Proposed New Rule Re: Definition of "Executive Representative" in Article Section 3 of the NASD By-Laws; Last Voting Date: September 25, 1991

MAIL VOTE

EXECUTIVE SUMMARY

The NASD invites members to vote on proposed changes to the definition of "Executive Representative" that are intended to better assure proper communication with members on important matters.

BACKGROUND

In Notice to Members 91-9 (February 1991), the Board requested comment from members on proposed changes to the definition of "Executive Representative" in Article III, Section 3 of the NASD By-Laws. The current definition of "Executive Representative" is quite broad and has, in the past, led to the designation as Executive Representative of persons who have limited authority in their firms. Since all important membership communications are directed to Executive Representatives, who are eligible to cast votes for their respective firms, the Board was concerned that important matters may not be directed to the right person at each member.

The Board proposed, therefore, to amend the definition of Executive Representative to require that only persons of authority in member firms be so designated to the NASD. The Board also noted that the Executive Representative list will be maintained separately from the firm contact list in the Central Registration Depository (CRD). This will assure that the Executive Representative will receive all important NASD communications and that routine CRD notices will be directed to the right persons at the member.

COMMENTS RECEIVED

Notice to Members 91-9 elicited five (5) comments from members. Three (3) of the five comments supported the proposed changes without reservation.

Two (2) commenters, both affiliated with insurance company members, were critical of the proposal, noting that, where an insurance company itself is a member, securities activities are likely to be handled by persons in "middle management." In the past, the NASD has taken a "carved-out" entity approach toward insurance company members and applied its requirements only to the middle managers in charge of the insurance company's securities sales operation. It would appear that this approach is equally applicable to the Executive Representative and that this could be conveyed to insurance company members administratively, as in the past. Both insurance-affiliated commenters also questioned the appropriateness of the NASD substituting its judgment for that of the member in appointing a person to represent the member with the NASD.

After consideration of these comments, the Board concluded that the unique situation presented by certain insurance companies, where the entire insurance company is a member, can be handled administratively as has been the case in the past without introducing verbal complications to the By-Laws definition of Executive Representative. The Board also believes the NASD has a stake in the determination of the primary contacts in members and that the proposed definition specifying the proper level of a person in members to receive communications and vote on NASD matters is a justifiable exercise of NASD authority. Accordingly, the NASD Board of Governors recommends that members vote their approval of the proposed changes to the definition of Executive Representative.

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 September 25, 1991.

Questions regarding this notice may be directed to John Vaughn in the Membership Department at (301) 590-6865 or Craig Landauer in the Office of General Counsel at (202) 728-8291.

TEXT OF PROPOSED BY-LAW CHANGE

Article III, Section 3

NASD By-Laws

EXECUTIVE REPRESENTATIVE

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

Sec. 3. 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 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 a[n executive officer] member of senior management and registered principal 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 and registered principal of the member, if given authority to act for the member in the course of the Corporation's activities.]