Notice To Members 85-3

Membership Vote on Proposed Amendments to Association's By-Laws and Solicitation of Comments on Proposed Amendments to the Code of Procedure

Published Date:

IMPORTANT

OFFICERS, PARTNERS AND PROPRIETORS

TO: All NASD Members and Other Interested Persons

LAST VOTING DATE IS FEBRUARY 14, 1985

Members of the National Association of Securities Dealers, Inc. ("NASD" or "Association") are invited to vote on certain amendments to the Association's By-Laws contained in Exhibit A to this Notice for Members. In addition, amendments to the Association's Code of Procedure related to the proposed By-Law amendments are being published for comment.

In November 1983, the membership approved a complete revision to the NASD By-Laws. 1/ This revision was designed to conform the language of the By-Laws to certain statutory changes, codify certain interpretations of the Board of Governors, clarify the application of certain provisions and generally update and modernize the By-Laws.

Upon membership approval, the revised By-Laws were subsequently filed with the Securities and Exchange Commission ("SEC"). 2/ In the course of its review, the SEC staff identified certain procedural and technical changes to the text of the revised By-Laws which it suggested be considered by the NASD membership. The requested changes to the revised By-Laws described below have been reviewed and approved for membership vote by the Association's Board of Governors. Prior to becoming effective, the amendments must be approved by the membership and then approved by the SEC.

Hearings Prior to Suspension or Cancellation of Membership

Two changes requested by the SEC staff relate to procedures preceding the Association's summary suspension or cancellation of a firm's membership. Article II, Section 3(c) of the revised By-Laws permits the Board to cancel the membership of a firm which becomes ineligible for membership, to suspend or bar a person who becomes ineligible for association with a member, and to cancel a firm's membership which has a disqualified person associated with it. Moreover, Article VII, Section 2 of the revised By-Laws permits the NASD to expel or suspend a member for failure to provide information formally demanded after giving 15 days' notice.

As filed with the SEC, these sections of the revised By-Laws do not provide a member or associated person with a right to hearing before imposition of the cancellation, suspension or bar. It has, however, been the Association's longstanding practice to provide such members and persons with a right to be heard upon request prior to imposition of the cancellation, suspension or bar. The SEC staff believes the revised By-Laws should codify that practice by explicitly providing that such members and persons shall have an opportunity for hearing. The proposed changes to the revised By-Laws providing such a right to a hearing appear at Exhibit A (attached).

Conforming amendments to the revised Code of Procedure, 3/ also pending SEC approval, are required to accommodate the hearings contemplated by these amendments to the revised By-Laws. These conforming amendments, attached as Exhibit B, also provide more specific language concerning reinstatement of membership or association. Amendments to the Code of Procedure do not require a membership vote and it is the intention of the Association to file these amendments for approval by the SEC contingent upon membership and SEC approval of the By-Law amendments contained herein. They are being provided to you at this time to assist your evaluation of the proposed By-Law amendments and to solicit your comments.

Conflicts of Interest

The second change to the By-Laws relates to potential conflicts of interest. The NASD By-Laws as presently in effect contain a prohibition against any Governor or Committee member participating in the decision on any matter in which he or she has a conflict of interest. In the revision of the By-Laws approved by the membership last year, this provision was inadvertently not included. It is proposed to be inserted as.new Section 4 of Article XVI, as appears on page 2 of Exhibit A.

Jurisdiction Over Municipal Securities

The third change to the By-Laws relates to the status of municipal securities. Under Section 15B of the Securities Exchange Act of 1934, as amended, the Municipal Securities Rulemaking Board ("MSRB"), rather than the NASD, has been given rulemaking authority over the activities of municipal securities brokers and municipal securities dealers. For purposes of conformance with this statutory provision, a new Article XVI, Section 5 of the revised By-Laws is proposed which would restate existing statutory provisions by limiting the applicability of NASD requirements so as not to conflict with those of the MSRB. This language is also contained on page 2 of Exhibit A.

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The Board of Governors believes these amendments to the By-Laws are necessary and appropriate. It recommends that members vote their approval.

Please mark the attached ballot according to your convictions and return it in the enclosed, stamped envelope to "The Corporation Trust Company." Ballots must be postmarked not later than February 14, 1985.

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As noted above, comments are also solicited on the proposed amendments to the revised Code of Procedure. All comments should be received by and directed to:

James M. Cangiano, Secretary
National Association of Securities Dealers, Inc.
1735 K Street, N.W.
Washington, D.C. 20006

Comments should be received no later than February 14, 1985. Any questions regarding this notice to members should be directed to Dennis C. Hensley, Vice President and Deputy General Counsel, or Edward R. Venit, Senior Attorney, Office of General Counsel, at (202) 728-8294.

Sincerely,

Frank J. Wilson
Executive Vice President and General Counsel

Attachments

Exhibit A

PROPOSED AMENDMENTS TO REVISED BY-LAWS

The following are proposed changes to the text of the revised By-Laws contained in Notice to Members 83-55 and filed with the SEC in File No. SR-NASD-84-14. New language is underlined; deleted language is in brackets.

