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85-3 Membership Vote on Proposed Amendments to Association's By-Laws and Solicitation of Comments on Proposed Amendments to the Code of Procedure
OFFICERS, PARTNERS AND PROPRIETORS
TO: All NASD Members and Other Interested Persons
LAST VOTING DATE IS FEBRUARY 14, 1985
Members of the National Association of Securities Dealers, Inc. ("NASD" or "Association") are invited to vote on certain amendments to the Association's By-Laws contained in Exhibit A to this Notice for Members. In addition, amendments to the Association's Code of Procedure related to the proposed By-Law amendments are being published for comment.
In November 1983, the membership approved a complete revision to the NASD By-Laws. 1/ This revision was designed to conform the language of the By-Laws to certain statutory changes, codify certain interpretations of the Board of Governors, clarify the application of certain provisions and generally update and modernize the By-Laws.
Upon membership approval, the revised By-Laws were subsequently filed with the Securities and Exchange Commission ("SEC"). 2/ In the course of its review, the SEC staff identified certain procedural and technical changes to the text of the revised By-Laws which it suggested be considered by the NASD membership. The requested changes to the revised By-Laws described below have been reviewed and approved for membership vote by the Association's Board of Governors. Prior to becoming effective, the amendments must be approved by the membership and then approved by the SEC.
Hearings Prior to Suspension or Cancellation of Membership
Two changes requested by the SEC staff relate to procedures preceding the Association's summary suspension or cancellation of a firm's membership. Article II, Section 3(c) of the revised By-Laws permits the Board to cancel the membership of a firm which becomes ineligible for membership, to suspend or bar a person who becomes ineligible for association with a member, and to cancel a firm's membership which has a disqualified person associated with it. Moreover, Article VII, Section 2 of the revised By-Laws permits the NASD to expel or suspend a member for failure to provide information formally demanded after giving 15 days' notice.
As filed with the SEC, these sections of the revised By-Laws do not provide a member or associated person with a right to hearing before imposition of the cancellation, suspension or bar. It has, however, been the Association's longstanding practice to provide such members and persons with a right to be heard upon request prior to imposition of the cancellation, suspension or bar. The SEC staff believes the revised By-Laws should codify that practice by explicitly providing that such members and persons shall have an opportunity for hearing. The proposed changes to the revised By-Laws providing such a right to a hearing appear at Exhibit A (attached).
Conforming amendments to the revised Code of Procedure, 3/ also pending SEC approval, are required to accommodate the hearings contemplated by these amendments to the revised By-Laws. These conforming amendments, attached as Exhibit B, also provide more specific language concerning reinstatement of membership or association. Amendments to the Code of Procedure do not require a membership vote and it is the intention of the Association to file these amendments for approval by the SEC contingent upon membership and SEC approval of the By-Law amendments contained herein. They are being provided to you at this time to assist your evaluation of the proposed By-Law amendments and to solicit your comments.
Conflicts of Interest
The second change to the By-Laws relates to potential conflicts of interest. The NASD By-Laws as presently in effect contain a prohibition against any Governor or Committee member participating in the decision on any matter in which he or she has a conflict of interest. In the revision of the By-Laws approved by the membership last year, this provision was inadvertently not included. It is proposed to be inserted as.new Section 4 of Article XVI, as appears on page 2 of Exhibit A.
Jurisdiction Over Municipal Securities
The third change to the By-Laws relates to the status of municipal securities. Under Section 15B of the Securities Exchange Act of 1934, as amended, the Municipal Securities Rulemaking Board ("MSRB"), rather than the NASD, has been given rulemaking authority over the activities of municipal securities brokers and municipal securities dealers. For purposes of conformance with this statutory provision, a new Article XVI, Section 5 of the revised By-Laws is proposed which would restate existing statutory provisions by limiting the applicability of NASD requirements so as not to conflict with those of the MSRB. This language is also contained on page 2 of Exhibit A.
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The Board of Governors believes these amendments to the By-Laws are necessary and appropriate. It recommends that members vote their approval.
Please mark the attached ballot according to your convictions and return it in the enclosed, stamped envelope to "The Corporation Trust Company." Ballots must be postmarked not later than February 14, 1985.
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As noted above, comments are also solicited on the proposed amendments to the revised Code of Procedure. All comments should be received by and directed to:
James M. Cangiano, Secretary
National Association of Securities Dealers, Inc.
1735 K Street, N.W.
Washington, D.C. 20006
Comments should be received no later than February 14, 1985. Any questions regarding this notice to members should 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.
Frank J. Wilson
Executive Vice President and General Counsel
PROPOSED AMENDMENTS TO REVISED BY-LAWS
The following are proposed changes to the text of the revised By-Laws contained in Notice to Members 83-55 and filed with the SEC in File No. SR-NASD-84-14. New language is underlined; deleted language is in brackets.
Article II, Section 3
Ineligibility of Certain Persons for Membership or Association
Article VII, Section 2
Authority to Suspend for Failure to [File Regulatory Reports] Submit Required Information
Article XVI, Section 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.
Article XVI, Section 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.
PROPOSED AMENDMENTS TO RECODIFIED CODE OF PROCEDURE
The following is the text of proposed new Article V of the revised Code of Procedure, filed with the Securities and Exchange Commission in File No. SR-NASD-82-11 (succeeding articles to be renumbered accordingly), as well as revisions to Articles VI and XII (formerly Articles V and XI) of the revised Code of Procedure. New language is underlined; material to be deleted is in brackets.
Article V — Revocation Proceedings Purpose
Sec. 1 This Article provides procedures, in addition to those contained for summary suspension pursuant to Article VII 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 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 VII, Section 2 of the By-Laws
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.
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 [V] VI
[ Member and Associated Person ] Eligibility Proceedings Purpose
Sec. 1 [ It is the purpose of this Article to provide where appropriate a procedure for requesting relief in cases of failure to meet the eligibility requirements of the Corporation's By-Laws. ] 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 V 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.
Sec. 2. (a) If the Corporation has reason to believe a statutory disqualification exists or there is otherwise a failure to meet the eligiblity 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 V of this Code. [ If it deems it appropriate, the Board of Governors may summarily cancel the membership of a member if it fails to meet the eligibility requirements provided by the By-Laws or if it continues to have associated with it a person who fails to meet the eligibility requirements provided in the By-Laws. ]
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Article [ XI] XII
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[ Suspension for Failure to Furnish Information Duly Requested]
[Sec. 3. In the event of a refusal to comply with Section 2, and after 15 calendar days' notice in writing, the President is authorized to suspend the membership, registration or association of any member or person associated with a member and to cause notice thereof to be published in the next following membership supplement. Prior to such notice, the Executive Committee of the Board of Governors shall be notified in writing of such contemplated action by the President.]
(Remaining material renumbered accordingly.)
1/ The complete text of the revised By-Laws was distributed to the membership in Notice to Members 83-55 (October 20, 1983). Copies of revised By-Laws may be obtained from the Association's Office of General Counsel at (202) 728-8294.
2/ File No. SR-NASD-84-14. This filing has not yet been approved by the SEC and the revised By-Laws are not yet effective. All references contained herein are to the text of the revised By-Laws.
3/ The revised Code of Procedure was filed for SEC approval in File No. SR-NASD-82-11. Complete copies of the revised Code of Procedure are available from the Association's Office of General Counsel at (202) 728-8294.