Request for Comments on Proposed Amendments to Article II, Sections 3, 4 and 5 of the NASD By-Laws

TO: All NASD Members and Other Interested Persons

LAST DATE FOR COMMENT: JANUARY 5, 1987.

EXECUTIVE SUMMARY

The NASD requests comments on proposed amendments to Article II, Sections 3, 4 and 5 of the NASD By-Laws. The amendments would require controlling persons of a firm liquidated under the Securities Investor Protection Act of 1970 (SIPA) to undergo eligibility proceedings pursuant to the NASD Code of Procedure prior to becoming associated, or continuing in association, with an NASD member firm.

The NASD believes that these amendments would provide an additional measure of protection for public customers and members from possible future misconduct by persons who have had control relationships with firms that have been liquidated under SIP A. The text of the proposed amendments is attached.

BACKGROUND

Since the adoption of the Securities Investor Protection Act of 1970, the NASD has been involved in regulating the financial and operational condition of the majority of NASD members. Currently, with an overall membership of approximately 6,700 firms, the NASD is the designated examining authority for financial responsibility pursuant to SEC Rule 17d-l for approximately 6,300 firms. In that capacity, the NASD has established comprehensive early-warning surveillance programs to closely monitor the financial and operational condition of its designated members, including computerized analysis of FOCUS I and n reports.

In its role as designated examining authority, it has been the NASD's experience that the liquidation of a broker-dealer typically involves violations of net capital and recordkeeping rules. While these violations result in disciplinary proceedings against the firm and its controlling persons and the imposition of appropriate sanctions, which may include suspensions or bars, such sanctions may not be imposed or become effective until well after the controlling persons of the liquidated firm have become associated with other NASD member firms. On several occasions, the Board of Governors and the staff of the Securities Investor Protection Corporation (SIPC) have expressed concern at the ease with which individuals who have had responsibility for the liquidation of a member firm by SIPC become affiliated in a similar responsible role with another member firm.

Under these circumstances, the Board believes that a close review of the past and proposed activities of the controlling persons of a liquidated broker-dealer, prior to the approval of such person's associations with other member firms, would provide an additional measure of protection for public customers and member firms from possible future misconduct by such persons.

PROPOSED AMENDMENTS

The NASD Board of Governors is publishing for comment proposed amendments to Article II, Sections 3, 4 and 5 of the NASD By-Laws that would authorize the NASD to examine the involvement of specified control persons in, and their responsibility for, the activities that led to the liquidation of a broker-dealer, prior to approving the association, or continued association of such persons, with another member firm.

Under the proposed amendments, a person who was an officer, director, general partner, financial and operations principal, owner of 10 percent or more of the voting securities, or a controlling person (or a person performing similar functions) of a broker-dealer at the time SIPA proceedings were instituted, or whose association with the broker-dealer was terminated within six months prior to the institution of SIPA proceedings, would be ineligible to become associated with an NASD member firm. In the event that a person's association with the liquidated broker-dealer was terminated prior to the institution of liquidation proceedings and he had become associated with another broker-dealer in the interim, he would be ineligible to continue in association with that broker-dealer.

The proposed amendments would require an ineligible person to undergo eligibility proceedings pursuant to Article VII of the NASD Code of Procedure. Article VII provides for application by an ineligible person for association with a member firm, consideration of the application by a panel designated by the Board of Governors, which may involve a hearing, and the issuance of a written decision by the Board of Governors.

The purpose of the eligibility proceedings is to determine the ineligible person's fitness to become associated or continue in association with a member firm and in what capacity. For example, a person who exercised supervisory or financial and operational responsibilities at a broker-dealer that was liquidated may be found to be qualified for a retail sales position, but not well suited for additional supervisory or financial and operational responsibilities.

National Association of Securities Dealers, Inc.
1735 K Street, N.W.
Washington, D.C 20006
(202) 728-8000

TO: SOES Subscribers

FROM: SOES Operations

DATE: December 1, 1986

SUBJECT: SOES Message Enhancement

The NASD Market Services, Inc. Board of Directors and the SOES Users Committee are pleased to announce a modification to the Small Order Execution System (SOES) to take effect December 12, 1986.

SOES Cancellation Message:

A new on-line screen/print message has been introduced to SOES which identifies a cancelled execution report. Upon the acceptance of a SOES Supervisory Cancellation, a screen/print message will be generated to the B partition of the originating order entry and market making terminals.

The cancellation message for Order Entry firms will appear as follows:

The code SCXO identifies a SOES cancellation report for a purchase of 1000 ABCD @ 9 3/8 for the order entry firm OEID. The message will appear on the B partition of the terminal from which the order was entered. XYZ 1234 is the identifier and sequence number of the order. MMID is the market maker with whom the order was executed. The trade was cancelled on 11/14 at 10:50 a.m.

The cancellation message for Market Makers will appear as shown below:

The code SCXM identifies a SOES cancellation report for a sale of 1000 ABCD @ 9 3/8 for the market maker MMID. The message will appear on the B partition of the terminal to which the order was routed. OEID is the order entry firm with whom the order was executed. XYZ 1234 is the identifier and sequence number of the execution. The trade was cancelled at 10:50 a.m. on 11/14.

NOTE: All cancellation reports will continue to appear in the execution file scan (^SX). In addition, under the new modification cancellations will now automatically adjust total trade and share data on the trade statistic file (^SQ)

Computer to Computer Interface:

The CTCI Cancellation message will utilize the same message format used for a SOES execution. The message will repeat the original trade with an indicator on line 3 denoting that the message is a cancellation. Questions regarding CTCI interface should be directed to Jack Donlon, New York Automation, (212) 839-6375.

If you have any questions regarding the above modification, please contact SOES Operations at (212) 839-6210.

NASDAQ/NMS Interim Additions

The following changes to the list of NASDAQ/NMS securities occurred since November 7, 1986:

NASDAQ/NMS Symbol* And/Or Name Changes

NASDAQ/NMS Deletions

Any questions regarding this notice should be directed to Ms. Kit Milholland, Senior Analyst, NASDAQ Operations, at (202) 728-8281. Questions pertaining to trade reporting rules should be directed to Mr. Leon Bastien, Assistant Director, Market Surveillance, at (202) 728-8192.

Sincerely,

Gordon S. Macklin
President

Article VIII

Officers and Employees

Article IX

Committees

Article X

Rules of Fair Practice

Article XI

Uniform Practice Code

Article XII

Limitation of Powers

Article XIII

Article XIV

Article XV

Article XVI

[new language is underlined; deleted language is stricken through]

BY-LAWS

ARTICLE I

Definitions

Sec:3 When used in these By-Laws, and any rules of the Corporation, unless the context otherwise requires, the term;

Explanation

The added language at the beginning of the Article and the new definition of ['rules of the Corporation" in subsection (n) are intended to make clear that the definitions in the By-Laws also apply to terms used in the Rules of Fair Practice and other Association rules.

The new terms "municipal securities" and "municipal securities dealer" in subsections (j) and (k) parallel the statutory definitions added by the Securities Acts Amendments of 1975 bringing this class of security and type of dealer under regulation by the Commission and the Association. The definition of "registered broker, dealer or municipal securities dealer" is included because under the 1975 Act Amendments only broker/dealers registered with the SEC are eligible for membership. The new definitions in subsections (a), (e) and (f) and amendments to certain existing definitions are for clarity. The definition of "branch office" has been transferred from existing Article I, Section 11 of the By-Laws.

[All of new Article II is taken from the existing provisions of Sections 1 and 2 of Article I, and has been substantially rewritten for clarity and to conform to the Securities Acts Amendments of 1975.]

ARTICLE I II

Membership Qualifications of Members and Associated Persons

Qualifications for Membership Persons Eligible to become Members and Associated Persons of Members

Sec. 1. (a) Any registered broker, or dealer or municipal securities dealer authorized to transact, and whose regular course of business consists in actually transacting any branch of the investment banking or securities business in the United States, under the laws of any State and/or the laws of the United States, shall be eligible to for membership in the Corporation, except such registered brokers, or dealers or municipal securities dealers as which are excluded pursuant to Section 2 of this Article under the provisions of Sections 3(a) or (b) of this Article.

Explanation

Subsection (a) is similar to existing Article I, Section 1 of the By-Laws, but incorporates the limitation of Sections 15A(g)(l) of the 1934 Act that only registered broker/dealers are eligible for membership in the Association. The new reference to municipal securities dealers, when read with the definition of the term in proposed Article I, subsection (j) of the By-Laws, makes clear that only non-bank municipal securities dealers are eligible for membership in conformity with the regulatory scheme for municipal securities established under the Securities Acts Amendments of 1975.