Article II, Section 3

Ineligibility of Certain Persons for Membership or Association

(a) No registered broker, dealer, or municipal securities broker or dealer shall be admitted to membership, and no member shall be continued in membership, if such broker, dealer, municipal securities broker or dealer or member fails or ceases to satisfy the qualification requirements under Section 2 of this Article, or if such broker, dealer, municipal securities broker or dealer or member is or becomes subject to a disqualification under Section 4 of this Article.
(b) No person shall become associated with a member, or continue to be associated with a member, or transfer association to another member, if such person fails or ceases to satisfy the qualification requirements under Section 2 of this Article, or if such person is or becomes subject to a disqualification under Section 4 of this Article; and no broker, dealer or municipal securities broker or dealer shall be admitted to membership, and no member shall be continued in membership, if any person associated with it is ineligible to be an associated person under this subsection.
(c) If it deems it appropriate, the Board of Governors, upon notice and opportunity for a hearing, may cancel the membership of a member if it becomes in eligible for continuance in membership under subsection (a) hereof, may suspend or bar a person from continuing to be associated with any member if such person is or becomes ineligible for association under subsection (b) hereof, and may cancel the membership of any member who continues to be associated with any such ineligible person.
(d) Any broker, dealer or municipal securities dealer which is ineligible for admission into membership, or any member which is ineligible for continuance in membership, may file with the Board of Governors an application requesting relief from the ineligibility pursuant to procedures adopted by the Board of Governors and contained in the Corporation's Code of Procedure. The Board of Governors may, in its discretion, approve the admission or continuance of an applicant or member, or the association of any person, if the Board determines that such approval is consistent with the public interest and the protection of investors. Any approval hereunder may be granted unconditionally or on such terms and conditions as the Board considers necessary or appropriate. In the exercise of the authority granted hereunder, the Board of Governors may:
(1) conduct such inquiry or investigation into the relevant facts and circumstances as it, in its discretion, considers necessary to its determination, which, in addition to the background and circumstances giving rise to the failure to qualify or disqualification may include the proposed or present business of an applicant for membership or of a member and the conditions of association of any prospective or presently associated person, among other matters;
(2) permit, in limited types of situations, a membership or association with a member pending completion of its inquiry or investigation, and its final determination, based upon a consideration of relevant factors, and may classify situations taking into account the status of brokers, dealers, and municipal securities brokers and dealers as applicants or existing members and of persons as prospective associated persons of members; the type of disqualification or failure to qualify; whether a member or associated person has been the subject of a previous approval and the terms and conditions thereof; and any other relevant factors; and
(3) delegate any of its functions and authority under this subsection (d) to appropriate committees of the Corporation or to Corporation staff members.
(e) An application filed under subsection (d) hereof shall not foreclose any action which the Board of Governors is authorized to take under subsection (c)hereof until approval has been granted.
(f) Approval by the Board of Governors of an application made under subsection (d) shall be subject to whatever further action the Commission may take pursuant to authority granted to the Commission under the Act.

Article VII, Section 2

Authority to Suspend for Failure to [File Regulatory Reports] Submit Required Information

(a) The Board of Governors shall have authority, upon notice and opportunity for a hearing, to cancel or suspend the membership of any member or suspend the association of any person associated with a member for failure to file, or to submit on request, any report, document or other information required to be filed with or requested by the Corporation. [ Before such cancellation or suspension shall become effective, the member or person associated with a member shall be given fifteen (15) days notice in writing thereof. ]
(b) The Board of Governors is authorized to delegate the authority here-inabove granted to the President of the Corporation; provided, however, that the Executive Committee of the Board of Governors shall be notified in writing of any such contemplated action by the President.
[(c) Any suspension or cancellation under this section shall take effect following the fifteen (15) day notice period and shall not be subject to the requirements of the Code of Procedure.]

Article XVI, Section 4

No member of the Board of Governors or of any committee of the Corporation shall directly or indirectly participate in any adjudication of the interests of any party which would at the same time substantially affect his interest or the interests of any person in whom he is directly or indirectly interested. In any such case, the member shall disqualify himself or shall be disqualified by the Chairman of the Board or Committee.

Article XVI, Section 5

The provisions of the By-Laws conferring rulemaking authority upon the Board of Governors shall not be applicable to the municipal securities activities of members or persons associated with members to the extent that the application of such authority would be inconsistent with Section 15B of the Act.

Exhibit B

PROPOSED AMENDMENTS TO RECODIFIED CODE OF PROCEDURE

The following is the text of proposed new Article V of the revised Code of Procedure, filed with the Securities and Exchange Commission in File No. SR-NASD-82-11 (succeeding articles to be renumbered accordingly), as well as revisions to Articles VI and XII (formerly Articles V and XI) of the revised Code of Procedure. New language is underlined; material to be deleted is in brackets.

