Proposed By-Laws Amendment on Filling Vacancies on District Committees; Last Voting Date: February 3, 1989

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IMPORTANT MAIL VOTE

EXECUTIVE SUMMARY

The NASD invites members to vote on a proposed amendment to Article VIII, Section 5 of the NASD By-Laws that would expedite the filling of vacancies created by departures of District Business Conduct Committee (DBCC) members during their terms and avoid the necessity of holding interim elections.

The amendment would provide for appointment of a person by the remaining DBCC members to fill the departing Committee member's seat until the next regularly scheduled election. At that time, the normal election process would occur to elect a new Committee member to serve for the duration of the departing Committee member's term.

The text of the proposed amendment follows this notice.

BACKGROUND AND SUMMARY

The NASD Board of Governors is concerned about practical problems encountered by District Committees when vacancies on a DBCC occur as a result of departures of Committee members during their terms. Such problems, including the necessity for holding special interim elections, would be alleviated by the proposed amendment to Article VIII, Section 5 of the NASD By-Laws.

The current procedure under Sections 5(a) and (b) of Article VIII of the NASD By-Laws sets forth a two-step mechanism for filling vacancies on a DBCC. If the unexpired term of the Committee member causing the vacancy is less than 12 months, the vacancy is to be filled by appointment by the remaining members of the DBCC of a representative of a member firm having a place of business in the same district. If the unexpired term of the Committee member causing the vacancy is 12 months or more, the vacancy is to be filled by election conducted in accordance with the provisions of Section 4 of Article VIII.

The Board of Governors believes that the current procedure requiring the holding of interim elections is burdensome and unnecessary. The Board, upon the recommendation of the Advisory Council and the National Business Conduct Committee, is therefore proposing to eliminate the requirement for a special election to be conducted to fill a vacancy of 12 months or more. Instead, regardless of the length of the remaining term, the remaining members of the DBCC would appoint a representative of a member firm doing business in the same district to fill the departing Committee member's seat until the next regularly scheduled election. A new Committee member would then be elected to serve for the duration of the departing Committee member's term.

In so proposing, the Board recommends that, in each instance, the DBCC should seriously consider former DBCC members for appointment to a vacancy. Because of prior experience, such persons would be able to assume such a position and make a meaningful contribution.

Therefore, the Board of Governors has approved the proposed amendment to Article VIII, Section 5 of the NASD By-Laws, and the amendment now is being submitted for membership approval. Prior to becoming effective, the By-Laws change also must be approved by the Securities and Exchange Commission.

COMMENTS RECEIVED

The proposed amendment to Article VIII, Section 5 of the NASD By-Laws was published for comment in NASD Notice to Members 88-48, dated July 1988. The NASD received three comments on the proposed amendment — two in opposition, and one in favor.

The negative comments generally questioned the NASD's argument that interim elections are too expensive; expressed concern that appointees would be obligated to the Committee and thus not maintain sufficient independence; and opined that the present system provides more persons with an opportunity to serve on a DBCC. The Board considered these issues and determined that the proposed amendment is appropriate since interim elections are an unnecessary expense, both monetarily and in terms of disruption of district operations. Further, DBCC members have been exercising appointive power in situations where the unexpired term of the departing Committee member is less than 12 months and the appointee would fill the vacancy only until the next scheduled election.

The Board of Governors thus believes that the proposed amendment to Article VIII, Section 5 of the NASD By-Laws is necessary and appropriate and 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 February 3, 1989.

Questions concerning this notice can be directed to Deborah F. McIlroy, Attorney, NASD Office of General Counsel, at (202) 728-8816.

PROPOSED AMENDMENT TO ARTICLE VIII, SECTION 5 OF THE NASD BY-LAWS

(Note: New text is underlined; deleted text is in brackets.)

Filling of Vacancies on District Committees

Sec. 5. All vacancies in any District Committee other than those caused by the expiration of a Committee [m]Member's term of office shall be filled as follows:

The District Committee shall appoint a representative of a member firm having a place of business in the same district to fill any vacancy resulting from the unexpired term of a departed Committee Member. Such appointment shall be effective until the next regularly scheduled election occurs, in accordance with the provisions of Section 4 of this Article. Following this election, the newly elected Committee Member will serve only the duration of the departed Committee Member's term.