Subsection (b) is entirely new and conforms to the requirement of Section 15A(b)(3) of the 1934 Act that the rules of the Association must provide that, with certain exceptions, any person may become associated with a member.

Restrictions on Admission to or Continuance in Membership

Sec (2) (a) No broker or dealer, except with the approval or at the direction of the Securities and Exchange commission (hereinafter referred to in these By-laws as the Commission), in cases m which the commission finds it appropriate m the public interest so to approve or direct pursuant to Section l5A of the Securities Exchange Ac of 1934; as amended (hereinafter referred to as the Act), shall be admitted to or continued in membership in the Corporation if such broker or dealer, whether prior or subsequent to becoming such, (A) has been and is suspended or expelled from a registered national or affiliated securities association, registered pursuant to Section 15A of the Act, or from a national securities exchange, registered pursuant to Section 6 of the Act, or has been and is barred or suspended from being associated with all members of such association or national securities exchange for violation of any rule of such registered securities association or national securities exchange which prohibits any act or transaction constituting conduct inconsistent with just and equitable principles of trade, or requires any act the omission of which constitutes conduct inconsistent with just and equitable princlples of trade; or (B) is subject to an order of the 60m mission denying, suspending or revoking his registration pursuant to Section 15 of the Act, or expelling or suspending him from membership m a registered securities association or a national securities exchange, or barring or suspending hfm from being associated with a broker or dealer; or (C) by his conduct while associated with a broker or dealer, was a cause of any suspension; expulsion; or order of the character described in clauses (A) or (B), which is m effect with respect to such broker or dealer, or (D) has associated with him any person who is known; or in the exercise of reasonable care should be known, to htm to be a person who, if such person were a broker ordealer; would be ineligible for admission to our continuance in membership under clauses (A), (B), or (C) of this section.

Authority of Board to Adopt Qualification Requirements

(d)Sec. 2 No broker or dealer shaft be admitted to or continued in membership and no natural person shaft become or continue to be associated with a member, except with the approval or at the direction of the commission in cases in which the commission finds it appropriate in the public interest so to approve or direct, unless such broker or dealer or person associated with a member is qualified to become a member or a person associated with a member in conformity with specified and appropriate standards with respect to the training, experience, and such other qualifications as the Board of Governors finds necessary or desirable, and in the case «of a member, the financial responsibility of such member. The Board of Governors shall have authority to adopt rules and regulations applicable to applicants for membership, members and persons associated with applicants or members establishing specified and appropriate standards with respect to the training, experience, competence and such other qualifications as the Board of Governors finds necessary or desirable, and in the case of an applicant for membership or a member, standards of financial responsibility and operational capability.

In establishing and applying such standards, the Board of Governors may classify members and persons associated with such members, taking into account relevant matters, including the nature, extent and type of business done being conducted and of securities sold, dealt in, or otherwise handled. The Board of Governors may specify that all or any portion of such standards shall be applicable to any such class and may require the persons in any such class to be registered with the Corporation.

Such classifications, qualifications, registration requirements, standards and exceptions thereto shaft be incorporated in Schedule C attached to and made a part of these By-Laws. Within the limitations provided herein, the Board of Governors shaft have the power to adopt, alter, amend, supplement or modify the provisions of Schedule "C" from time to time without recoarse to the membership for approval as wooid otherwise be required by Article IX hereof, and Schedule "C", as adopted, altered, amended, supplemented or modified, shall become effective as the Board of Governors may prescribe unless disapproved by the Commission. The Board of Governors may from time to time make changes in such rules, regulations and standards as it deems necessary or appropriate. Neither the adoption nor any change in such standards need be submitted to the membership for approval and such rules, regulations and standards as adopted or amended shall become effective at such time as the Board of Governors may prescribe.

Explanation

The provision is based upon existing Article I, Section 2(d) of the By-Laws, but has been rewritten primarily for clarity and to be consistent with other provisions of the By-Laws. Article I, Sections 2(a), (b) and (c) have been completely replaced by new sections 3 and 4 below. It is proposed that the content of existing Schedule C will be moved to a different portion of the Manual.

Ineligibility of Certain Persons for Membership or Association

Sec. 3. (a) No registered broker, dealer or municipal securities dealer shall be admitted to membership, and no member shall be continued in membership, if such broker, dealer, municipal securities dealer or member fails or ceases to satisfy the qualification requirements under Section 2 of this Article, or if such broker, dealer, municipal securities dealer or member is or becomes subject to a disqualification under Section 4 of this Article.

Explanation

The provision is a complete revision and consolidation of existing By-law provisions concerning ineligibility for membership or association with a member. The changes are primarily clarifying.

Subsection (a) carries forward the existing prohibitions of Article I, Section 2 of the By-laws and provides that no applicant or member shall be admitted or continued in membership if there is a failure to satisfy examination and other qualification requirements, or the applicant or member is subject to a disqualification as that term is defined by Section 4. Subsection (b) imposes similar standards of ineligibility upon prospective and presently associated persons, and also carries forward existing language under which a member becomes ineligible for continuance in membership if it allows an ineligible person to become or remain associated with the member.

Subsection (c) grants authority to the Board of Governors to summarily cancel the membership of a member or suspend or bar a person from continuing to be associated with a member in cases where a member or person becomes ineligible under subsections (a) and (b). The provision carries forward substantially the existing language of Article I, Section 13(b) of the By-laws and is designed to make the ineligibility provisions of subsections (a) and (b) effective in the event of a failure to voluntarily comply with the prohibitions thereunder.

Subsection (d) is based upon existing Article I, Section 13(c) of the By-Laws, but considerably expands upon and codifies the scope of the Board's authority as it has been carried out in practice. The provision's introductory language states, in substance, that notwithstanding an ineligibility, any applicant for membership or member has a right to make application to the Board requesting approval of its admission or continuance in membership. It carries forward existing practice by requiring an application to be made by a member where an ineligibility concerns an associated person in recognition of the importance of supervision to a determination to approve or deny association. It also makes explicit the Board's authority to impose conditions on any approval where such appears necessary or appropriate.

The remaining language of the provision is entirely new to the By-laws, but reflects existing practice. Subsection (d)(i) authorizes the Board to conduct an investigation in such depth as it deems necessary to any determination to approve. Subsection (d)(ii) gives the Board authority to deal with the variety of ineligibility situations which experience has demonstrated are likely to occur and to adopt policies or guidelines therefor concerning such matters as employment, admission and continuance in membership during the time period involved in reaching a final determination. Subsection (d)(iii) recognizes the substantial number of ineligibility situations which must be handled in the course of a year and authorizes the Board to delegate some of its responsibility to appropriate committees or the Association's staff.

Subsection (e) is intended to clarify that a pending application for approval does not, by itself, foreclose the Board from exercising its authority to summarily cancel a membership or bar an association if it deems such action necessary or appropriate. Subsection (f) incorporates the provisions of Section 15A(g)(2) of the Act, and Commission rules and regulations thereunder, that under certain circumstances the Association is required to notify the Commission of any approval with respect to persons who are ineligible by virtue of a disqualification.

Definition of Disqualification

See. 4. A person is subject to a "disqualification" with respect to membership, or association with a member, if such person;

Commission and Self-Regulatory Organizaton Disciplinary Sanctions

Misstatements

Convictions

Injunctions

Explanation

The provision parallels the definition of statutory disqualification in Section 3(a)(39) of the 1934 Act, added by the Securities Acts Amendments of 1975. It is somewhat broader than the types of disqualifications in existing Article I, Sections 2(aMc) of the By-Laws because of the broader language of the statute.

ARTICLE I III

Membership

Application for Membership

Sec. 4 1. (a) Application for membership in the Corporation, properly signed by the applicant, shall be made to the Board of Governors Corporation, on the form to be prescribed by the Board and shall contain: Membership agreement

Action on Application for Membership

Signing of the By-Laws

Explanation of Proposed Changes

Subsection (a) has been amended to conform to Sections 15A(b)(7) and 19(g) of the 1934 Act, added by the Securities Acts Amendments of 1975 which provide that the Associaton shall enforce compliance by its members with, in addition to its own rules, the 1934 Act, Commission rules and regulations thereunder and rules of the Municipal Securities Rulemaking Board. The amendments to subsections (b) and (c) are intended to more clearly express the existing procedure followed by the District Committees in reviewing membership applications. New subsection paragraph (d) simply makes explicit that members have an obligation to keep their membership applications current. This obligation is implicit under existing requirements.

