchange Act of 1934, as amended.


1/ See, Securities Exchange Act Release No. 21843 (March 12, 1985).

2/ See, Securities Exchange Act Release No. 21838 (March 12, 1985).

3/ As noted in the attached text, certain minor portions of the By-laws and Code are expected to become effective upon Commission approval in the near future.

4/ See, Securities Exchange Act Release No. 21842 (March 12, 1985).

5/ See, Securities Exchange Act Release No. 21840 (March 12, 1985).

* The text herein reflects amendments to Articles VI, VII, and X which have been filed with the Securities and Exchange Commission in File No. SR-NASD-85-2 but which are not yet effective. See, Securities Exchange Act Release No. 21839 (March 12, 1985). These amendments codify existing Association practice. The Association anticipates that, absent significant adverse comment, the Commission will approve these amendments in the near future. Pending Commission approval, the Association will nevertheless act in accordance with the amended text.

* The text herein reflects amendments to Articles II, VII, and XVI which have been filed with the Securities and Exchange Commission in File No. SR-NASD-85-2 but which are not yet effective. See, Securities Exchange Act Release No. 21839 (March 12, 1985). These amendments codify existing Association practice. The Association anticipates that, absent significant adverse comment, the Commission will approve these amendments in the near future. Pending Commission approval, the Assocation will nevertheless act in accordance with the amended text.



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