Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change by National Association of Securities Dealers, Inc., Relating to Application for Membership in the Association

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-34156; File No. SR-NASD-94-14]

Self-Regulatory Organizations; Notice of Filing of Proposed Rule

Change by National Association of Securities Dealers, Inc., Relating to

Application for Membership in the Association

June 3, 1994.

Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934

(``Act''),\1\ notice is hereby given that on May 4, 1994, the National

Association of Securities Dealers, Inc. (``NASD'' or ``Association'')

filed with the Securities and Exchange Commission (``SEC'' or

``Commission'') the proposed rule change as described in Items I, II,

and III below, which Items have been prepared by the NASD.\2\ The

Commission is publishing this notice to solicit comments on the

proposed rule change from interested persons.

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\1\15 U.S.C. 78s(b)(1) (1988).

\2\The NASD amended the proposed rule change once subsequent to

its original filing on March 11, 1994. This amendment changes the

requirement that an applicant for membership in the NASD submit a

copy of its ``current submission to the Securities and Exchange

Commission pursuant to Rule 15b1-2(c) under the Securities Exchange

Act of 1934'' to require that the applicant submit ``Form BD filed

with the Central Registration Depository.'' This amendment is

technical in nature in that it corrects a deficiency that arose out

of the 1992 amendments to the broker-dealer registration process

which deleted Rule 15b1-2(c) and requires that Form BD be submitted

to the NASD. See Securities Exchange Act Release No. 31660 (Dec. 28,

1992), 58 FR 11 (Jan. 4, 1993) (adoption of rule amendments to

broker-dealer registration and reporting requirements).

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I. Self-Regulatory Organization's Statement of the Terms of Substance

of the Proposed Rule Change

The NASD is proposing to amend sections 1(b) and 1(c) to Article

III of the NASD By-Laws and Schedule C to the By-Laws to modify the

process by which an applicant applies for membership in the

Association. Below is the text of the proposed rule change. Proposed

new language is italicized and deleted language is bracketed.

By-Laws 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 Governors or any duly

authorized committee, the provisions of the federal securities laws,

including the rules and regulations adopted thereunder, including the

rules of the Municipal Securities Rulemaking Board and the Treasury

Department, 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 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, including the rules of the Municipal

Securities Rulemaking Board and the Treasury Department; 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 [d]District in which the applicant has

his principal place of business, and if [a majority of the members of]

such District Committee or a Subcommittee designated by such District

Committee determines that the applicant has satisfied all of the

admission requirements of the [By-Laws] Corporation, it shall

[recommend the applicant's admission to the membership and promptly

notify the Secretary of the Corporation of such recommendation]

promptly notify the Association's Membership Department of its

determination.

(c) If [a majority of the members of] such District Committee or a

Subcommittee designated by such District Committee determines that the

applicant fails to satisfy all of the admission requirements of the

[By-Laws] Corporation, 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] Association's Membership Department

of its determination.

(d) Each member shall ensure that this membership application with

the Corporation is kept current at all times by supplementary

amendments to the original application.

* * * * *

Schedule C

* * * * *

Part I--Applications For Membership

(1) Pre-Membership Interviews

(a) An applicant for membership in the Corporation shall furnish to

the District Office staff for the District in which it has or intends

to have its principal place of business:

(1) A copy of its [current submission to the Securities and

Exchange Commission pursuant to Rule 15b1-2(c) under the Securities

Exchange Act of 1934] Form BD filed with the Central Registration

Depository;

(2) Its most recent trial balance, balance sheet, supporting

schedules and computation of new capital;

(3) A copy of its written supervisory procedures;

(4) A list of all officers, directors, general partners, employees

and other persons who will be associated with it at the time of

admission to membership;

(5) A description of business activities in which it intends to

engage; and

(6) Such other relevant information and documents as may be

requested by the District Office staff.

Unless otherwise determined by a Subcommittee designated by the

District [c]Committee, an applicant's failure to respond or a

materially inadequate response to a request for information by the

District Office staff within sixty (60) days of the request shall

result in the termination of that application.

(b) Before an applicant shall be admitted to membership in the

Corporation, and within a reasonable period of time after receipt of

the foregoing information, the District Office staff shall schedule a

pre-membership interview at which responsible personnel of the

applicant, as determined by the District Office staff, shall personally

appear at the District Office. At such interview, the applicant shall

demonstrate, in accordance with the criteria listed in section (1)(c)

hereof, the appropriateness of its admission to membership in the

Corporation to conduct the type of business intended in the manner

specified in its submission. Unless otherwise determined by a

Subcommittee designated by the District (c)Committee, an applicant

shall have twelve (12) months, from the date of application made in

accordance with section 1(a) above, to complete the premembership

review process. Failure to complete requirements for review by a

Subcommittee designated by the District [c]Committee by that date shall

result in the termination of that application.

