# Self-Regulatory Organizations; National Association of Securities Dealers, Inc.; Order Approving a Proposed Rule change to the By-Laws and Rules of Fair Practice Relating to Rule Approval Procedures > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/fr%3A94-5920 ## Record - **Collection:** Federal Register - **Document type:** Uncategorized Document - **Published:** March 15, 1994 ## Text SECURITIES AND EXCHANGE COMMISSION [Release No. 34-33737; File No. SR-NASD-93-48] Self-Regulatory Organizations; National Association of Securities Dealers, Inc.; Order Approving a Proposed Rule change to the By-Laws and Rules of Fair Practice Relating to Rule Approval Procedures March 8, 1994. I. Introduction On September 17, 1993, the National Association of Securities Dealers, Inc. (``NASD'' or ``Association'') filed with the Securities and Exchange Commission (``SEC'' or ``Commission'') a proposed rule change pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'')\1\ and Rule 19b-4 thereunder.\2\ The rule change amends the NASD By-Laws and Rules of Fair Practice to make uniform all rule approval and amendment procedures under the NASD's By-Laws and to convert certain appendices of Rules of Fair Practice into Rules of Fair Practice themselves. --------------------------------------------------------------------------- \1\15 U.S.C. 78s(b)(1) (1988). \2\17 CFR 240.19b-4 (1993). --------------------------------------------------------------------------- Notice of the proposed rule change appeared in the Federal Register on September 28, 1993.\3\ The Commission received four comment letters opposing the proposal.\4\ This order approves the rule change.\5\ --------------------------------------------------------------------------- \3\Securities Exchange Act Release No. 32942 (Sept. 22, 1993), 58 FR 50609 (Sept. 28, 1993). \4\Letter from Merle I. Hoch, Executive Director, Securities Traders Association of New York, to Jonathan G. Katz, Secretary, SEC (Oct. 15, 1993) (``STANY Comment Letter''); letter from Dennis Marion, President and Chief Executive Officer, Sherwood Securities, to Jonathan G. Katz, Secretary, SEC (Oct. 15, 1993) (``Sherwood Comment Letter''); letter from David E. Rosendahl, Chairman, Federal Regulation Committee, Securities Industry Association (``SIA''), and Mark T. Commander, Chairman, Self-Regulatory and Supervisory Practices Committee, SIA, to Jonathan Katz, Secretary, SEC (Nov. 4, 1993) (``SIA Comment Letter''); and letter from Kenneth S. Spirer, General Counsel, Private Client Group, Merrill Lynch, to Jonathan G. Katz, Secretary, SEC (Oct. 25, 1993) (``Merrill Lynch Comment Letter''). \5\The rule change was approved for filing with the Commission at a meeting of the NASD Board of Governors (``Board'') on November 13, 1992. The change was submitted to a vote of the NASD membership in NASD Notice to Members 93-15 (Mar. 1993), and was approved by the membership, as required by Article XII, Section 1, and Article XVII, Section 1 of the NASD By-Laws by a vote of 1,683 in favor, 478 opposed, and 11 not voting out of 2,172 ballots received. --------------------------------------------------------------------------- II. Description of the Rule Change The NASD is proposing to amend the NASD By-Laws and Rules of Fair Practice to make all rule approval and amendment procedures under the NASD's By-Laws uniform\6\ and, thus, eliminate the requirement that certain rules be submitted to the membership for their approval as part of the rulemaking process.\7\ The rule change conforms the NASD's procedure to those of other securities industry self-regulatory organizations (``SRO''), which do not require member vote for rule changes.\8\ The rule change is effective immediately and applies only to proposed rule changes approved by the Board or the Executive Committee\9\ after the effective date of the rule change.\10\ Thus, rule changes currently pending before the Commission or approved by the Board prior to the date of effectiveness of this order will not be affected by the rule change. --------------------------------------------------------------------------- \6\In addition, the rule change converts certain appendices of Rules of Fair Practice into Rules of Fair Practice themselves. \7\Currently, the NASD By-Laws and Rules of Fair Practice require Board and membership approval to amend Rules of Fair Practice while amendment to other NASD rules only requires Board approval. Thus, the NASD By-Laws currently provide that the Board may adopt Rules of Fair Practice for submission to NASD members. NASD Manual, By-Laws, Art. XII, Sec. 1 (CCH)  1251. Certain Rules of Fair Practice adopted by the Board and approved by the