Self-Regulatory Organizations; Notice of Filing and Order Granting Temporary Accelerated Approval of Proposed Rule Change by National Association of Securities Dealers, Inc. Relating to the Allocation and Delegation of Authority and Responsibilities by the National Association of Securities Dealers, Inc., to NASD Regulation, Inc., and The Nasdaq Stock Market, Inc.

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-37425; File No. SR-NASD-96-29]

Self-Regulatory Organizations; Notice of Filing and Order

Granting Temporary Accelerated Approval of Proposed Rule Change by

National Association of Securities Dealers, Inc. Relating to the

Allocation and Delegation of Authority and Responsibilities by the

National Association of Securities Dealers, Inc., to NASD Regulation,

Inc., and The Nasdaq Stock Market, Inc.

July 11, 1996.

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

(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on July 2,

1996,\1\ 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.

The Commission is publishing this notice to solicit comments on the

proposed rule change from interested persons. For the reasons discussed

below, the Commission is granting accelerated approval of the proposed

rule change for a period of 120 days.

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\1\ On July 8, 1996, the NASD filed Amendment No. 1 to the

proposed rule change. Amendment No. 1 amended the language of

proposed new Subsections II.C.4. and III.C.3 of the Delegation Plan

to clarify that it is proposed that the NASD Board of Governors have

authority to determine to both call for review or not call for

review a matter of the subsidiary Board during the 15-day period

provided for consideration by the NASD Board.

On July 10, 1996, the NASD filed Amendment No. 2 to the proposed

rule change. Amendment No. 2 requests temporary approval of the

proposed rule change for a period of 120 days. See Letter from T.

Grant Callery, Senior Vice President and General Counsel, NASD to

Katherine A. England, Assistant Director, Division of Market

Regulation, Commission (dated July 10, 1996).

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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 its rules to: (1) Add new Rule 0130

to the NASD's rules delegating to the subsidiaries of the NASD, NASD

Regulation, Inc. (``NASDR'') and The Nasdaq Stock Market, Inc.

(``Nasdaq''), the authority to act on behalf of the Association as set

forth in a Plan of allocation and Delegation adopted by the NASD Board

of Governors and approved by the Commission pursuant to its authority

under the Act; and (2) adopt a Plan of Allocation and Delegation of

Functions by NASD to Subsidiaries (``Plan'') setting forth the purpose,

function, governance, procedures and responsibilities of the NASD,

NASDR and Nasdaq, following the reorganization of the NASD.

The proposed rule change submitted herein, with exceptions, was

previously filed with the Commission in SR-NASD-96-16 and was

simultaneously published for comment and approved by the Commission on

a temporary basis for a period of 90 days.\2\ Release 34-37107

contained the full text of the proposed rule change, with the exception

of three amendments thereto. Set forth below are excerpts from the

Plan, marked to show the three amendments. Additions to the Plan are in

italics; deletions are in brackets.\3\

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\2\ Securities Exchange Act Release No. 37107 (April 11, 1996),

61 FR 16948 (April 18, 1996) (Release 34-37107).

\3\ The Commission is separately approving SR-NASD-96-20,

amending the NASD By-Laws consistent with the Plan, for a period of

120 days. See Securities Exchange Act Release No. 37424 (July 11,

1996).

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Plan of Allocation and Delegation of Functions by NASD to Subsidiaries

I. NASD, Inc.

* * * * *

C. Board of Governors

1. Composition: The NASD Board of Governors (``NASD Board'') shall

be composed of at least Nine (9) and no more than thirteen (13)

Governors, a majority of whom shall be Non-industry (including at least

Two (2) Public Governors). The Chief Executive Officer (``CEO'') of

NASD shall be a Governor. In the event that the NASD Board shall

consist of Eleven (11) or more governors, at least Three (3) shall be

Public Governors.