(c) The pre-membership interview shall address the applicant's

business plans to determine their adequacy and consistency with the

federal securities laws and the rules of the Corporation; good business

practices in the investment banking or securities business; a member's

fiduciary obligation to its customers; and the public interest and the

protection of investors. The pre-membership interview and shall review,

among other things,

(1) The nature, adequacy, source and permanence of applicant's

capital and its arrangements for additional capital should a business

need arise;

(2) The applicant's proposed recordkeeping system;

(3) The applicant's proposed internal procedures, including

compliance procedures;

(4) The applicant's familiarity with applicable NASD rules and

federal securities laws;

(5) The applicant's capability to properly conduct the type of

business intended in view of the:

A. Number, experience and qualifications of the persons to be

associated with it at the time of its admission to membership,

B. Its planned facilities,

C. Arrangements, if any, with banks, clearing corporations and

others, to assist it in the conduct of its securities business,

D. Supervisory personnel, methods and procedures; and

(6) Other factors relevant to the scope and operation of its

business.

(d) Within thirty (30) days after the conclusion of such pre-

membership interview, or if further information and/or documents are

requested, within thirty (30) days of the receipt of such information

or documents, [the District Office] a Subcommittee designated by the

District Committee shall consider the application and shall notify the

applicant in writing whether its application has been granted, denied,

or granted subject to restrictions on its business activities, and

provide the rationale for such determination.

(e) In all cases where restrictions are placed on its business

activities, the applicant shall, prior to approval of membership,

execute a written agreement with the Corporation agreeing to abide by

the restrictions specified in the determination and agreeing not to

modify its business activities in any way inconsistent with such

agreement without first notifying the Corporation and receiving its

written approval. These restrictions shall remain in effect and are

binding on the applicant and all successors to the ownership or control

of the applicant until modified pursuant to [paragraph] section (3)

below.

(2) Procedures for Review by the District Committee and the Board

of Governors

(a) The [District Office's] Subcommittee's determination shall be

[reviewed] subject to review by the relevant District Committee upon

request made by the applicant, filed within 15 calendar days after the

date [of receipt] of the notification. Until completion of the District

Committee's review, an applicant denied membership shall not be

admitted to membership, and an applicant admitted to membership subject

to restrictions on its business activities may engage in business

consistent with such restrictions only after it has executed the

agreement required by [paragraph] section (1)(e) hereof.

(b) In connection with review by the District Committee, the

applicant shall have the right to appear before a Hearing

[s]Subcommittee of the District Committee, or the Hearing

[s]Subcommittee may require such appearance. The applicant may present

evidence and be represented by counsel. The Hearing [s]Subcommittee may

request additional information to assist it in reaching a

determination. A record shall be kept of the proceedings. No member of

the District Committee who served as a member of the Subcommittee

designated pursuant to Section 1(d) shall participate in the

determination by the District Committee.

(c) The District Committee, after consideration of the record

before it developed by the Hearing Subcommittee and the criteria

contained in section (1)(c), above, shall within a reasonable time

after the close of the record, notify the applicant in writing that its

application has been granted, denied or granted subject to restrictions

on its business activities and provide the rationale for such

determination. The District Committee's determination shall be made

independent of the determination of the [District Office] Subcommittee

designated by the District Committee and shall not be limited thereby.

(d) The District Committee's determination shall be [reviewed]

subject to review by the [Board of Governors] National Business Conduct

Committee (NBCC) upon request made by the applicant, filed within 15

calendar days after the date [of receipt] of the notification. The

[Board of Governors] NBCC may call for review any District Committee

determination within forty-five calendar days [of] after the date of

the notification. During the pendency of such review, an applicant

denied membership shall not be admitted to membership and an applicant

admitted to membership subject to restrictions on its business

activities may engage in business consistent with such restrictions

only after it has executed the agreement required by [paragraph]

section (1)(e), above.

(e) In connection with review by the [Board of Governors] NBCC, the

applicant shall have the right to appear before a [s]Subcommittee of

the [Board of Governors] NBCC, or the NBCC [s]Subcommittee may require

such appearance. The applicant may supplement the record developed

before the District Committee and be represented by counsel. The NBCC

[s]Subcommittee may request additional information to assist the [Board

of Governors] NBCC in reaching a determination. A record shall be kept

of the proceedings.

