Self-Regulatory Organizations; Notice of Filing and Order Granting Temporary Accelerated Approval To Proposed Rule Change by National Association of Securities Dealers, Inc. Relating To Changes in the Structure of the NASD Board of Governors

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-38644; File No. SR-NASD-96-20, Amendment No. 5]

Self-Regulatory Organizations; Notice of Filing and Order

Granting Temporary Accelerated Approval To Proposed Rule Change by

National Association of Securities Dealers, Inc. Relating To Changes in

the Structure of the NASD Board of Governors

May 15, 1997.

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 May 14,

1997, the National Association of Securities Dealers, Inc. (``NASD'')

filed with the Securities and Exchange Commission (``Commission'')

Amendment No. 5 to the proposed rule change as described in Items I, II

and III below, which Items have been prepared by the NASD.\1\ The

[[Page 28089]]

Commission is publishing this notice to solicit comments on the

proposed rule change as further amended by Amendment No. 5 from

interested persons and is simultaneously granting accelerated approval

to the proposed rule change for a period of six months.

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\1\ The NASD originally filed the rule change on May 28, 1996.

On June 5, 1996, the NASD filed Amendment No. 1 to the proposed rule

change. Amendment No. 1 amended Article VI, Section 5 of the NASD

By-Laws (``By-Laws'') to clarify that, in a contested election, the

term of office of a candidate certified by the National Nominating

Committee for inclusion on the ballot for the election of Governors

pursuant to Article VI, Section 7(c) would be identical to the term

of office of a candidate nominated by the National Nominating

Committee pursuant to Article VI, Section 7(c). Amendment No. 1 also

amended Article VI, Section 7(a) of the By-Laws to clarify that any

person elected to the Board of Governors must be nominated or

certified by the National Nominating Committee. See Letter from

Suzanne E. Rothwell, Associate General Counsel, NASD to Katherine A.

England, Assistant Director, Division of Market Regulation,

Commission (dated June 4, 1996).

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

rule change. Amendment No. 2 provided the final report of the vote

of the NASD membership with respect to the proposed rule change.

2,227 valid ballots were received from NASD members. 2,101 voted to

approve the proposed rule change, 117 voted to disapprove the

proposed rule change and 9 did not vote.

On July 10, 1996, the NASD filed Amendment No. 3 to the proposed

rule change. Amendment No. 3 requested 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).

On November 12, 1996, the NASD filed Amendment No. 4 to the

proposed rule change. Amendment No. 4 requested temporary approval

of the proposed rule change for a period of six months. 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 November 12, 1996).

The Commission previously published notice of the proposed rule

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

29777 (June 12, 1996)) and granted accelerated approval to the

proposed rule change for periods of 120 days and six months

(Securities Exchange Act Release No. 37424 (July 11, 1996), 61 FR

37515 (July 18, 1996) and Securities Exchange Act Release No. 37956

(November 15, 1996), 61 FR 59265 (November 21, 1996), respectively).

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

of the Proposed Rule Change

In 1995, the NASD Board of Governors (``Board'') appointed The

Select Committee on Structure and Governance (``Select Committee'') to

examine the corporate structure, governance, and functions of the NASD

and to recommend changes and improvements to enable the NASD to meet

its regulatory and business obligations. In September 1995, the Select

Committee recommended, among other things, that the NASD establish two

distinct subsidiaries; one to perform the regulatory functions of the

NASD and the other to run The Nasdaq Stock Market, Inc. (``Nasdaq'').

The Select Committee recommended that each subsidiary have an

independent Board of Directors with at least 50% public representation

and that the NASD remain as parent corporation overseeing the

operations of both subsidiaries. The Select Committee recommended that

the NASD Board of Governors be composed of a majority of public

directors.

In January 1996, the NASD created a new subsidiary, NASD

Regulation, Inc. (``NASD Regulation'') to provide regulation and member

and constituent services, with the NASD retaining responsibility for

general oversight over the effectiveness of the self-regulatory and

business operations of the NASD and its major subsidiaries, Nasdaq and

NASD Regulation, and final policymaking authority for the association

as a whole. The NASD also adopted Select Committee proposals to

restructure and reduce the size of the NASD Board and to implement

policies to ensure a balance of non-industry and industry

representation on the Nasdaq and NASD Regulation Boards.