Article V — Revocation Proceedings Purpose

Sec. 1 This Article provides procedures, in addition to those contained for summary suspension pursuant to Article VII of this Code of Procedure, for the Corporation to cancel or suspend the membership of a member or to bar or suspend a person from being associated with a member pursuant to Article II, Section 3 or Article VII, Section 2 of the By-Laws. Such actions are hereinafter referred to as "revocation proceedings."

Commencement of Revocation Proceedings

Sec. 2 (a) Should the Corporation determine to commence a revocation proceeding, it shall send notice thereof to the member or person associated with a member at least five (5) business days prior to the effective date of any action under Article II, Section 3 of the By-Laws and at least fifteen (15) days prior to the effective date of any action under Article VII, Section 2 of the By-Laws

(b) Upon written request of the member or persons associated with the member received by the Corporation prior to the expiration of the applicable notice period provided in Subsection 2(a), the matter shall be presented to a hearing panel designated by the Board of Governors.
(c) A decision rendered by a hearing panel designated pursuant to Subsection 2(b) shall constitute final action by the Corporation. Cancellation, bar or suspension shall become effective on a date established by the hearing panel.

Hearings

Sec. 3 At any hearing held under this Article, a record shall be kept and the member or person associated with a member and the Corporation shall be entitled to be heard in person and be represented by counsel and to submit any relevant matter.

Decisions

Sec. 4 Following any hearing held under this Article, a written decision shall be issued setting forth the findings made and the grounds upon which that determination is based.

Other Action Not Foreclosed

Sec. 5 Action by the Corporation under this Article shall not foreclose action by the Corporation under any other provisions of this Code where a violation of the Rules of the Corporation may be involved.

ARTICLE [V] VI

[ Member and Associated Person ] Eligibility Proceedings Purpose

Sec. 1 [ It is the purpose of this Article to provide where appropriate a procedure for requesting relief in cases of failure to meet the eligibility requirements of the Corporation's By-Laws. ] This Article provides procedures for a person to become associated with a member notwithstanding the existence of a statutory disqualification as defined in Section 3(a)(39) of the Securities Exchange Act of 1934, as amended, for reinstatement after a revocation proceeding pursuant to Article V of this Code, and to obtain relief in cases of failure to meet the eligibility or qualification requirements of the Corporation's Rules and By-Laws.

Eligibility Proceedings

Sec. 2. (a) If the Corporation has reason to believe a statutory disqualification exists or there is otherwise a failure to meet the eligiblity requirements of the Corporation's By-Laws, the member or broker or dealer or person shall be notified in writing of the specific eligibility deficiencies. No such notice shall be required, however, in the case of a cancellation or suspension of membership or suspension or bar of a person associated with a member pursuant to Article V of this Code. [ If it deems it appropriate, the Board of Governors may summarily cancel the membership of a member if it fails to meet the eligibility requirements provided by the By-Laws or if it continues to have associated with it a person who fails to meet the eligibility requirements provided in the By-Laws. ]

(b) The member or broker or dealer or person may make application to the Corporation requesting relief and shall demonstrate why the application should be granted, [notwithstanding the eligibility deficiencies.] Should the Corporation decline to grant such request, then if requested in writing by any party, [ If requested, ] or if directed by the Corporation, a hearing shall be held before a hearing panel designated by the Board of Governors, and a record shall be kept. At the hearing, the parties shall be entitled to be heard in person and be represented by counsel and to submit any relevant matter. The hearing panel shall make a recommendation as to the application which shall be forwarded to the Board of Governors together with the record.
(c) The Board of Governors shall make a written determination upon the record before it, setting forth therein the specific grounds upon which such determination is based and the conditions, if any, as to the continuance in or admission to membership it considers appropriate.
(d) The Board of Govenors shall promptly notify the applicant of any action taken. When required, a notification shall be filed with the Commission. Any applicant or person who is aggrieved by the action of the Board of Governors may make application for review of such action to the Commission.

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Article [ XI] XII

Miscellaneous

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[ Suspension for Failure to Furnish Information Duly Requested]

[Sec. 3. In the event of a refusal to comply with Section 2, and after 15 calendar days' notice in writing, the President is authorized to suspend the membership, registration or association of any member or person associated with a member and to cause notice thereof to be published in the next following membership supplement. Prior to such notice, the Executive Committee of the Board of Governors shall be notified in writing of such contemplated action by the President.]

(Remaining material renumbered accordingly.)

1/ The complete text of the revised By-Laws was distributed to the membership in Notice to Members 83-55 (October 20, 1983). Copies of revised By-Laws may be obtained from the Association's Office of General Counsel at (202) 728-8294.

2/ File No. SR-NASD-84-14. This filing has not yet been approved by the SEC and the revised By-Laws are not yet effective. All references contained herein are to the text of the revised By-Laws.

3/ The revised Code of Procedure was filed for SEC approval in File No. SR-NASD-82-11. Complete copies of the revised Code of Procedure are available from the Association's Office of General Counsel at (202) 728-8294.