2. Election Procedures

a. Commencing with the selection of Governors to take office on

April of 1997, Governors (except the CEO of NASD) shall be elected by a

majority vote of those members of the NASD casting ballots on a slate

of nominees presented to the NASD membership by the National Nominating

Committee for election by secret ballot.

b. National Nominating Committee

(1) The National Nominating Committee shall be composed of at least

Six (6) and not more than Nine (9) members, equally balanced between

Industry and Non-industry Committee Members (including at least Two (2)

Public Committee Members). In the event that the Nominating Committee

shall consist of Seven (7) or more members at least Three (3) shall be

Public Committee Members. If at any time there shall be an odd number

of members of the National Nominating Committee, Non-industry Committee

Members shall be in the majority. No officer or employee of the

Association shall serve as a member of the National Nominating

Committee in any voting or non-voting capacity. Two members of the

National Nominating Committee shall be selected by each of the

Subsidiaries and the NASD. No more than three of the Committee Members

and no more than two of the Industry Committee Members shall be current

members of the NASD Board or of the Board of Directors of one of the

Subsidiaries (collectively the ``Association Boards''). Any member of

the National Nominating Committee who is a current member of any

Association Board shall be in his/her final year of service on any

Association Board.

(2) Members of the National Nominating Committee shall be appointed

annually by the NASD Board and may be removed for cause by a majority

vote of the NASD Board.

(3) The National Nominating Committee shall propose to the NASD

Board one or more nominees for each vacant or new Governor position,

and for each Director position on the Boards of Directors of the

Subsidiaries.

3. Contested Elections.

a. A candidate for the NASD Board who has not been nominated

pursuant to Section 2.b(3) above may be [included on the ballot]

nominated by petition, for the term of office specified by the Board

for the vacant governorship, if the candidate presents duly executed

petitions to the National Nominating Committee demonstrating that such

candidate has the support of Two (2) percent of the members of the

NASD.

b. A candidate for the NASD Board [shall] may be [certified by the

National Nominating Committee and] included on the ballot only if the

Committee certifies that the candidate's petitions

[[Page 37519]]

are duly executed by the requisite number of members of the NASD and

that the candidate meets the qualifications for the position to be

filled, as defined in section I.A. above.

* * * * *

II. NASD Regulation, Inc. (``NASDR'')

* * * * *

C. NASDR Board Procedures

1. Disciplinary Actions--Any initial disciplinary decision of the

Association, including dismissals, may be appealed to the NBCC within

15 calendar days, or called for review by the NBCC within 45 calendar

days, as set forth in the Code of Procedure. A decision of the NBCC may

be called for review by any member of the NASDR Board not later than

its meeting next following the NBCC's decision. A decision of the NBCC

or the NASDR Board may be called for review by any member of the NASD

Board not later than its meeting next following the decision of the

NBCC or NASDR Board but which is 15 calendar days or more following the

decisions of the NBCC or NASD Board. Any disciplinary decision not

appealed or called for review shall become the final action of the

Association upon the expiration of the time allowed for appeal or call

for review. A respondent has the right to appeal a final action of the

Association taken by the NBCC, NASDR, or NASD to the SEC.

2. Statutory Disqualification Decisions--any decision of the NBCC

with respect to statutory disqualification may be called for review by

any member of the NASDR Board not later than its meeting next following

the NBCC's decision. A decision of the NBCC or the NASDR Board may be

called for review by any member of the NASD Board not later than its

meeting next following the decision of the NBCC or NASDR Board but

which is 15 calendar days or more following the decision of the NBCC or

the NASDR Board. Any decision that is not called for review shall

become the final action of the Association upon expiration of the time

allowed for appeal or call for review. A respondent has the right to

appeal a final action of the Association taken by the NBCC, NASDR or

NASD to the SEC.

3. Rule Filings--Any rule change adopted by the NASDR Board that

imposes fees or other charges on persons or entities other than NASD

members or that the NASDR Board refers to the NASD Board because in the

view of the NASDR Board it raises significant policy issues shall be

reviewed and ratified by the NASD Board before becoming the final

action of the Association. If the NASDR Board does not refer a rule

change to the NASD Board for review, the NASDR Board action will become

the final action of the Association unless called for review by any

member of the NASD Board not later than its meeting next following the

NASDR Board's action but which is 15 calendar days or more following

the action of the NASDR Board. During the process of developing rule

proposals, NASDR staff shall consult with and seek the advice of Nasdaq

staff before presenting any rule proposal to the NASDR Board.