On April 11, 1996, the Commission granted temporary approval for a

period of 90 days to: (i) amendments to Article VII of the NASD By-Laws

to create a national nominating committee to nominate persons to serve

on the Board of Governors and reconstitute the Board as a majority non-

industry Board; \2\ (ii) NASD Rule 130 providing for the delegation of

authority to act on behalf of the NASD to NASD Regulation and Nasdaq

pursuant to the ``Plan of Allocation and Delegation of Functions by

NASD to Subsidiaries'' (``Delegation Plan''); and (iii) the Delegation

Plan.\3\ The Delegation Plan sets forth certain purposes, functions and

governance procedures of the three corporations working together.

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\2\ Securities Exchange Act Release No. 37106 (April 11, 1996),

61 FR 16944 (April 18, 1996) (``Release 34-37106'').

\3\ Securities Exchange Act Release No. 37107 (April 11, 1996),

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

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On June 11, 1996, the Commission approved the instant proposed rule

change for a period of 120 days. The rule change amended the By-Laws to

conform them to the Delegation Plan. The rule change provided for the

creation of a national nominating committee to identify and nominate

for election industry and non-industry persons to serve on the Board;

deleted references to the District and local administration, because

responsibility for the local administration of regulatory affairs under

the Delegation Plan has been assigned to NASD Regulation; conformed

terms and rule citations to those used in the reorganized NASD Manual

and made miscellaneous clarifying corrections to the By-Laws; and

replaced all references to the NASD ``Certificate of Incorporation''

with references to the ``Restated Certificate of Incorporation'' to

reflect that the Certificate of Incorporation has been amended to be

consistent with the changes previously adopted and proposed herein to

the By-Laws. On November 15, 1996, the Commission extended temporary

approval of the instant proposed rule change for an additional six

months.\4\

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\4\ The Commission separately approved SR-NASD-96-29, amending

the Delegation Plan, for periods of 120 days and six months. See

Securities Exchange Act Release No. 37425 (July 11, 1996), 61 FR

37518 (July 18, 1996) and Securities Exchange Act Release No. 37957

(November 15, 1996), 61 FR 59267 (November 21, 1996), respectively.

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The NASD hereby files this Amendment No. 5, pursuant to Section

19(b)(1) of the Act and Rule 19b-4 thereunder, to obtain authorization

for an interim extension of the amendments to the By-Laws for a period

for six months.\5\ During this interval, there will be no further

amendments to the By-Laws, absent Commission approval of a

corresponding Rule 19b-4 filing.\6\

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\5\ The NASD also filed Amendment No. 4 to SR-NASD-96-29,

requesting an extension of the Commission's temporary approval of

the Delegation Plan for a period of six months. The Commission is

separately approving that rule change as further amended by

Amendment No. 4. See Securities Exchange Act Release No. 38645, May

15, 1997).

\6\ The NASD filed SR-NASD-97-28, to propose changes in the By-

Laws of the NASD, NASD Regulation, Inc., The Nasdaq Stock Market,

Inc., the Plan of Allocation and Delegation of Functions by the NASD

to Subsidiaries, Membership Application Procedures, Disciplinary

Proceedings, Other Proceedings, and Other Conforming Changes; the

filing contains proposed amendments to the NASD By-Laws. The comment

period for this rule filing expires on June 6, 1997. See Securities

Exchange Act Release No. 34-38545 (April 24, 1997, 62 FR 25226 (May

8, 1997).

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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 V 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

1. Purpose

The purpose of Amendment No. 5 is to ensure continued effectiveness

of the amended NASD By-Laws while the Commission considers whether to

grant permanent approval to the instant NASD rule filing. Amendment No.

5 is intended to ensure that the NASD continues to possess the

requisite

[[Page 28090]]

corporate authority to continue the restructuring necessary to

implement the principles articulated in the report of the Select

Committee.

2. Statutory Basis

The NASD believes that the proposed rule change as further amended

by Amendment No. 5 is consistent with the provisions of Sections 15A(b)

(2), (4), and (6) of the Act \7\ in that the restructured organization

will: (1) 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; (2) provide for the

fair representation of members, issuers and investors on the Board of

Governors and in the administration of the NASD's affairs; and (3)

enhance the NASD's ability to protect investors and the public interest

in furtherance of the purposes of the Act.