Similarity of Membership Names

Sec. 2. (a) No person or firm shall be admitted to or continued in membership in the Corporation having a name which is idential to the name of another member appearing on the membership roll of the Corporation or a name so similar to any such name as to tend to confuse or mislead;

Explanation

The effect is to convert an existing resolution of the Board of Governors into a By-Law provision.

Executive Representative

Sec. 5 3. (a) Each member shall appoint and certify to the Secretary of the Corporation one "executive representative" who shall represent, vote and act for the member in all the affairs of the Corporation, except that other executives of a member may also hold office in the Corporation, serve on the Board of Governors or committees of the Corporation, or otherwise take part in the affairs of the Corporation. A member may change its executive representative at wtli upon giving written notice thereof to the Secretary, or may, when necessary, appoint, by written notice to the Secretary, a substitute for its executive representative. An executive representative of a member or a substitute shall preferably be an executive officer of the member, if a corporation, a partner in case of a partnership, and the member himself if an individual, but he may be an employee of the member, if given authority to act for the member in the course of the Corporation's activities.

Explanation

New subsection (b) concerning appointment by members of a "district executive representative" is a reworded and slightly more detailed statement of a part of the Explanation of the Board of Governors which appears under Article I, Section n of the present By-Laws.

Membership Roll

Sec. 6 4. The Secretary of the Corporation shall keep a currently accurate and complete membership roll, containing the name and address of each member, and the name and address of the executive representative of each member and the district executive representatives, if any, of each member. In any case where a membership has been terminated, such fact shall be recorded, together with the date on which the membership ceased. The membership roll of the Corporation shall at all times be available to all members of the Corporation, to all governmental authorities, and to the general public.

Explanation

The section is amended to conform to new subsection 2(b) above.

Resignation of Members—Effective Date

Sec. 75

Transfer and Termination of Membership

Sec 8 6. (a) No individual, corporation or partnership which is a member of the Corporation may sell or transfer his or its membership or any right arising therefrom as a result of any consolidation, merger, reorganization, change of partners, name change, or otherwise, except that the consolidation, merger, change of name, or reorganization of any corporation which is a member of the corporation or any change in the name or membership of a partnership which is a member of the Corporation, shafi not be deemed to constitute a transfer, except as otherwise herein provided. Aft rights of a member in the Corporation or in its property shall cease apon the termination of his membership. In the case of an individaai member, his membership shall forthwith cease apon his death. In the case of the liquidation or winding ap of a corporation or partnership whieh is a member of the Corporation, its membership shatt forthwith cease provided that att obligations of membership ander the By-Laws and Roles of Fair Practice have been fulfilled, and unless except where the business of any such individual or corporation or partnership is to be carried on by a successor organization or organizations, and the predecessor corporation organization shall so represent to the Board of Governors, Corporation in which case the membership of any such individual or corporation or partnership shall be extended to such successor organization or organizations with the consent of the Board of Governors Corporation and subject to such terms and conditions as the Board deems equitable and appropriate in the circumstances.

Explanation

This section is largely rewritten in order to clarify the intent. Subsection (a) prohibits a member from transferring its membership unless this occurs in connection with a merger, consolidation, reorganization or similar event and the business of the member is to be carried on by a successor organization. Subsection (b) provides that all rights of a member in the Corporation shall cease upon termination of membership unless the business of the member is carried on by a successor organization in which case the successor shall succeed to the rights and obligations of the member.

Registration of Branch Offices

Sec. 9 7(a) Each branch office of a member of the Corporation shall register be registered with, and be listed upon the membership roll of, the Corporation, and shall pay such dues, assessments and other charges as shall be fixed from time to time by the Board of Governors pursuant to Article III hereof of the By-Laws.

Explanation

Subsection (b) is new and incorporates the Board of Governors Resolution under Article I, Section 9 of the existing By-Laws. The other changes are for clarity.

Vote of Branch Offices

Sec. 10 8 A registered branch office of a member of the Corporation shatt entitle such member Each member of the Corporation having a registered branch office shall be entitled to one vote on all matters pertaining solely to the district in which such registered branch office is located (including the election of members to the Board of Governors from such district); provided, however, that if any member of the Corporation shall have more than one registered branch office in a district, or its principal office and one or more registered branch offices in a district, such member shall be entitled to only one vote in such district.

Explanation

The changes are for clarity.

Definition of "Branch Office"

Sec11 The term "branch office" as used in Section 9 of this Article, including a corporate subsidiary of a member, is defined to be an office which is located in the United States which is owned or controlled by the member, and which is engaged in the investment banking or securities business as defined.

Explanation

The definition has been transferred to new Article I, subsection (c) of the By-Laws.

District Committees' Right to Classify Branches

Sec. 12 9 A District Committee may classify any branch or corporate subsidiary of a member not meeting the requirements of Section 11 9 of this Article as a "branch office" if such Committee is satisfied that the requirements of Section 11 9 of this Article are substantially met and that the business of said branch or subsidiary in the district is of sufficient importance to justify such a classification.

Membership Continuance Proceeding

Sec 13 (a) A member shaH retain its membership in the Corporation only so long as the Board of Governors deems that it possesses all of the qualifications for membership, and a broker or dealer seeking membership may, if the Board of Governors deems it appropriate, be denied admission therein if it is subject to any of the disqualifications provided in this Article.

Explanation

The existing provisions have been incorporated into proposed Article II, Section 3 of the By-Laws and the proposed Code of Procedure previously circulated to the membership for comment and currently on file with the Commission for approval.

ARTICLE XV IV

Registration of Registered Representatives and Associated Persons

"Registered Representative"

Sec1. The term "registered representative" means any person associated with a member who has demonstrated his qualifications to engage in the investment banking or securities business regardless or his designation as either a principal or a representative of the member pursuant to the provisions of Schedule "C" of these By-Laws.

Explanation

The definition is being eliminated because portions of this Article are applicable to unregistered associated persons and because the persons required to be registered are already defined by Schedule C to the By-Laws.

eompHanee with Schedule "C"

Qualification Requirements

Sec. 2 1. No member shall permit any person associated with such member to engage in the investment banking or securities business unless the member determines that such person has complied with the applicable provisions of Schedule "C" if applicabie Article II of the By-Laws.

Explanation

The changes are primarily for clarity and to reflect the broadened scope of this Article to the By-Laws as noted in the comment above.

Application for Registration

Sec 32. (a) Application by any person for registration with the Corporation, properly signed by the applicant, shall be made to the Board of Governors, Corporation, on the form to be prescribed by the Board of Governors and shall contain:

Explanation

The section has been amended to conform to sections 15A(b)(7) and 19(g) of the 1934 Act, added by the Securities Acts Amendments of 1975 which provide that the Association shall enforce compliance by associated persons of members with, in addition to its own rules, the '34 Act, Commission rules and regulations thereunder and rules of the Municipal Securities Rulemaking Board. Subsection (c) is deleted because persons associated with members are required to comply with the By-Laws irrespective of whether they have signed them.

Voluntary Resignation of Registered Representative

Sec 4(a) Registration with the Corporation of any person associated with a member may be voluntarily terminated at any time but only by formal resignation in writing and addressed to the Board of Governors. The Board of Governors shall immediately notify the member employing such person. Such resignation (subject to Section - shall not take effect until 3-& days after receipt by the Board of Governors of such written resignation or so long as any complaint or action is pending against a member and to which complaint or action such person associated with the member is also a respondent, or so long as any complaint or action is pending against such person individually or so long as any examination of the member or person associated with such member is in process. The Board of Governors, however, may in its discretion declare the resignation effective at any timer

Explanation

The provision is no longer consistent with existing practice. Although the Association forwards resignations from registered persons to an employer-member, it will only process terminations received directly from members.

Notification by Member to Board Corporation of Termination

Sec 5 (a)3 No person associated with a member who is registered with the corporation may transfer his registration or any right arising therefromT Promptly upon, but in no event later than thirty (30) calendar days after Following the termination of the association with a member of a person who is registered with it, such member shall promptly, but in no event later than thirty (30) calendar days after such termination, give written notice to the Association on a form designated by the Board of Governors of the termination of such association. A member who does not submit such notification in writing within the time period prescribed shall be assessed a late filing fee as specified by the Board of Governors. Termination of registration (subject to Section 6) of such person associated with a member shall not take effect until thirty O& days after receipt thereof by the Board of Governors nor so long as any complaint or action is pending against a member and to which complaint or action such person associated with a member is also a respondent, or so long as any complaint or action is pending against such person individually or so long as any examination of the member or person associated with such member is in process. The Board of Governors, however, may in its discretion declare the resignation termination effective at any time.