4. Notwithstanding the requirements set forth in paragraphs 1

through 3 of this Section, the NASD Board may determine it is advisable

to call or not call for review any disciplinary action, statutory

disqualification decision, or rule change within the 15 calendar day

period following the decision of the NBCC or the NASDR Board, as

applicable.

* * * * *

III. Delegation to Nasdaq

* * * * *

C. Nasdaq Board Procedures

1. Listing/Delisting Decisions--Any initial decision of Nasdaq

staff concerning the listing or delisting of securities on The Nasdaq

Stock Market may be appealed to the Nasdaq Listing and Hearing Review

Committee (``Listing Committee'') within 15 calendar days, or called

for review by any member of the Listing Committee within 45 days, as

set forth in the Code of Procedure. A decision of the Listing Committee

may be called for review by any member of the Nasdaq Board not later

than its meeting next following the Listing Committee's decision. A

decision of the Nasdaq Board may be called for review by any member of

the NASD Board not later than its meeting next following the Nasdaq

Board's decision but which is 15 calendar days or more following the

decision of the Listing Committee or the Nasdaq Board. Any decision not

appealed or called for review shall become the final action of the

Association upon expiration of the time allowed for appeal or call for

review. An issuer has the right to appeal a final action of the

Association taken by the Listing Committee, Nasdaq Board or NASD to the

SEC.

2. Rule Filings--Any rule change adopted by the Nasdaq Board that

imposes fees or other charges on persons or entities other than NASD

members or issuers or that the Nasdaq Board determines to refer to the

NASD Board because in the view of the Nasdaq Board it raises

significant policy issues shall be reviewed and ratified by the NASD

Board before becoming the final action of the Association. If the

Nasdaq Board does not refer a rule change to the NASD Board for review,

the Nasdaq Board action will become the final action of the Association

unless called for review by any member of the NASD Board not later than

its meeting next following the Nasdaq Board's action but which is 15

calendar days or more following the action of the Nasdaq Board. During

the process of developing rule proposals, Nasdaq staff shall consult

with and seek the advice of NASDR staff before presenting any rule

proposal to the Nasdaq Board.

3. Notwithstanding the requirements set forth in paragraphs 1 and 2

of this Section, the NASD Board may determine it is advisable to call

or not call for review any listing/delisting decision or rule change

within the 15 calendar day period following the decision of the Listing

Committee or the Nasdaq Board, as applicable.

* * * * *

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.

(a) Purpose of the Proposed Rule Change

Description of Plan

The Plan is organized in three principal parts, one for each of the

three major entities that will constitute the reorganized NASD: the

parent corporation, National Association of Securities Dealers, Inc.;

the regulatory subsidiary, NASD Regulation, Inc.; and the stock market

operating subsidiary, The Nasdaq Stock Market, Inc.\4\ The

[[Page 37520]]

Plan, the contents of which are self-explanatory, describes the

purposes, functions, governance, procedures and responsibilities of

each entity.

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\4\ The Plan does not discuss other wholly owned subsidiary

corporations of the NASD, such as, the Securities Dealers Risk

Purchasing Group, Inc. and Securities Dealers Insurance Co., Ltd.

These and any other wholly owned subsidiaries of the NASD not

described in the Plan do not perform any of the Association's

regulatory functions or the operating functions related to the

operation of The Nasdaq Stock Market. In addition the Plan does not

address the NASD's ownership role in corporations such as the

National Securities Clearing Corporation or the Depository Trust

Company.

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The first part of the Plan describes the parent corporation,

National Association of Securities Dealers, Inc. The Plan sets forth

the purpose and function of the NASD; the composition of the Board of

Governors, including provisions relating to the qualifications for

Governors, election procedures, creation of a National Nominating

Committee,\5\ term of office, vacancies and removal from office; the

function, composition and reporting structure of the Audit Committee

and the Office of International Review; the function and composition of

the Management Composition Committee; and the Commission's access to

and status of officers, directors, employees, books, records and

premises of the subsidiaries.