membership, however, authorize the Board to establish rules, regulations and/or procedures concerning NASD members without recourse to the membership for approval. NASD Manual, Rule of Fair Practice, Art. III, Secs. 30(b) (Margin accounts), 31 (Securities ``failed to receive'' and ``failed to deliver''), 32(b) (Fidelity bonds), 33(c) (Options), 34(c) (Direct participation programs) & 37 (Operating rules for ITS/CAES and CAES), (CCH)  2180, 2181, 2182, 2183, 2191 & 2197. \8\See, e.g., Amex, Const., Art. II, Sec. 2; Chicago Stock Exchange, Const., Art. XI, Sec. 2; Midwest Clearing Corp., By-Laws, Art. VII, Sec. 1; NYSE, Const., Art. VIII, Sec. 1. \9\Between Board meetings, the Executive Committee has authority to act on behalf of the Board during emergency or extraordinary market conditions. NASD Manual, By-Laws, Art. VII, Sec. 3, (CCH)  1182A. \10\Letter from Suzanne Rothwell, Associate General Counsel, NASD, to Selwyn Notelovitz, Branch Chief, SEC (Jan. 27, 1994). --------------------------------------------------------------------------- A. Amendments to the By-Laws Article VII, Section 1(a) of the By-Laws sets forth certain authority of the Board. The rule change amends this section with respect to the Board's authority to amend the NASD rules; to amend its Certificate of Incorporation or By-Laws, the NASD will continue to be required to obtain membership approval. To reflect this distinction, Article VII, section 1(a)(1) of the By-Laws has been divided into two subsections. Amended section 1(a)(1) provides that amendments to the By-Laws require membership approval and new section 1(a)(2) specifies that the Board has the authority to adopt and amend Rules of Fair Practice. This new section also provides that the Board may, in its discretion, still choose to submit certain rule changes or additions to Rules of Fair Practice to the membership for consideration. Redesigned section 1(a)(3) (formerly section 1(a)(9)) generally provides broad authority to the Board to exercise the action necessary or appropriate to implement the provisions of the Act. The rule change deletes from redesignated section 1(a)(3) language referencing the Government Securities Act of 1986 because the pertinent provisions of the Government Securities Act of 1986 are incorporated in the Act, as amended.\11\ --------------------------------------------------------------------------- \11\The rule change also amends redesignated sections 1(a) (5), (6) and (8) (formerly sections 1(a) (3), (4) and (6)) because the language in these sections specifying that no member vote is needed is now superfluous. In addition, redesignated sections 1(a) (9) and (10) (formerly sections 1(a) (7) and (8)) have been amended stylistically, with no substantive implications. --------------------------------------------------------------------------- Article XII, Section 1 of the By-Laws is also amended to delete the reference to the member vote procedure for adoption and amendment of Rules of Fair Practice, and to remove references to emergency rules. Because the NASD may now amend Rules of Fair Practice without membership vote, the procedures for member vote and references to emergency rules are no longer. B. Amendments to Rules of Fair Practice Currently, the text of Rules of Fair Practice, Article III, Sections 30 through 34 contain general Rules of Fair Practice and set forth the procedures for adopting the specific requirements underlying these general rules, which procedures include that the Board may adopt or amend these rules without recourse to the membership.12 The specific requirements underlying these general rules appear in appendices to each of these rules, which include a reiteration of the general rule. As noted above, the rule change amends Article VII of the By-Laws to provide the Board authorization to and the procedure for amending all Rules of Fair Practice without recourse to the membership. Accordingly, the rule change deletes the text of Sections 30 through 34, which are now superfluous, and converts the substantive provisions found in the appendices to each of these rules into their respective sections. To conform the former appendices to the format of Rules of Fair Practice, the appropriate numbering, lettering and cross referencing, changes have been made.13 --------------------------------------------------------------------------- \1\2NASD Manual, Rule of Fair Practice, Art. III, Secs. 30(b), 31, 32(b), 33(c), 34(c) & 37, (CCH)  2180, 2181, 2182, 2183, 2191 & 2197. \1\3The numbering convention for former Appendix A, however, is not changed at this time because, as explained in SR-NASD-92-35, the NASD's new margin rule is based on rules of the NYSE and, for