Explanation

The deleted language under existing subsection (b) has been moved to new Section 4.

subject to oomplaint or Action

Sec 6 Any person associated with a member of the Gorporation shall be subject to any complaint or action brought against such person individually and/or against any member with whom he has at any time been associated.

Explanation

The provision appears redundant in light of other provisions of the By-Laws. [New Section 4 is a complete rewording of existing Sections 4(b) and 5(b) of Article XV of the By-Laws. ]

Retention of Jurisdiction

Sec. 4. A person whose association with a member has been terminated shall continue to be subject to the filing of a complaint by the Corporation based upon conduct which commenced prior to the termination, but any such complaint shall be filed within one (1) year after the effective date of termination. For purposes hereof, the effective date of termination shall mean the effective date of termination of registration pursuant to Sections 3 or 4 above or, in the case of an unregistered person, the date upon which such person ceased to be associated with any member.

Explanation

The new section incorporates the provisions of present Sections 4(b) and 5(b) which authorize the Association to file complaints against former registered persons of members within a year of the effective date of termination of registration. The provision has also been extended to apply to complaints filed against former associated persons who were never required to be registered because of the nature of their duties with a member.

ARTICLE II V

Affiliates

Qualifications for Affiliation

Sec. 1. Any association of brokers or dealers, registered with the Commission as an affiliated securities association under the provisions of Section 15A of the Act, may become an affiliate of the Corporation as hereinafter provided in this Article.

Application for Admission as Affiliate

Sec. 2. Application for admission as an affiliate shall be made to the Board of Governors in writing, in such form as the Board of Governors may prescribe, and shall contain a certified copy of the application to the Commission for registration as an affiliated securities association, a certified copy of the order of the Commission granting such registration, and such other reasonable information as the Board of Governors may require.

Agreement of Affiliate

Sec. 3. No applicant may become an affiliate of the Corporation unless it agrees:

Conditions of Affiliation

Sec. 4. No applicant may become an affiliate of the Corporation unless it appears to the Board of Governors:

Approval of Admission as an Affiliate

Sec 5. If it appears to the Board of Governors that the foregoing requirements of this Article are met by the applicant, it shall approve such applicant's admission as an affiliate; otherwise, after appropriate notice and opportunity for hearing, it shall disapprove such application in writing and shall set forth therein the specific grounds upon which such disapproval is based.

Suspension or Cancellation of Affiliation

Sec 6. The Board of Governors may at any time suspend or cancel the affiliation of an affiliate with the Corporation if the Board of Governors finds that the affiliate has ceased to be of such a character as to be able to or has failed to carry out its purposes or the purposes of Section t&A of the Act, or has failed to carry out any of the conditions of affiliation. In any proceeding, however, under this Section to determine whether the affiliation of an affiliate should be suspended or canceled, specific charges shall be brought; such affiliate shall be notified of, and be given an opportunity to defend against, such charges; a record shall be kept; and any determination that the affiliation of an affiliate shall be suspended or canceled shall be in writing and shall set forth therein the specific grounds upon which such determination is based. Such suspension or expulsion shall take effect upon the 60th day after the filing with the Commission of notice thereof and a copy of the record of the proceedings before the Board of Governors, unless within thirty days after such filing such suspension or cancellation is disapproved by the Commission.

Exclusion of Territory Covered by Affiliated Association

Sec. 7. The Board of Governors shall, if it deems such action to be in the interest of efficient and economical administration and desirable in carrying out the purposes of Section t&A of the Act, recommend appropriate changes in the By-Laws to exclude the territory covered by an affiliate association from the geographical area covered by the Corporation.

ARTICLE III VI

Dues, Assessments and Other Charges

Power of Board to Fix and Levy Assessments

Sec 1. The Board of Governors shall prepare an estimate of the funds necessary to defray reasonable expenses of administration in carrying on the work of the Corporation each fiscal year, and on the basis of such estimate, shall fix and levy the amount of admission fees, dues, assessments and other charges to be paid by members of the Corporation and issuers and any other persons using any facility or system which the Corporation operates or controls. Fees, dues, assessments and other charges shall be called and payable as determined by the Board of Governors from time to time; provided, however, that such charges shall be equitably allocated among members and issuers and any other persons using any facility or system which the Corporation operates or controls. In the event of termination of membership or the extension of any membership to a successor organization during any fiscal year for which an assessment has been levied and become payable, the Board of Governors may make such adjustment in the fees, dues, assessments or other charges payable by any such member or successor organization or organizations during such fiscal years as it deems fair and appropriate in the circumstances. The amount of admission fees, dues, assessments and other charges to be paid by the membership to the Corporation shall be set forth in Schedule A attached to and made a part of these By-fcaws. The Board of Governors may from time to time make such changes in Schedule A such fees, dues, assessments and other charges as it deems necessary or appropriate to assure equitable allocation of dues among members. Neither the adoption nor any No such change in Schedule A such fees, dues, assessments and other charges need be submitted to the membership for approval to become effectivey as would otherwise be required by Article IX hereof, but any such proposed change shall be filed with the bom mission tn accordance with section t&A of the Acty and unless it is disapproved by the Commission as therein provided, it and such fees, dues, assessments and other charges as adopted or amended shall become effective at such time as the Board of Governors may prescribe.

Explanation

The amendments conform to Section 15A(b)(5) of the 1934 Act, added by the Securities Acts Amendments of 1975, which authorizes the Association to impose charges upon, in addition to its members, issuers and persons using any facility or system operated or controlled by the Association. It is proposed that Schedule A will be moved to a new portion of the Manual.

Reports of Members

Sec. 2. (a) Each member, issuer or other person shall promptly furnish all information or reports requested by the Board of Governors in connection with the determination of the amount of admission fees, dues, assessments or other charges payable by members during any given fiscal year.

Explanation

The provision has been expanded to reflect NASDAQ issuer fees.

Suspension or Cancellation of Membership for Non-Payment of Dues

Sec. 3. The Board of Governors, after fifteen (15) days notice in writing, may suspend or cancel the membership of any member in arrears in the payment of any fees, dues, assessments or other charges or for failure to furnish any information or reports requested pursuant to Section 2 of this Article.

Reinstatement of Membership

Sec. 4 4. Any membership suspended or canceled under this Article may be reinstated by the Board of Governors upon such terms and conditions as it shall deem just; provided, however, that any applicant for reinstatement shall possess the qualifications required for membership in the Corporation.

Membership List Showing Dues-Paying Classification

Sec. 5 5. As soon as practicable after the annual levy provided for in Section 1 of this Article, the Secretary of the Corporation shall prepare a list of the members of the Corporation which shall disclose the dues-paying classification of each member and such list shall be available for inspection by any member of the Corporation or his duly authorized representative during business hours at the main office of the Corporation.

Explanation

The change is purely grammatical.

ARTICLE IV VII

Organization and Administration

Administrative Districts

Sec. 1. For the purpose of administration, the several states of the United States are is hereby divided into districts, the boundaries of which are set forth in Schedule B, appended hereto shall be established by the Board of Governors. The Board of Governors may from time to time make such changes in Schedule B the boundaries as it deems necessary or appropriate. Neither the establishment nor any No such change in Schedule B the boundaries need be submitted to the membership for approval, as would otherwise be required by Article IX hereof, and the boundaries, as established or changed, but a copy of any such proposed change shall be filed with the Commission in accordance with Section 15A ofthe Act and unless it is disapproved by the Commission as therein provided, it shall become effective as at such time as the Board of Governors may prescribe.

Explanation

The changes are largely technical. It is also proposed that the content of Schedule B will be transferred to a new portion of the Manual where all the By-Law schedules will appear together.

Powers and Authority of Board of Governors

Sec 2. (a) The management and administration of the affairs of the Corporation shall be vested in a Board of Governors composed of thirty-one members, twenty-one to be elected by the members of the various district in accordance with the provisions of Sections 3(a) through (e), of this Article, nine to be elected by the Board of Governors in accordance with the provisons of Sections 3(f), (g) and (h) of this Article, and the President of the Corporation to be selected by the Board of Governors in accordance with the provisions of Article V VIII, Section 2.

Explanation

The authority of the Board to establish automated systems in new subsection (c) has been transferred from existing Article XVI and new subsection (b)(6) concerning use of clearing agencies has been transferred from existing Article XVII of the By-Laws. New subsection (b)(7) is intended to clarify that the Board has full power to engage in any lawful activities as prescribed by its Certificate of Incorporation and the provisions of the federal securities laws.