(f) Unless a matter is called for discretionary review by the Board

of Governors (Board) pursuant to Section (2)(g), [T]the [Board of

Governors] NBCC, after consideration of the record before it developed

by the NBCC Subcommittee, and the criteria stated in Section (1)(c),

above, shall within a reasonable period of time after close of the

record before it, notify the applicant in writing that its application

has been granted, denied or granted subject to restrictions on its

business activities, provide the rationale for such determination, and

shall constitute final action for the NASD for purposes of section

(2)(h) below. The [Board of Governors'] NBCC's determination shall be

made independent of the determinations of the [District Office]

Subcommittee designated by the District Committee and District

Committee, and shall not be limited thereby. In the event of

discretionary review by the Board of Governors, the decision of the

Board shall constitute final action of the NASD for the purposes of

section (2)(h) below and the applicant shall be promptly notified in

writing that its application has been granted, denied or granted

subject to restrictions in its business activities, and shall be

provided the rationale for such determination.

(g) Determinations of the NBCC may be reviewed by the Board of

Governors solely on the request of one or more Governors. Such review,

which may be undertaken solely at the discretion of the Board, shall be

in accordance with resolutions of the Board governing the review of

NBCC determinations. In reviewing any NBCC determination of an

application for membership, the Board may affirm, reverse of modify any

decision to accept, deny or accept subject to restrictions, an

applicant. Discretionary review by the Board shall operate as a stay of

any action or denial by the Subcommittee designated by the District

Committee and any determination by the NBCC, until a decision is

rendered by the Board.

[(g)] (h) The applicant may apply for review of the NBCC's or the

Board of Governors' determination to the Securities and Exchange

Commission in accordance with Section 19 of the Securities Exchange Act

of 1934, as amended.

[(h)] (i) In any case where restrictions have been placed upon its

business activities by the Board of Governors, NBCC, [or] a District

Committee, or a Subcommittee designated by a District Committee, the

applicant shall, prior to approval of membership, execute the agreement

required by paragraph (1)(e), above.

(3) Removal of Restrictions Imposed

(a) Upon written request by the member, any restrictions on the

business activities of a member shall be reviewed and may be removed or

modified by a Subcommittee designated by the District Committee for the

District in which the member currently has its principal place of

business, when, in the [District Committee's] Subcommittee's judgement,

the member has demonstrated that such action is appropriate in light of

the criteria contained in section (1)(c), above. In doing so, the

District Committee shall consider the circumstances which gave rise to

the imposition of the restrictions, the operations of the member since

the imposition of the restrictions and any new evidence submitted in

connection with the member's request.

(b) Any modification of restrictions shall be subject to review by

the District Committee and the NBCC or the Board of Governors and the

SEC pursuant to the procedures provided in Section (2), above. A

refusal by a Subcommittee designated by a District Committee to remove

or modify any restrictions shall be similarly reviewed but only upon

[application] request of the member filed with the [Board of Governors]

District Committee that is filed within ten calendar days after the

date of notification of such refusal.

(c) Should the restrictions on a member's activity be modified, the

agreement required by [paragraph] section (1)(e), above, shall be

modified accordingly.

(4) Changes in Ownership or Control of Existing Members

Should the ownership or control of an existing member change, the

Corporation may, in its discretion, condition continuance in membership

in the Corporation on prompt compliance with the pre-membership

interview procedures contained in this part I.

(5) Notification to the District Office of Certain Events

Members are required to notify in writing the Corporation's

District Office for the District in which the member's main office is

located no later than ten (10) business days after any of the following

specified events; (1) Any merger of the member; (2) an acquisition by

the member; (3) an acquisition of the member or substantially all of

its assets; and (4) any change in the entity ownership or partnership

capital of the member which results in one person or entity owning 50%

or more of such equity ownership or partnership capital.

II. Self-Regulatory Organization's Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule Change

In its filing with the Commission, the NASD included statements

concerning the purpose of and basis for the proposed rule change and

discussed any comments it received on the proposed rule change. The

text of these statements may be examined at the places specified in

Item IV below. The NASD has prepared summaries, set forth in sections

(A), (B), and (C) below, of the most significant aspects of such

statements.