purposes of comparison, the NASD considers using the same numbering scheme for the NASD's and NYSE's rules useful. See Securities Exchange Act Release No. 31918 (Feb. 24, 1993), 58 FR 12286 (Mar. 3, 1993) (order approving File No. SR-NASD-92-35). --------------------------------------------------------------------------- Finally, the rule change deletes Rules of Fair Practice, Section 37, which provided the Board authority to adopt and amend CAES Operating Rules and ITS/CAES Operating Rules without seeking membership approval. As amended, redesignated Sections 1(a) (3), (8) and (9) (formerly sections 1(a) (9), (6) and (7)) generally provide the Board authority to adopt rules and operate systems such as CAES and ITS/CAES without membership approval; thus, section 37 is unnecessary. III. Comment Letters The Commission received four comment letters opposing the rule change. Commentators noted, among other things, that it violated the traditionally democratic process of the NASD14 and is unnecessary given the Board's authority to adopt rules in the event of an emergency.15 One commenter opposed the NASD's rule change because it believed that member vote provides a mechanism for NASD members to give careful consideration to rule changes.16 In addition, this commenter argued that the NASD should establish a uniform comment period for all rule changes. --------------------------------------------------------------------------- \1\4STANY and Sherwood Comment Letters. \1\5STANY and SIA Comment Letters. \1\6Merrill Lynch Comment Letter. --------------------------------------------------------------------------- In response, the NASD noted that its members have access to the NASD's rulemaking process through means other than membership vote.17 In particular, the NASD noted, members participate in this process through their representatives on Standing and District committees and through the election of a Board member from their district. In addition, the NASD noted, the Board has reserved the option of submitting to its members for consideration proposed changes to Rules of Fair Practice. Moreover, the NASD reiterated its representation that it will continue to notify its members of proposed rule changes through regular publication of Notice to Members and periodic summaries of Board meetings and noted that it will still respond to member comments. --------------------------------------------------------------------------- \1\7Letter from T. Grant Callery, Vice President and General Counsel, NASD, to Selwyn Notelovitz, Branch Chief, SEC (Nov. 29, 1993). --------------------------------------------------------------------------- IV. Discussion The Commission believes that the NASD's rule change is consistent with the requirements of the Act and the rules and regulations thereunder applicable to the NASD and, therefore, has determined to approve the rule change. Specifically, the Commission believes that the rule change is consistent with the provisions of sections 15A(b)(4) and (6) of the Act.18 These sections require, in part, that the NASD's rules assure fair representation in the selection of its directors and the administration of its affairs and be designed to foster cooperation and coordination of securities transactions, to remove impediments to a free and open market, and to protect investors and the public interest. --------------------------------------------------------------------------- \1\815 U.S.C. 78o-3(b)(4) and (6). --------------------------------------------------------------------------- By eliminating the need for member vote prior to amending certain of the Rules of Fair Practice, the rule change simplifies the NASD's ability to amend its rules. With the change, the NASD's procedures for amending its rules will be consistent with those of other SROs in the securities industry, which do not require member vote for rule changes. According to the NASD, the change will not only reduce delays in making rule changes effective, but will also result in administrative cost savings. A member vote will, however, continue to be required for amendments to the NASD's By-Laws. Further, the Board has specifically provided that it may seek a member vote on any rule change if it considers such a vote appropriate. The rule change does not alter the substance of the NASD's Rules of Fair Practice. Rather, it simplifies the NASD's ability to amend its rules by eliminating the requirement for member vote. Nonetheless, mechanisms for members to participate in the formulation of and comment on NASD proposed rule changes remain. As noted above, members will continue to be able to participate in this process through the election of a