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\5\ The National Nominating Committee shall be composed of at

least six and not more than nine members equally balanced between

Industry and Non-Industry Committee Members (including at least two

Public Committee Members). Two members of the National Nominating

Committee shall be selected by each of the Subsidiaries and the

NASD, of which it is anticipated that at least three will be Non-

Industry Members.

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The second part of the Plan describes the regulatory subsidiary,

NASD Regulation, Inc. The Plan sets forth the delegation of authority

to NASDR by the NASD; the purpose, function and authority of NASDR; the

composition of and qualifications for members of the Board of Directors

from 1997 forward, including provisions relating to election

procedures; the function and composition the National Business Conduct

Committee; the Board's procedures for reviewing disciplinary actions,

statutory disqualification decisions and proposed rule change

recommendations; and the Board's procedures for initiating actions.

The third part of the Plan describes the stock market operating

subsidiary, The Nasdaq Stock Market, Inc. The Plan sets forth the

delegation of authority to Nasdaq; the purpose and function of Nasdaq;

the composition of and qualifications for members of the Board of

Directors, including, provisions relating to election procedures and

the authority of the Board; the Board's procedures for reviewing

listing/delisting decisions, and rule change recommendations; the

Board's procedures for initiating actions; the functions and

composition of the Quality of Markets Committee; and functions of the

Stockwatch Department.

Description of Amendments to Plan

The NASD is filing as part of this rule change three amendments to

the Plan previously approved by the Commission in SR-NASD-96-16. The

NASD is proposing to amend Article I.C.3 of the Plan that is titled

Contested Elections in order to make clear that: (1) the term for which

a candidate nominated by petition would be elected cannot subsequently

be set by the Board of Governors of the NASD for a term shorter than

that for which the Nominating Committee's candidate was proposed; and

(2) the Nominating Committee certifies only that a nominee has

satisfied the criteria for nomination by position in the category to be

filled (i.e., Public, Non-industry, Industry).

In addition, the NASD is proposing to add a new subparagraph to

Sections II.C. and III.C of the Plan. Those sections currently specify

that disciplinary, statutory disqualification, listing/delisting, and

rule filing actions by the subsidiaries may be called for review by the

NASD Board at the meeting next following the subsidiary's board

meeting, so long as the NASD Board meeting is at least 15 calendar days

after the subsidiary's Board meeting. With the exception of rule

filings, an action by one of the subsidiaries that is not called for

review will only become a final action of the NASD after the expiration

of the 15-day period. Rule filings that are referred by a subsidiary to

the NASD Board are permitted to be reviewed immediately. If, however,

the rule filing is not so referred, the Board's determination to review

or not review on its own motion must wait for the expiration of the 15-

day period. While this mandatory time period ensures that the NASD

Board will have sufficient opportunity to determine whether or not to

call for review, there are situations where the NASD believes it to be

in the public interest to expedite its determination whether or not to

call for review a disciplinary, statutory disqualification or rule

filing action by a subsidiary board and, if a matter is called for

review, to take appropriate action. Examples of situations that might

require such an expedited treatment include: proceedings to revoke the

registration of a member or person associated with a member when the

associated person has become subject to a statutory disqualification or

the member or the person has failed to pay an arbitration award;

disciplinary proceedings imposing sanctions of expulsion of a member or

bar of an associated person; and rulemaking that results from a market

emergency or otherwise requires submission to the Commission on an

expeditious basis in the public interest.

(b) Statutory Basis for the Proposed Rule Change

The NASD believes that the proposed rule change is consistent with

the provisions of Section 15A(b)(2) of the Act \6\ in that the terms of

the Plan will provide for the organization of the Association in a

manner that will permit the Association, through its operating

subsidiaries, to carry out the purposes of the Act, to comply with the

Act, and to enforce compliance by Association members and persons

associated with members with the Act, the rules and regulations

thereunder, the rules of the Association and the federal securities

laws.