Authority to Suspend for Failure to File Regulatory Reports

Sec. 3(a) The Board of Governors shall have authority 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.

Explanation

New subsection (a) makes clear that the Board has authority to suspend or cancel the membership of a firm and suspend the association of a person associated with a member for failure to file any report or other information required to be filed or for failure to honor a request for information. New subsection (b) authorizing the Board to delegate its authority to suspend or cancel parallels the existing procedure under Article IV, Section 5 of the Rules of Fair Practice respecting suspension for refusal by a member to permit inspection of its books and records.

Representation of Bistriets on Board

Composition of Board

Sec. 3 4. The several districts shall be represented on the Board of Governors. The elected members of the Board of Governors shall be chosen as follows:

Explanation

In subsection (g) the word "Association" is deleted and replaced with the word "Corporation" for purposes of consistency. The proposed new subsection (i) implements Section 15A(b)(4) of the Act requiring that at least one member of the Board of Governors shall be representative of issuers and one of investors and shall not be affiliated with a broker/dealer. New subsection (j) has been transferred from existing Article V, Section 2 of the By-Laws.

Term of Office of Governors

Sec. 4 5. Each elected member of the Board of Governors, including the Governors-at-Large, except as otherwise herein provided, shall hold office for a term of three years, and until his successor is elected and qualified, or until his death, resignation or removal. The President of the Corporation shall serve as a member of the Board of Governors until his successor is selected and qualified, or until his death, resignation or removal.

Succession to Office

Sec. 5 6. The office of a retiring member of the Board of Governors elected under Section 3 subsections (a) through (e) of Section 4 of this Article shall be filled by the election of a member from the same disrict as that of the retiring member. The office of a retiring Governor-at-Large shall be filled by election by the Board of Governors as provided in Section 3 subsections (f), (g) and/or (h) of Section 4 of this Article, as the case may be.

Election of Board Members

Sec. 6 7. The elected members of the Board of Governors shall be chosen as follows:

Procedure for Nominations by Nominating Committees

Nomination of additional candidates

Contested elections

Explanation

Subsection (a) would be amended to eliminate the requirement of an advance ballot to the membership before a District Nominating Committee may nominate an incumbent member of the Board to succeed himself in the case where the incumbent is filling a vacancy with an unexpired term of less than one year. The other changes are clarifying.

Filling of Vacancies on Board

Sec 7 8. All vacancies in the Board of Governors other than those caused by the expiration of a Governor's term of office, shall be filled as follows:

Meetings of Board

Sec. 8 9. Meetings of the Board of Governors shall be held at such times and places, upon such notice, and in accordance with such procedure as the Board of Governors in its discretion may determine. A quorum of the Board of Governors shall consist of fourteen a majority of the members, and any action taken by a majority vote at any meeting at which a quorum is present, except as otherwise provided in these By-Laws, shall constitute the action of the Board. Meetings of the Board of Governors may be held by mail, telephone or telegraph, in which case any action taken by a majority vote of the Board of Governors shall constitute the action of the Board. Any action taken by telephonic vote shall be confirmed in writing at a regular meeting of the Board of the Governors.

Explanation

The change in the quorum requirement to a majority of the Board members is intended to reflect the fact that the number of Board members has increased in recent years. The other changes are clarifying and to conform to existing practice.

Offices of Corporation

Sec.9 10. The Corporation shall maintain such offices as the Board of Governors may from time to time deem necessary or appropriate.

District Committees

Sec. 10 11. (a) For the purpose of effectuating a maximum degree of local

administration of the affairs of the Corporation, each of the districts created under Section 1 of this Article shall elect a District Committee, as hereinafter provided. Each such District Committee shall determine the number of its members so to be elected, but in no event shall any District Committee consist of more than twelve members; provided, however, that the Board of Governors by resolution may increase, upon request, any such District Committee to a larger number.

Explanation

The language added by new subsection (c) reflects the fact that the persons who comprise the District Committees and the District Business Conduct Committees are the same persons. The change is made in conjunction with the elimination of existing Section 3 of Article VI of the By-Laws requiring that the District Committees go through the procedure of appointing District Business Conduct Committees.

Term of Office of District Committeemen

Sec. 11 12. Each regularly elected member of a District Committee shall hold office for a term of three (3) years, and until his successor is elected and qualified, or until his death, resignation or removal.

Election of District Committeemen

Sec. 12 13. Members of the District Committees shall be elected as follows: Procedure for Nominations by Nominating Committees

Contested elections

Explanation

Subsection (a) would be amended to eliminate the requirement for an advance ballot to the membership before a District nominating Committee may nominate an incumbent member of the District Committee to succeed himself in the case where the incumbent is filling a vacancy with an unexpired term of less than one year. The other changes are clarifying.

Filling of Vacancies on District Committees

Sec. 13 14. All vacancies in any District Committee other than those caused by the expiration of a member's term of office, shall be filled as follows:

Explanation

The change in the authority of the District Committees to fill vacancies by appointment is extended to cases where the unexpired term is for less than one year in order to be consistent with the existing authority of the Board to fill vacancies under Article IV, Section 7 of the present By-Laws.

Meetings of District Committees

Sec. 14 15. Meetings of each District Committee shall be held at such times and places, upon such notice, and in accordance with such procedure as each District Committee in its discretion may determine. A quorum of a District Committee shall consist of a majority of its members, and any action taken by a majority at any meeting at which a quorum is present, except as otherwise provided in the By-Laws, shall constitute the action of the Committee. Action by a District Committee may be taken by mail, telephonic or telegraphic vote, in which case any action taken by a majority of the Committee shall constitute the action of the Committee. Any action taken by telephonic vote shall be confirmed in writing at a regular meeting of the District Committee.

Explanation

The change incorporates desirable practice with respect to confirmation of telephone votes.

Election of Chairmen and Other District Officers

Sec. 15 16. Following the annual election of members of the District Committee pursuant to Section 1213 of this Article, each District Committee shall elect from its members a Chairman and such other officers as it deems necessary for the proper performance of its duties under these By-Laws and shall prescribe their powers and duties.

Advisory Council

Sec.16 17. (a) The Chairman Chairmen of the several District Committees, elected pursuant to Section 1516 of this Article, shall constitute an Advisory Council to the Board of Governors,.

Explanation

The changes are clarifying.

Expenses of District Committees

Sec. 17 18. Funds to meet the regular expenses of each District Committee elected pursuant to Section 1213 of this Article, shall be provided by the Board of Governors out of funds collected by it under the provisions of Article III VI hereof, and all such expenses shall be subject to the approval of the Board of Governors.

District Committees Agencies of Corporation

Sec. 18 19. The District Committees shall act as the agencies of the Corporation for the administration of its affairs in their respective districts and as such shall have such powers and duties as are provided in the By-Laws or from time to time delegated by the Board of Governors.

Certain Functions of District Committees

Sec. 19 20. District Committee shall endeavor, in such manner or through such media as they deem appropriate, to educate members and other dealers in their respective districts as to the objects, purposes and work of the Corporation in order to foster their interest and friendly cooperation. District Committees shall consider the practical operation of all provisions of the Certificate of incorporation, By-Laws, Rules of Fair Practice and Sode of Procedare of the Corporation and rules of the Corporation and shall report to the Secretary any which do not work satisfactorily in their respective districts.

Explanation

The changes are primarily to incorporate the new definition of "rules of the Corporation" appearing in Article I, Section (n) hereof.

Nominating Committees

Sec.20 21. (a) Each of the Districts created under Section 1 of this Article shall elect a Nominating Committee, as provided in Section 22 23 hereafter of this Article. Each such Nominating Committee shall consist of five members; provided, however, that the Board of Governors by resolution may increase any such Nominating Committee to a larger number. Members of the Nominating Committee in each District shall be members of the Corporation having places of business in the respective District, but shall not be members of the District Committee. All Nominating Committees shall include a majority of persons who have previously served on the District Committee and/or on the Board of Governors and shall, insofar as practicable, include at least one former member of the Board of Governors.

Explanation

The changes are proposed for purposes of clarity and to codify a resolution of the Board of Governors adopted at the September 1982 meeting.

Term of Office of Nominating Committeemen

Sec. 21 22. Each regularly elected member of a Nominating Committee shall hold office for a term of one (1) calendar year, and until his successor is elected and qualified, or until his death, resignation or removal.

Election of Nominating Committees

Sec. 22 23. Members of the Nominating Committee shall be elected as follows: Procedures for Nominations by Nominating Committees

Nomination of Additional Candidates

Contested Elections

Explanation

The proposed changes are for clarity and to reflect the composition of Nominating Committees under new language added to Section 21(a) above.