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\7\ 15 U.S.C. Sec. 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 of certain parts of the proposed rule

change for member vote in Notice to Members 95-101, attached as Exhibit

2 to rule filing SR-NASD-96-02, the NASD received three comments, which

were attached as Exhibit 4 to SR-NASD-96-02. The NASD's statement on

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

forth in rule filing SR-NASD-96-02 and was published by the Commission

in Release 34-37106.

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

Commission Action

The NASD requests that the Commission find good cause, pursuant to

Section 19(b)(2) of the Act, for approving the proposed rule change

prior to the 30th day after its publication in the Federal Register to

avoid any interruption of the effectiveness of the amended By-Laws. The

current authorization is scheduled to expire by May 15, 1997. Hence it

is imperative that the Commission approve the instant filing on or

before that date. Otherwise, the NASD will be required to suspend

operation of the self-regulatory organization functions currently

assumed by NASD Regulation and Nasdaq pending Commission action on the

proposed extension.

IV. Discussion

The Commission finds that the proposed rule change as further

amended by Amendment No. 5 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-96-29 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 instant proposed rule change was previously published for

comment and approved by the Commission on a temporary basis for periods

of 120 days and six months in Releases 34-37424 and 34-37956,

respectively. The six month approval period is scheduled to expire by

May 15, 1997. No comment letters concerning the instant proposed rule

change were received by the Commission. The reorganization of the NASD

Board of Governors is also reflected in rule changes to the NASD

Delegation Plan submitted in rule filing SR-NASD-96-29, which also was

previously granted temporary approval for periods of 120 days and six

months.\8\ The Commission is also extending its temporary approval of

that proposed rule change.\9\

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\8\ See Securities Exchange Act Release No. 37425 (July 11,

1996), 61 FR 37518 (July 18, 1996) and Securities Exchange Act

Release No. 37957 (November 15, 1996), 61 FR 59267 (November 21,

1996), respectively.

\9\ Securities Exchange Act Release No. 38645 (May 15, 1997).

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The Commission finds good cause for approving the instant 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 NASD

Regulation 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.

Accordingly, the Commission believes that accelerating the approval

of the proposed rule change as further amended by Amendment No. 5 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, 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-96-20,

Amendment No. 5 and should be submitted by June 12, 1997.

VI. Commission's Findings and Order Granting Accelerated Approval

The Commission finds that the proposed rule change is consistent

with the provisions of Sections 15A(b)(2), (4),

[[Page 28091]]

and (6) of the Act \10\ in that the restructured organization will: (1)

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 NASD members and persons associated with members with the

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

and the federal securities laws; (2) provide for the fair

representation of members, issuers and investors on the Board of

Governors and in the administration of the NASD's affairs; and (3)

enhance the NASD's ability to protect investors and the public interest

in furtherance of the purposes of the Act.

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\10\ 15 U.S.C. Sec. 78o-3.

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The NASD has requested that the Commission approve the proposed

rule change on or before May 15, 1997, which is prior to the 30th day

following publication of notice of the filing of the proposed rule

change in the Federal Register, in order to permit the uninterrupted

authorization of those corporate actions necessary to effectuate the

Delegation Plan.

Pursuant to Section 19(b)(2) of the Act,\11\ the Commission finds

good cause for approving the proposed rule change, as further amended

by Amendment No. 5, prior to the 30th day after publication in the

Federal Register. The proposed rule change will permit the NASD to

continue to carry out the functions and organize itself in the manner

contemplated by the Delegation Plan, which is intended to enable the

NASD to meet its regulatory and business obligations. Because the

Commission believes that the proposed rule change facilitates the

ability of the NASD to manage its affairs in a manner that enhances its

ability to carry out the purposes of the Act and enforce compliance by

NASD members and their associated persons with the provisions of the

Act, the Commission believes that the rule filing should be approved

without delay, for a six-month period.

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\11\ 15 U.S.C. 78s(b)(2).

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

that SR-NASD-96-20, as further amended by Amendment No. 5, be, and

hereby is, approved effective through November 15, 1997.

For the Commission, by the Division of Market Regulation,

pursuant to delegated authority, 17 CFR 200.30-3(a)(12).

Jonathan G. Katz,

Secretary.

[FR Doc. 97-13461 Filed 5-21-97; 8:45 am]

BILLING CODE 8010-01-M