(A) Self-Regulatory Organization's Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule Change

By-Laws

Sections 1(b) and 1(c) to Article III of the NASD By-Laws currently

provide that any application for membership in the Association shall be

referred to the District Committee of the NASD district in which the

applicant has its principal place of business, and that such District

Committee shall make the determination as to whether the applicant

satisfies or fails to satisfy all of the admission requirements of the

NASD By-Laws. However, the provisions governing pre-membership

interviews in Schedule C to the NASD By-Laws currently contemplate a

possible three-step process under which the initial determination for

Association eligibility is made by District Office staff with review,

if appropriate, by the District Committee upon request by the

applicant.

Although the provisions of Schedule C contemplate review of

applications for membership in the Association by the District Office

staff, no District, in fact, has ever made such a determination at a

staff level. Additionally, such action would be inconsistent with the

governing By-Law provision that requires that the District Committee

shall make such an initial determination. The proposed rule change,

therefore, would amend the NASD By-Laws and Schedule C to modify and

make consistent the process by which an applicant applies for

membership in the Association in that it would require all initial

applications for membership be reviewed by either the District

Committee or a Subcommittee of the District Committee, with a right of

appeal to the full District Committee.

Subsection 1(b) and 1(c) to Article III of the NASD By-Laws are

proposed to be amended to establish the authority of a District

Committee to designate a Subcommittee to make a determination of

admissibility of an applicant and to require a designated Subcommittee

to promptly notify the Association's Membership Department of its

determination. The phrase ``a majority of the members of'' is proposed

to be eliminated from Subsection 1(b) as unnecessary.

Schedule C

As an initial matter, Schedule C is proposed to be amended

throughout by referencing the phrase ``a Subcommittee designated by the

District Committee'' in place of the phrases ``District Committee'' or

``District Office'' wherever such replacement conforms the language of

Schedule C to the proposed change in the By-laws establishing the

ability for the District Committee to delegate authority to a

Subcommittee to review and determine the admissibility of an applicant.

Subsection (1)(a) to part I of Schedule C to the By-Laws is

proposed to be amended to clarify that applications for membership in

the Association are to be furnished to the District Office staff.

Subsection 1(a)(6) is proposed to be amended to clarify that the

applicant must provide in connection with its application submission

such other relevant information and documents as may be requested by

the District Office staff.

Subsection 1(b) to part I of Schedule C to the By-Laws is proposed

to be amended to clarify that the scheduling of an applicant's pre-

membership interview and the determination of which responsible

personnel shall appear on behalf of the applicant at such interview

will be determined by the District Office staff.

Subsection (1)(d) to part I of Schedule C to the By-Laws is

proposed to be amended to clarify that the District Committee's

designated Subcommittee, rather than the District Office, shall

consider the application submission.

Subsection 2(a) to part I of Schedule C to the By-Laws is proposed

to be amended to clarify that it is the determination of the designated

Subcommittee, rather than the District Office, which will be reviewed

by the District Committee upon request of the applicant. Subsection

2(a) to part I of Schedule C to the By-Laws is also proposed to be

amended to clarify that the applicant's request for review must be

filed within 15 calendar days after notification of the Subcommittee's

determination.

Subsection 2(b) to part I of Schedule C to the By-Laws is proposed

to be amended to clarify that, in connection with review by the

District Committee, an applicant is entitled to appear before a Hearing

Subcommittee of the District Committee and that no member of the

District Committee who served as a member of the Subcommittee

originally designated to review the applicant's submission and no

member of the Hearing Subcommittee shall participate in the

determination resulting from the District Committee's review.

Subsection 2(c) to part I of Schedule C to the By-Laws is proposed

to be amended to clarify that the District Committee's determination of

the record developed before it shall be made independent of the

determination of the Subcommittee designated by the District Committee.

Subsection 2(d) to part I of Schedule C to the By-Laws is proposed

to be amended to clarify that the District Committee's determination

shall be subject to review by the National Business Conduct Committee

(``NBCC'') upon request made by the applicant filed within 15 calendar

days after the date of notification to the applicant by the District

Committee of its determination.

Subsection 2(e) to part I of Schedule C to the By-Laws is proposed

to be amended to clarify that in connection with review by the NBCC,

the applicant has the right to appear before a Subcommittee of the

NBCC.

Subsection 2(f) to part I of Schedule C to the By-Laws is proposed

to be amended to clarify that the NBCC's determination of the record

developed before it shall be made independent of the determination of

the Subcommittee designated by the District Committee, and shall

constitute final action for the NASD for purposes of Subsection (2)(h)

to part I of Schedule C to the By-Laws unless called for discretionary

review by the Board of Governors. Subsection 2(f) to part I of Schedule

C to the By-Laws is also proposed to be amended to clarify that a

decision by the Board pursuant to its power of discretionary review

shall constitute final action for purposes of Subsection (2)(h) to part

I of Schedule C to the By-Laws and that such determination and its

rationale shall be communicated to the applicant in writing.