Filling of Vacancies for Nominating Committees

Sec.23 24. All vacancies in any Nominating Committee other than those caused by the expiration of a member's term of office shall be filled as follows:

Meetings of Nominating Committees

Sec 24 25. Meetings of each Nominating Committee shall be held at such times and places, upon such notice, and in accordance with such procedure as each Nominating Committee in its discretion may determine. A quorum of a Nominating Committee shall consist of a majority of its members, and any action taken by a majority of the entire Committee at any meeting at which a quorum ts present, except as otherwise provided in the By-Laws, shall constitute the action of the Committee. Action by a Nominating Committee may be taken by mail, telephonic or telegraphic vote, in which case any action taken by a majority of the Committee shall constitute the action of the Committee. Any action taken by telephonic vote shall be confirmed in writing at a regular meeting of the Nominating Committee.

Explanation

The changes make clear that any final action by a Nominating Committee must be taken by a majority of the Committee members.

Election of Chairman and Other Nominating Committee Officers

Sec 25 26. Following the annual election of members of the Nominating Committees pursuant to Section 22 23 of this Article, each Nominating Committee shall elect from its members a Chairman and such other officers as it deems necessary for the proper performance of its duties under these By-Laws.

ARTICLE V VIII

Officers and Employees

Election of Officers of the Board

Sec. 1. As soon as practicable, following the annual election of members to the Board of Governors, the Board of Governors shall elect from its members a Chairman, one or more Vice Chairmen, and such other officers as it shall deem necessary or advisable, to serve until the next annual election and or until their successors are chosen and qualify. The officers so elected shall have such powers and duties as may be determined from time to time by the Board of Governors. The Board of Governors, by affirmative vote of fourteen a majority of its members, may remove any such officer at any time.

Officers of the Corporation

Sec. 2. The Board of Governors shall select a chief executive officer, to be designated President of the Corporation, who as such chief executive officer of the Association shall be responsible for the management and administration of its affairs and shall be the official representative of the Association Corporation in all public matters and shall bey during his tncumbancyr a member of the Board of Governors and ex officio a member of any committee authorized by the Board of Governors. The Board may provide for other executive or administrative officers as it shall deem necessary or advisable, including, but not limited to, Executive Vice-President, Senior Vice-President, Vice-President, General Counsel, Secretary and Treasurer of the Corporation. All such officers shall have such titles, such powers and duties and shall be entitled to such compensation as shall be determined from time to time by the Board of Governors. The terms of office of such officers shall be at the pleasure of the Board of Governors, which by affirmative vote of fourteen a majority of the members, may remove any such officer at any time.

Explanation

The changes expand the class of authorized officers and permit removal of any officer by a majority vote of the Board. The fact that the President shall serve as a member of the Board has been transferred to new Article VII, Section 4 of the By-Laws.

Absence of President

Sec. 3. In the case of the abasence or inabiliy to act of the President of the Corporation, or in case of a vacancy in such office, the Board of Governors may appoint its Chairman or such other person as it may designate to act as such officer pro tern, who shall assume all the functions and discharge all the duties of the President.

Employment of Counsel

Sec. 4. The Board of Governors may retain or authorize the employment of counsel, with such powers, titles, duties and authority as it shall deem necessary or advisable.

Administrative Staff

Sec. 5. The Board of Governors may employ or authorize the employment and prescribe the powers and duties of such an administrative staff as it deems necessary or advisable. The employment and compensation of such administrative staff of the Corporation shall be at the pleasure of the Board of Governors.

Restrictions on Compensation of Board and Committee Members

Sec. 6. No member of the Board of Governors, (except the that member who is designated President of the Corporation as provided in Section 2 of this Article, or the President pro tem), as provided in Section 3 of this Article, or no member of any District Committee or of and no member of any other Committee, shall be entitled to receive any compensation from the Corporation for any work done in connection with his duties as a member of the Board of Governors, any District Committee or any other committee., but However, all members of the Board of Governors, of the Advisory Council, of the District Committee, and of all other committees appointed either by the Board of Governors or by any District Committee, such persons shall be entitled to reimbursement for reasonable expenses incurred in connection with the business of the Corporation.

Explanation

Grammatical changes and a proposed revision which would permit payment by the Association for the performance of services unrelated to Board or committee activity such as acting as outside counsel to the Association.

ARTICLE VI IX

Committees

National Standing Committees

Sec. 1. The Board of Governors may appoint such standing and other committees as it deems necessary or desirable, and it shall fix their powers, duties and terms of office.

District Standing Committees

Sec. 2. Each District Committee, in the exercise of its powers and performance of its duties as provided in the By-Laws, may, except as otherwise herein provided, appoint such standing or other committees as it deems necessary or desirable, and shall fix their powers, duties and terms of office.

District and Local Business Conduct Committees

Sec. 3. Each District committee annually snail appoint irom among its members or members of the Corporation having places of business within the District, a District Business Conduct Committee of not more than twelve members, at least one member of which shall be a member of the District Committee, provided, however, that the Board of Governors by resolution may increase, upon request any such District Business Conduct Committee to a larger number. Each such committee shaft function as the Business Conduct Committee of the Corporation in such District in accordance with the By-Laws, Rules of Fair Practice and Code of Procedure for Handling Trade Practice Complaints. Each District Committee may also appoint such Local Business Conduct Committees as it deems necessary or appropriate and, wherever possible, at least one member of each such Local Business Conduct Committee shall be a member of the District Business Conduct Committee Each such Local Business Conduct Committee shall function as a subcommittee of the District Business Conduct Committee in accordance with the By-Laws, the Rules of Fair Practice, and the Code of Procedure for Handling Trade Practice Complaint.

Explanation

The language concerning appointment of District Business Conduct Committee is being deleted because as a practical matter the members of the District Committees and District Business Conduct Committees are the same persons. The elimination of language concerning Local Business Conduct Committees is done because no such committees have been constituted as a practical matter.

Removal of Committeemen

Sec. 4. 3. Any member of any committee appointed pursuant to Sections 1, 2 or 3 of this Article may be removed from office, after appropriate notice from the District Committee appointing such member, or from the Board of Governors, if it is the appointing authority, for refusal, failure, neglect or inability to discharge his duties, or for any cause the sufficiency of which shall be decided by the District Committee or the Board of Governors, whichever is the appointing authority.

Executive Committee

Sec. 5 4. By resolution passed not less than annually by a majority of the entire Board of Governors, there may be created an Executive Committee consisting of five or more members of the Boardy which Committee shall have and may exercise such of the powers of the Board in the management of the business and affairs of the Corporation in the interim between meetings of the Board of Governors as may be delegated to it from time to time by the Board. Each The Executive Committee created hereunder shall keep minutes of its meetings and shall report its proceedings to the Board of Governors at each the next meeting thereof.

Explanation

The amendment would require the Board to adopt a resolution appointing an Executive Committee at least once a year. The other changes are clarifying.

ARTICLE VII X

Rules of Fair Practice

Authority to Adopt Rules and Amendments-Submission to Members—Voting on Rules and Amendments

Sec. 1. To promote and enforce just and equitable principles of trade and business, to maintain high standards of commercial honor and integrity among members of the Corporation, to prevent fraudulent and manipulative acts and practices, to provide safeguards against unreasonable profits or unreasonable rates of commissions or other charges, to protect investors and the public interest, to collaborate with governmental and other agencies in the promotion of fair practices and the elimination of fraud, and in general to carry out the purposes of the Corporation and of Section 15A of the Act, the Board of Governors is hereby authorized to adopt for submission to the members of the Corporation such rRules of fFair pPractice for the members and persons associated with members, and such amendments thereto as it may, from time to time deem necessary or appropriate. The Board of Governors, upon the adoption of any such rRules of fFair pPractice or amendments thereto shall forthwith cause copies thereof to be sent to each member of the Corporation to be voted upon. If any such rRules of fFair pPractice or amendment thereto are approved by a majority of the members voting, within thirty (30) days after the date of submission to the membership, and are not disapproved approved by the Commission as provided in Section 15A of the Act, they shall become effective rRules of fFair pPractice of the Corporation as of such date as the Board of Governors may prescribe. In any case, however, where a particular section of the Rules of Fair Practice provides that membership approval is not required, the Board may amend that provision as provided subject to approval of the amendment by the Commission as provided by the 1934 Act. Also, where the Board of Governors by resolution finds an emergency to exist, such rRules of fFair pPractice or amendments thereto, if adopted by a two-thirds vote of the Board of Governors and not disapproved approved by the Commission pursuant to Section 15A of the Act, may become effective as of such time as the Board of Governors may prescribe, without submission to the members for a vote as hereinbefore required. An emergency which is found by the Board of Governors to exist shall continue until the Board of Governors by resolution terminates such but in no event shall an emergency continue for a period in excess of six months. The Board of Governors shall have the authority, however, after, in each instance, reassessing the facts and circumstances which gave rise to the emergency, by resolution to declare, if it deems such appropriate under the facts and circumstances then existing, the emergency to continue to exist for successive six-month periods as required. All emergency rules adopted during the period of the emergency shall cease to be effective upon the termination of the emergency as hereinbefore provided. The Board of Governors is hereby authorized, subject to the provisions of the By-Laws and of Section 15A of the Act, to administer, enforce, suspend, or cancel any rRules of fFair pPractice adopted hereunder.