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\6\ 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. However, in

connection with the publication for member vote of proposed amendments

to the By-Laws to implement the Plan in Notice to Members 95-101

(December 11, 1995), attached as Exhibit 2 to proposed rule change SR-

NASD-96-02, the NASD received three comments which were attached as

Exhibit 4 to that proposed rule change. The NASD's statement on the

comments received with respect to Notice to Members 95-101 is set forth

in SR-NASD-96-02 and was published by the Commission in Securities

Exchange Act Release No. 37106 (April 11, 1996), 61 FR 16944 (April 18,

1996). SR-NASD-96-02 proposed certain of the By-Law amendments issued

for member vote in Notice to Members 95-101 (December 11, 1995) in

order to permit the reorganization of its Board of Governors consistent

with the Plan submitted in SR-NASD-96-16.

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

Commission Action

The NASD has requested that the Commission find good cause pursuant

to Section 19(b)(2) for approving the

[[Page 37521]]

proposed rule change prior to the 30th day after publication in the

Federal Register.

IV. Discussion

The Commission finds that the proposed rule change is consistent

with the requirements of the Act and the rules and regulations

thereunder applicable to the NASD and, in particular, the requirements

of Section 15A of the Act and the rules and regulations thereunder. The

Commission believes that the proposed rule change will allow the NASD

to carry out the purposes of the Act to comply with, and enforce

compliance by its members and associated persons, with the provisions

of the Act, the rules and regulations thereunder, and the rules of the

NASD. Furthermore, the amendments are designed (with amendments to the

NASD By-Laws simultaneously approved in SR-NASD-96-20, as set forth

below) to assure a fair representation of the NASD's members, in the

selection of its directors and administration of its affairs as well as

comply with the public and non-industry participant requirements of the

Act. It is envisioned that these rules and any subsequent changes that

may be implemented from time-to-time will enable the NASD to better

comply with the requirements of Section 15A(b)(2) in particular and the

Act in general.

The Commission finds good cause for approving the proposed rule

change prior to the 30th day after the date of publication of notice of

filing thereof in that accelerated approval will enhance the NASD's

ability to carry out its regulatory obligations under the Act. The

Commission believes that the proposed rule change is intended to

accomplish certain allocations and delegations of authority necessary

to reorganize the NASD, and establish as separate subsidiaries the

NASDR and Nasdaq in accordance with the September 1995 recommendations

of The Select Committee on Structure and Governance in order to enable

the NASD to meet its regulatory and business obligations. The Plan,

which is part of this proposed rule change, sets forth the purpose,

functions, governance, procedures, and responsibilities of the NASD,

the NASDR and Nasdaq following the reorganization of the NASD. The

NASD's Board of Governors, which has been reorganized to be consistent

with the proposed rule change, has held meetings to carry out the

business of the Association. The subsidiaries also have held meetings

of the Board of Directors of NASDR and Nasdaq in order to carry out the

business of the subsidiaries during the 90 day period during which the

Plan has been effective.

The proposed rule change, with the exception of the three

amendments submitted herein, was previously filed with the Commission

in SR-NASD-96-16 and was simultaneously published for comment and

approved by the Commission on a temporary basis for a period of 90 days

in Release 34-37107. The 90-day approval period expires on July 10,

1996. No comment letters concerning SR-NASD-96-16 were received by the

Commission. The reorganization of the NASD Board of Governors is also

reflected in proposed rule changes to the NASD By-Laws submitted in

rule filing SR-NASD-96-20 and published for comment by the Commission

in Securities Exchange Act Release No. 37282 (June 6, 1996), 61 FR

29777 (June 12, 1996). The Commission is granting temporary accelerated

approval to that proposed rule change.\7\

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\7\ See Securities Exchange Act Release No. 37424 (July 11,

1996).

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Accordingly, the Commission believes that accelerating the approval

of the proposed rule change will benefit members and the public

interest by fully implementing the reorganization of the NASD and its

subsidiaries.

V. 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, N.W., Washington, D.C. 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 the file number in the caption

above and should be submitted by August 8, 1996.

It is therefore ordered, pursuant to Section 19(b)(2) of the Act,

that the proposed rule change SR-NASD-96-29 be, and hereby is, approved

for a period of 120 days.

For the Commission, by the Division of Market Regulation,

pursuant to delegated authority.\8\

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\8\ 17 CFR 200.30-3(a)(12).

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Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 96-18170 Filed 7-17-96; 8:45 am]

BILLING CODE 8010-01-M