Notice To Members 88-29

Proposed New Section 3 to Article VII and Amendment to Article XI, Section 4 of the NASD By-Laws Concerning Emergency Authority of the NASD Board of Governors

Published Date:

TO; All NASD Members

LAST VOTING DATE IS MAY 28, 1988

EXECUTIVE SUMMARY

NASD members are invited to vote on new Section 3 to Article VII of the NASD By-Laws, which grants emergency authority to the NASD Board of Governors and a committee consisting of the Chairman of the Board (or Vice Chairman in his absence), the NASD President, and a member of the Executive Committee—to take various actions in the event of extraordinary market conditions. These actions pertain to the operations of various NASD systems, including quotation, execution, and other systems and the participation therein of any person or the trading therein of any security.

The NASD is also proposing a technical amendment to Article XI, Section 4 of the NASD By-Laws to clarify the procedure by which the Board delegates authority to the Executive Committee to act between meetings of the Board.

The texts of the proposed amendments are attached.

BACKGROUND

Under Article XI, Section 4 of the NASD By-Laws, the Executive Committee of the Board of Governors is delegated the authority to exercise the powers of the Board between Board meetings. Generally, the Executive Committee acts via telephone conference calls or by mail. However, it is sometimes necessary to take action immediately to respond to volatile market conditions. Following the market decline in October, the Board approved publishing for comment proposed new Section 3 to Article VII and an amendment to Article XI, Section 4 of the NASD By-Laws. These proposed amendments are now being submitted for membership approval. Prior to becoming effective, the rule changes must also be approved by the Securities and Exchange Commission.

PROPOSED AMENDMENTS

Proposed new Section 3 to Article VII of the NASD By-Laws grants the Board—or between Board meetings, a committee consisting of the Chairman of the Board (or the Vice Chairman in his absence), the NASD President, and a member of the Executive Committee—the authority to take any action regarding:

1. Operation of NASD quotation, execution, and other systems,and the participation therein of any person or the trading therein of any security;
2. Operation of, or trading in, the over-the-counter (OTC) markets; and
3. Operation of firms' offices or systems.

The proposed amendment also provides that the exercise of such authority shall occur only if the NASD President, in his discretion, concludes that convening a meeting of the entire Board or Executive Committee is not practical or appropriate. It further provides that the President shall report immediately any emergency action taken by the Committee to the Executive Committee and to the Board of Governors.

The proposed amendment to Article XI, Section 4 of the NASD By-Laws is a technical amendment to clarify the procedure by which the Board delegates authority to the Executive Committee to act between Board meetings.

COMMENTS RECEIVED

The proposed amendments were published for comment in NASD Notice to Members 88-8, dated January 20, 1988. The NASD received five comment letters. Three generally favored the proposed amendments and two requested clarification of the terms used in the amendments or expressed concern that the amendments were overly broad.

One commentator favoring the proposed amendments was in "wholehearted agreement." Another commentator strongly endorsed the proposal's adoption but recommended that the Board be given notice concurrent with any actions being taken. A third commentator stated that while he had "no problem" with emergency powers being delegated to a committee, the delegated power should be limited to operation of the OTC market, NASDAQ, or any related trading system and not extend to the operation of firms' offices or systems. This commentator also suggested that there should be a "time frame" within which the emergency directives issued by the committee pursuant to proposed Section 3 be in effect, and that beyond that time, the directives should be reviewed by the Board of Governors.

One commentator not endorsing the amendments said it would be helpful to understand what constitutes "highly volatile markets." Another commentator expressed concern that the grant of authority in proposed Section 3 is too broad and recommended that a third member of the Executive Committee be included as a member of the proposed committee empowered to act in emergencies.

After considering the comments, the Board of Governors decided to approve the proposed amendments with two changes. First, the committee authorized to take emergency action is increased from two members to three. The third committee member would be selected from the Executive Committee. Second, the proposed amendments require that the President report immediately to the Executive Committee and to the Board any emergency action taken pursuant to proposed Section 3.

The Board believes that the proposed amendments to the NASD By-Laws are necessary and appropriate to promptly handle any emergency situations that may arise due to volatile market conditions and therefore 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 no later than May 28, 1988.

Questions concerning this notice can be directed to Ms. Eneida Rosa, NASD Office of General Counsel, at (202) 728-8294.

Sincerely,

Frank J. Wilson
Executive Vice President
Legal and Compliance

Attachment

PROPOSED AMENDMENTS TO NASD BY-LAWS

(Amend Article VII of the By-Laws by redesignatigg Sections 3 through 9 as Sections 4 through 10 and adding new Section 3 as follows:)

Authority for Actions Affecting Over-the-Counter Market, Corporation Systems, and Member Offices

Sec. 3.

(a) The Board of Governors, or between meetings of the Board, a Committee consisting of the Chairman of the Board (or in his absence, a Vice Chairman of the Board), the President of the Corporation, and a member of the Executive Committee, in the event of an emergency or extraordinary market conditions, shall have the authority to take any action regarding (i) the trading in or operation of the over-the-counter securities market, the operation of any automated system owned or operated by the Corporation or any subsidiary thereof, and the participation in any such system of any or all persons or the trading therein of any or all securities and (ii) the operation of any or all member firms' offices or systems, if, in the opinion of the Board or the Committee hereby constituted, such action is necessary or appropriate for the protection of investors or the public interest or for the orderly operation of the marketplace or the system.
(b) The authority provided in Subsection (a) shall be exercised by the Committee only if the President, in his discretion, concludes that it is not practical or appropriate to convene a meeting of the Board of Governors or Executive Committee to consider the contemplated action.
(c) The President shall immediately report any action taken by the Committee pursuant to this Section to the Executive Committee and to the Board of Governors.

(Amend Article XI, Section 4 as follows:)*

Executive Committee

Sec. 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 Board. [which] The Executive Committee shall exercise such of the powers of the Board in the management of the Corporation between meetings of the Board of Governors as may be delegated to it from time to time by the Board. The Executive Committee created hereunder shall keep minutes of its meetings and shall report its proceedings to the Board of Governors at the next meeting thereof.

*New language is underlined; deleted language is in brackets.