Explanation

The- amendments clarify that the Board is authorized to adopt appendixes and supplements to certain Rules of Fair Practice without a requirement for membership approval.

Supplemental Local Rules and Amendments

Sec.2. Subject to the approval of the Board of Governors and the provisions of Section 15A of the Act, each Distict Ccommtttee may adopt such supplemental local rules of fair practice and such amendments thereto, as it may from ttme to time deem necessary or appropriate}- provided, however, that such rules of fair practice and amendments thereto shall be designed to effect the same purposes and shall be subject to the same provisions with respect to approval by members having places of business within the district as are provided flt Section i or this Article, with respect to rules or rair practice applicable to all members. The Board of Governors, subject to the provisions of Section 15A of the Act, may at any time suspend or cancel any such locai rules of fair practice or any portion of any such local rules so adopted and approved. Any Disrict oommtttcc, Subject to the approval of the Board of Governors and the provisions of Section 1-5A of the Act, may at any time suspend or cancel any local rules of fair practice or any portion of any such local rules adopted by it pursuant to this Section.

Explanation

The section has been in the By-Laws since the inception of the Association when the future structure of the Association was unknown. No local rules of fair practice have ever been adopted and the section appears unnecessary.

Power of the Board

Sec. 3 2. The Board of Governors, in the administration and enforcement of any rRules of fFair pPractice adopted under Sections Section 1 and 2 of this Article, shall have power to:

Explanation

The changes primarily conform to Section 15A(b)(7) of the 1934 Act, as amended by the Securities Acts Amendments of 1975, which authorizes the Association to impose disciplinary sanctions consisting of limitation of activities, functions and operations of members and associated persons. The changes also reflect statutory changes authorizing the Association to impose disciplinary sanctions based upon Violations of the federal securities laws and rules and regulations thereunder. In addition, new subsections (c)(3) and (4) codify what are presently resolutions of the Board of Governors.

Disciplinary Proceedings

Sec. 4 3. In any proceeding under this Article, any member or person associated with a member shall be given the opportunity to have a hearingr at which hearing any such person he shall be entitled to be heard in person and/or by counsel. Such persons may present any relevant material. In any such proceeding against a member or against a person associated with a member to determine whether the member and/or the person associated with a member shall be disciplined:

Explanation

The proposed changes are to conform to the statutory changes in Section 15A(h)(l) of the Act by which the Association is no longer required to state whether a respondent's conduct was inconsistent with just and equitable principles of trade and to reflect the Association's authority to impose disciplinary sanctions based upon violations of the federal securities laws and rules and regulations thereunder.

Grounds for Btsqualificatton to Participate in Determination of Complaint

Sec.5 No member of the Board of Governors or of any District Business Conduct Committee or of any tocai Business Gonduct Committee shaft in any manner, directly or indirectlyt participate m the determination of any complaint affecting his interest or the interests of any person in whom he is directly or indirectly interested. In any case where such an interest is invdvedr the particular member shaft disqualify himself, or shaft be disqualified by the Chairman of any such Board or Committee.

Explanation

The provision has been transferred to the proposed Code of Procedure which has previously been circulated to the membership for comment and is presently on file with the Commission.

ARTICLE XIV XI

Uniform Practice Code

Authority to Adopt Code

Sec 1. The Board of Governors is hereby authorized to adopt a Uniform Practice Code and amendments, interpretations and explanations thereto designed to make uniform, where practicable, custom, practice, usage, and trading technique in the investment banking and securities business with respect to such matters as trade terms, deliveries, payments, dividends, rights, interest, reclamations, exchange of confirmations, stamp taxes, claims, assignments, powers of substitution, computation of interest and basis prices, due-bills, transfer fees, "when, as and if issued" trading, "when, as and if distributed" trading, marking to the marked and close-out procedure all to the end that the transaction of day-to-day business by members may be simplified and facilitated, that business disputes and misunderstandings, which arise from uncertainty and lack of uniformity in such matters, may be eliminated, and that the mechanisms of a free and open market may be improved and impediments thereto removed. Such code, and any amendments thereto, if duly adopted by the Board of Governors and not disapproved approved by the Commission pursuant to Section 15A of the Act, shall become effective as at such time as the Board of Governors may prescribe.

Explanation

The proposed changes are primarily technical and clarifying.

Administration of Code

Sec. 2 The administration of any uUniform pPractice cCode, or any amendment thereto, adopted by the Board of Governors pursuant to Section 1 of this Article, shall be vested in the Board of Governors, and the Board is hereby granted such powers as are reasonably necessary to achieve its effective operation. In the exercise of such powers, the Board may issue explanations and interpretations, and may act as arbitrator or conciliator in controversies arising under or in connection with said coder The Board may also issue and make binding rulings with respect to the applicability of the provisions of this code to situations in which there is no substantial disagreement as to the facts involved. The Board may delegate to appropriate Ccommittees such of its powers^ hereunder as it deems necessary and appropriate to achieve effective administration and operation of the code.

Explanation

The change is to reflect the fact that the Board does not act as an arbitrator of disputes under the Code and render awards which are intended to be judicially enforceable. Under the Association's rules the arbitration function rests with arbitration panels which are appointed and act pursuant to the Association's Code of Arbitration Procedure.

Transactions Subject To Code

Sec. 3. All over-the-counter transactions in securities between by members, except transactions in securities which are exempted under Section 3(a)(12) of the Act or are municipal securities as defined in Section 3(a)(29) of the Act, shaft be are subject to the pertinent provisions of the Uniform Practice Code and to the provisions of Section 2 of this Article unless exempted therefrom by the terms of the Code.

Explanation

The express exclusion from the Code for transactions in municipal securities is intended to avoid confusion by making clear that after the Securities Acts Amendments of 1975 such transactions continue to be exempt from the Code because they are now subject to the rulemaking authority of the Municipal Securities Rulemaking Board which has its own uniform practice rules.

Authority to Adopt District Code

Scope - Effective Bate of Sode and Amendments

See 4. Each Btstrict Gommittee, after submission to the membership in its district for comment and criticism, and subject to the approval of the Board of Governors, is hereby authorized to adopt a district uniform practice code and amendments thereto, provided, however, that any such district uniform practice code and any amendment thereto shaft be designed to effect the same general purposes as are provided in Section i of this Article with respect to any uniform practice code adopted by the Board of Governors, and shaft not conflict in any way therewith. Any such district uniform practice code, and any amendment thereto, if duly adopted by the District Gommittee, approved by the Board of Governors and not disapproved by the Commission pursuant to Section 15A of the Act, shaft become effective as at such time as the District Gommittee may prescribe. The Board of Governors, subject to the provisions of Section 15A of the Act, may at any time declare ineffective any such district uniform practice code or any portion thereof.

Explanation

The section has been in the By-Laws since the inception of the Association when the future structure of the Association was unknown. No local uniform practice codes have ever been adopted and the provision appears unnecessary.

Administration of District Gode

Sec 5. The administration of any district uniform practice code or any amendment thereto, adopted pursuant to Section 4 of Article, shaft be vested in the District Gommittee adopting same, and such committee is hereby granted such powers as are reasonably necessary to achieve effective operation; Jn the exercise of such powers a Bistrict Committee may issue explanations and interpretations, and may act as arbitrator or conciliator in controversies arising under or in connection with such district uniform practice coder A District Gommittec may also issue binding rulings with respect to the applicability of the provisions of such district uniform practice code to situations m which there is no substantial disagreement as to the facts involved, A District Gommtt-tee may delegate to appropriate Gommittees such of its powers hereunder as it deems necessary and appropriate to achieve effective administration and operation of such coder

Explanation

See comment above.