Proposed new Subsection (2)(g) to part I of Schedule C to the By-

Laws is intended to clarify that review by the Board of Governors of

NBCC determinations is discretionary and may occur solely on the

request of one or more governors, and not at the request of the

applicant. Such discretionary review of the Board shall be in

accordance with the resolutions of the Board governing the review of

NBCC determinations. The Board may affirm, reverse or modify an NBCC

decision. The commencement of the review shall operate as a stay of any

action by the Subcommittee designated by the District Committee and any

determination by the NBCC until a decision is reached by the Board.

Old Subsection (2)(g) to part I of Schedule C to the By-Laws is

proposed to be designated Subsection (2)(h) and states that the

applicant may apply for review to the Securities and Exchange

Commission of any determination by the NBCC or the Board.

Old Subsection (2)(h) to part I of Schedule C to the By-Laws is

proposed to be designated Subsection (2)(i) and clarifies that the

requirements of the Subparagraph apply to determinations of

restrictions placed on the applicant made by the NBCC or a Subcommittee

designated by the District Committee, as well as to such determinations

made by the Board or a District Committee.

Subsection (3)(a) to part I of Schedule C to the By-Laws is

proposed to be amended to clarify that review and removal or

modification of restrictions placed on the applicant shall be done by a

Subcommittee designated by the District Committee.

Subsection (3)(b) to part I of Schedule C to the By-Laws is

proposed to be amended to clarify that modifications of restrictions

shall be subject to review by the District Committee and the NBCC, as

well as by the Board and the SEC. Subsection (3)(b) to part I of

Schedule C to the By-Laws is also proposed to be amended to clarify

that the refusal by a Subcommittee designated by the District Committee

to remove or modify restrictions shall also be subject to review, but

only upon request of the member filed with the District Committee

within ten calendar days after the date of notification of such

refusal.

The NASD believes that the proposed rule change is consistent with

the provisions of section 15A(b)(8) of the Act,\3\ which require, among

other things, that the rules of the Association provide a fair

procedure for the denial of membership to any person seeking membership

therein or the prohibition or limitation by the Association of any

person with respect to access to services offered by the Association or

a member thereof, in that the proposed rule clarifies the process by

which an applicant for membership in the Association is accepted,

denied or accepted with limitations and eliminates any ambiguity in the

Association's By-Laws and the Schedules to the By-Laws with respect to

the application and administration of such process.

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\3\15 U.S.C. 78o-3.

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(B) Self-Regulatory Organization's Statement on Burden on Competition

The NASD does not believe that the proposed rule change will result

in any burden on competition that is not necessary or appropriate in

furtherance of the purposes of the Act, as amended.

(C) Self-Regulatory Organization's Statement on Comments on the

Proposed Rule Change Received From Members, Participants, or Others

Written comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for

Commission Action

Within 35 days of the date of publication of this notice in the

Federal Register or within such longer period (i) as the Commission may

designate up to 90 days of such date if it finds such longer period to

be appropriate and publishes its reasons for so finding or (ii) as to

which the self-regulatory organization consents, the Commission will:

A. By order approve such proposed rule change, or

B. Institute proceedings to determine whether the proposed rule

change should be disapproved.

IV. Solicitation of Comments

Interested persons are invited to submit written data, views, and

arguments concerning the foregoing. Persons making written submissions

should file six copies thereof with the Secretary, Securities and

Exchange Commission, 450 Fifth Street NW., Washington, DC 20549. Copies

of the submission, all subsequent amendments, all written statements

with respect to the proposed rule change that are filed with the

Commission, and all written communications relating to the proposed

rule change between the Commission and any person, other than those

that may be withheld from the public in accordance with the provisions

of 5 U.S.C. 552, will be available for inspection and copying in the

Commission's Public Reference Room. Copies of such filing will also be

available for inspection and copying at the principal office of the

NASD. All submissions should refer to file number SR-NASD-94-14 and

should be submitted by June 30, 1994.

For the Commission, by the Division of Market Regulation,

pursuant to delegated authority.\4\

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\4\17 CFR 200.30-3(a)(12) (1993).

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Margaret H. McFarland,

Deputy Secretary.

[Fr Doc. 94-14029 Filed 6-8-94; 8:45 am]

BILLING CODE 8010-01-M