Board member from their district and through representation on more than twenty Standing and District committees.19 Each Standing committee consists of at least one Board member and of members from across the country with expertise in the committee's business. In addition, section 19(b) of the Act provides NASD members the mechanism to comment in writing directly to the Commission on all NASD rule changes.20 --------------------------------------------------------------------------- \1\9NASD Manual, By-Laws, Sec. 4(a), (CCH) 1183; By-Laws, Art. III., Secs. 1-12, (CCH) 1191-1202; By-Laws, Art. XI, Secs. 1-4, (CCH) 1241-44. \2\015 U.S.C. 78s(b)(1). --------------------------------------------------------------------------- To facilitate access to its committees, in addition to publishing the names and titles of all its officers, the NASD provides in the front of its manual a list of its committees and the names of the committee members. Each committee has a mission statement which provides it authority to make recommendations to the Board concerning specific areas of concentration. When the jurisdiction for an issue overlaps, all the relevant committees are presented an opportunity to provide input before a final recommendation is presented to the Board. The NASD's current process of electing Board members and selecting committee members provides fair representation of local, regional and national firms on the Board and on committees. To provide greater representation to each board member, in 1990, the NASD decreased the size of the Board.21 Finally, the Commission notes that an overwhelming majority (77%) of the members voting on the NASD's proposal voted to approve the rule change. --------------------------------------------------------------------------- \2\1Securities Exchange Act Release No. 28406 (Sept. 4, 1990), 55 FR 37782 (Sept. 13, 1990). --------------------------------------------------------------------------- Recognizing that some rule changes will engender more debate than others, the Board has reserved the option of submitting to its members for consideration proposed changes to Rules of Fair Practice. Furthermore, the NASD has reiterated its representation that it will continue to notify its members of proposed rule changes through regular publication of Notice to Members and periodic summaries of Board meetings. Section 15A(b)(4) requires the NASD's rules assure fair representation of its members in the selection of its directors and administration of its affairs. This can be accomplished in several ways, not just by requiring member votes on specific rules. Accordingly, the Commission encourages the NASD not to underestimate the benefits derived from membership comment. In the Commission's experience, this provides members the opportunity to review proposals carefully, and often members provide useful comments which may lead to changes in the proposal.\22\ Committee members, therefore, should be encouraged to obtain the views of all interested members and committee chairman should be reminded of the NASD's obligation to provide fair representation to a cross-section of members pursuant to section 15A(b)(4) of the Act. --------------------------------------------------------------------------- \22\See, e.g., SR-NASD-93-3 (amendment to Section 34, Appendix F, Rules of Fair Practice to limit member participation in unfair roll-up transactions); SR-NASD-92-46 (amendment to Schedule E, Schedule to the By-Laws concerning conflicts of interest). --------------------------------------------------------------------------- V. Conclusion For the reasons stated above, the Commission believes the rule change is consistent with the Act and, therefore, has determined to approve it. The rule change will provide the NASD greater flexibility to amend its rules. This will enable the NASD to respond quickly to the needs of its members and to protect investors and the public interest in this era of rapidly changing market conditions. The Commission does not believe that the 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. It is therefore ordered, Pursuant to section 19(b)(2) of the Act, that the rule change SR-NASD-93-48 be, and hereby is, approved. For the Commission, by the Division of Market Regulation, pursuant to delegated authority.\23\ --------------------------------------------------------------------------- \23\17 CFR 200.30-3(a)(12). --------------------------------------------------------------------------- Margaret H. McFarland, Deputy Secretary. [FR Doc. 94-5920 Filed 3-14-94; 8:45 am] BILLING CODE 8010-01-M --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A94-5920. Public record. Not legal advice.