Transactions Subject to Bistrict Gode

Sec 6. All over-the-counter transactions in securities between members in any district wherein a district uniform practice code is duly adopted pursuant to Section 4 of this Article, except transactions in securities exempted under Section 3(a)(l2) of the Act, shall be subject to the pertinent provisions of any such district uniform practice code and to the provisions of Section 5 or this Article.

Explanation

See comment above.

ARTICLE XVI

Automated Quotations System (NASDAQ)

Definitions

Sec. 1. The term "automated quotations system" means an electronic data processing system interconnected by wire or other means with terminals which make readily available to appproved subscribers, and to the general public at specific times and in appropriate summary form, the quotes of registered market makers in authorized securities.

The term "registered market maker" means a member which is willing and able to serve as such in connection with a specified authorized security and which meets the qualifications for such set forth in Schedule "D" to these By-Laws.

The term Authorized security" means a security which meets the qualifications for such set forth in Schedule "D" to these By-Laws.

Board Authorized to Organize and Operate

Sec 2. The Board of Governors is hereby authorized to organize and operate automated quotations systems to provide qualified subscribers with quotations on authorized securities traded on the "over-the-counter" market. The systems may be organized and operated by a division or subsidiary company of the Corporation or by one or more independent firms under contract with the Gorporation, as the Board from time to time may deem necessary or appropriate.

Rules, Charges, Classifications, Qualifications, Requirements, Standards and Aggrievement Procedure

Sec. 3. Taking into account relevant matters including the type of business done-securities traded, and service rendered, the Board of Governors may publish operating rules for the automated quotations systems, establish reasonable qualifications and classifications for registered market makers and other subscribers, provide standards for authorized securities, and publish the charges to be collected from subscribers by the operator of automated quotations systems, Services shall be provided to members on a nondiscriminatory basis and at reasonable and uniform rates designed to encourage maximum utilization by all members, with due allowance for the geographic remoteness of members of their branch offices receiving service outside of the 48 contiguous states.

Members and other persons aggrieved by action taken or authorized by the Board of Governors in applying such qualifications, criteria, standards, and charges, or ensuing out of the operation of the automated quotations systems shaft, upon filing a complaint with the Board, be entitled to a hearing thereon (if requested), decision and review by the Board in accordance with procedures specified by the Board.

Such rules, charges, classifications, qualifications, registration requirements, standards, exceptions thereto, and aggrtevement procedure shall be incorporated in Schedule D attached to and made a part of these By-Laws.

Within the limitations provided herein, the Board or Governors shall have power to adopt, alter, amend, supplement or modify the provisions of Schedule B from time to time without recourse to the membership for approval, as would otherwise be required by Article IX hereof, and Schedule B, as adopted, altered, amended, supplemented or modified, shall, become effective as the Board of Governors may prescribe unless disaproved by the commission.

Explanation

The entire Article has been reworded in a shorter form and transferred to new Section 2(c) of Article VII of the By-Laws. Schedule "D" will be transferred to a new portion of the Manual. In addition, the aggrievement and other procedural provisions concerning the NASDAQ System now appearing in Schedule D have been moved to the proposed Code of Procedure which previously was sent to the membership for comment and is presently on file with the Commission for approval.

Lists to be Kept

Sec. 4. The Board of Governors shall keep a currently accurate and complete roll (a)- of registered market makers together with a list of the authorized securities as to which eaeh may enter quotes on the automated quotations systems, and (b)- of authorized securities.

ARTICLE XVIII

Reporting Transactions on Consolidated Tape Authorization

Under the provisions of Rule 17a-15 adopted by the Securities and Exchange Commission under Section 17 of the Securities Exchange Act of 1934 the Corporation is required to file with the Securities and Exchange Commission a written plan meeting specified standards concerning the collection and dissemination by the Corporation of information relating to over-the-counter transactions executed by its members in securities registered or admitted to unlisted trading privileges on an exchanger The Board of Governors is hereby authorized to adopt rules and procedures in order to carry out the Corporation's responsibilities and duties under Rule 17a-15 and implement the plan filed pursuant to the rule as it may be amended from time to times-Such rules and procedures may include, among other things.

The Board of Governors shall also have authority to use any automated quotations system established under the provisions of Article XVI of the By-Laws in any manner it deems necessary and appropriate to further the implementation and operation of any composite transaction reporting system established pursuant to Rule 17a-15. The Board of Governors shaft also have authority to impose reasonable and equitable fees and changes tn connection with the collection and dissemination of last sale information.

Such rules, procedures and charges shall be incorporated into Schedule G attached to and made a part of these By-Laws. The Board of Governors shaft have the power to adopt, alter, amend, supplement or modify the provisions of Schedule G from time to time without recourse to the membership for approval as would otherwise be required by Article IX hereof, and Schedule G as adopted, altered, amended, supplemented or modified shaft become effective as the Board of Governors shaft prescribe unless disapproved by the Commission.

Explanation

The provisions are proposed to be moved to the Rules of Fair Practice because they prescribe a standard of member conduct.

ARTICLE XVII

Clearing and Settling of Transactions of Members Transactions to Be Cleared Through Facilities of Registered Blearing Agencies

Sec. 1. All over-the-counter transactions in securities between members shaft be cleared and settled through the facilities of a clearing agency registered with the Commission pursuant to the Securities Exchange Act of 1934 which clears and settles such over-the-counter transactions tn securities, unless,

Explanation

The Article has been reworded and transferred to new Section (b)(6) of Article VII of the By-Laws.

ARTICLE VIII XII

Limitation of Powers

Prohibitions

Sec 1. Under no circumstances shall the Board of Governors or any officer, employee or member of the Corporation have power to:

Explanation

The changes are grammatical.

Use of Name of Corporation by Members

Sec. 2. No member shall use the name of the Corporation on letterheads, circulars or other advertising matter or literature except to the extent that may be authorized by the Board of Governors.

Unauthorized Expenditures

Sec. 3. No officer, employee, member of the Board of Governors or of any District or other Committee, shall have any power to incur or contract any liability on behalf of the Corporation not authorized by the Board of Governors. The Board may delegate to the President of the Association Corporation, or his delegate, such authority as it deems necessary to contract on behalf of the Association Corporation or to satisfy unanticipated liabilities during the period between Board meetings.

Explanation

The changes are for clarity and consistency with language in other By-Law provisions.

ARTICLE IX XIII

Amendments to By-Laws Procedure for Adopting Additionsy Alterations or Amendments to By-Laws

Any member of the Board of Governors by resolution, any District Committee by resolution, or any twenty-five members of the Corporation by petition signed by such members, may propose additions, alterations, or amendments to these By-Laws. Every proposed addition, alteration or amendement shall be presented in writing to the Board of Governors and a record shall be kept thereof. The Board of Governors shall first pass on all proposed additions alterations or amendments to these By-Laws, and first may adopt any proposed addition, alteration or amendment to these By-Laws by affirmative vote of a majority of the members of the Board of Governors then in office. The Board of Governors, upon adoption of any such addition, alteration or amendment to these By-Laws, except as otherwise provided in these By-Laws Section 2 of Article I, Section 1 of Article III, Section 1 of Article IV and Section 3 of Article XVI hereof, shall forthwith cause a copy thereof to be sent to and voted upon by each member of the Corporation to be voted upon. If such addition, alteration or amendment to these By-Laws is approved by a majority of the members voting within thirty (30) days after the date of submission to the membership, and is not disapproved approved by the Commission as provided in Section 15A of the Act, it shall become effective as of such date as the Board of Governors may prescribe.

Explanation

The changes are to eliminate unnecessary language and to conform to the existing Commission review authority prescribed under Section 19(b) of the 1934 Act, added by the Securities Acts Amendments of 1975.

ARTICLE X XIV

Corporate Seal

The corporate seal shall have inscribed thereon, the name of the Corporation, the year of its organization and the words "Corporate Seal, Delaware." Said seal may be used by causing it or a facsimile thereof to be imposed or affixed or reproduced or otherwise.

ARTICLE XI XV

Checks

All checks or demands for money and notes of the Corporation shall be signed by such officer or officers or such other person or persons as the Board of Governors from time to time designate.

ARTICLE XII

Ftscai Year

The fiscal year shaft begin the first day of October in each yearr

Explanation

The provision appears unnecessary.

ARTICLE XIII XVI

Annual Financial Statement

As soon as practicable after the end of each fiscal year, the Board of Governors shall send to each member of the Corporation a reasonably itemized statement of receipts and expenditures of the Corporation for such preceding fiscal year.