Last Voting Date: April 23, 1993"
Senior Management
Legal & Compliance
Executive Summary
The NASD invites members to vote on a proposed amendment to the NASD By-Laws and Rules of Fair Practice to make all rule approval procedures under the NASD's By-Laws uniform (presently some need only Board approval; others need full membership approval) and to convert Appendices into Rules of Fair Practice. The last voting date is April 23, 1993. The text of the amendment follows this Notice.
Background and Description of Proposal
The proposed amendments are the first of a multi-part program, the purpose of which is to make all rule approval and amendment procedures under the NASD's By-Laws uniform and to make the NASD Manual easier to use. Presently some Rules of Fair Practice need only Board approval for amendment; others need full membership approval.
Below are the changes to the By-Laws needed to make the voting procedures uniform. The proposal removes the member-vote requirement for adoption of or amendments to the Rules of Fair Practice and other rules. This action would make the NASD's procedures consistent with those of other self-regulatory organizations in the securities industry, which do not require member votes for rule changes. The proposal would not only reduce delays in making rule changes effective, but would also result in administrative cost savings. Amendments to the NASD's By-Laws would continue to require a member vote, and the Board has specifically provided in the proposed amendments that it may seek a member vote on any rule change if it feels such a vote is desirable.
Section 1(a)(1) of Article VII of the By-Laws has been divided into two subsections, since amendments to the By-Laws would continue to require a member vote. New subsection (2) would specify that the Board has the authority to adopt or to change the Rules of Fair Practice, and that it can still choose to submit certain rule changes to the membership for a vote at its option.
Amendments to Article VII, Sections 1(a)(3), (4), and (6) of the By-Laws would remove superfluous language therein specifying that no member vote is needed. The deleted provisions are in brackets. New Section 1(a)(2) states that the Board has authority to adopt Rules of Fair Practice. Amended Section 1(a)(3) gives a broader grant of authority to the Board to adopt such rules as are necessary to "implement the provisions of the Act."
Existing subsection (9) is proposed to become new subsection (3) with language in that subsection specifically referencing the Government Securities Act of 1986 deleted because the pertinent provisions of that Act are part of the Securities Exchange Act of 1934, as amended (the Act). The amended subsection contains general authorization to the Board to adopt rules to implement the provisions of the Act.
Article XII, Section 1 of the By-Laws is also proposed to be amended to delete the reference to the member vote procedure for adoption and amendment of Rules of Fair Practice, and to remove references to emergency rules.
Certain of the Rules of Fair Practice themselves specify that a member vote is not required as to rules in a specified category and that the Board itself can adopt these rules. Because of the By-Laws changes, this language will no longer be necessary. Shown below are proposed amendments to those rules, which will eliminate the unnecessary language.
Article III, Sections 30 through 34 of the Rules of Fair Practice have appendices that, as adopted, contain substantive rule provisions in the respective areas where the Board was given authority by the rules to act without a member vote. These appendices are proposed to be converted to rules and appropriate changes have, therefore, been made. Also deleted are the provisions authorizing the types of rules specified and stating how the appendices may be amended. Authorization is adequately covered in Article VII of the By-Laws, and the amendment procedure is left to the Board by that Article.
Section 37, which authorizes the ITS/CAES and CAES Operating Rules, has been deleted completely, as such authorization is contained in Article VII, new subsections 1(a)(3), (8), and (9).
Request for Vote
The NASD Board of Governors believes that the proposed amendments to the Rules of Fair Practice will aid the Board in approving and amending Rules of Fair Practice in a timely manner, subject to approval by the Securities and Exchange Commission, without the costs and delays inherent in sending proposed rule changes to nearly 6,000 members for a mail vote. Rule changes would continue to be announced to the membership, and a comment period is always provided subsequent to SEC publication of a proposed rule change in the Federal Register. In addition, the SEC requires the NASD to consider and respond to all comments received from members and the public on a proposed change to NASD rules. Therefore, members will have adequate opportunity for their comments and concerns to be addressed. Please mark the attached ballot according to your convictions and mail it in the enclosed, stamped envelope to The Corporation Trust Company. Ballots must be postmarked no later than April 23, 1993.
Questions concerning this Notice should be directed to T. Grant Callery, Vice President and General Counsel, at (202) 728-8285.
Proposed Amendments to Articles VII and X of the NASD By-Laws
(Note: New text is underlined; deleted text is in brackets.)
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Article VII
Board of Governors Powers and Authority of Board of Governors
Sec. 1.
(a) The Board of Governors shall be the governing body of the Corporation and, except as otherwise provided by these By-Laws, shall be vested with all powers necessary for the management and administration of the affairs of the Corporation and the promotion of the Corporation's welfare, objects and purposes. In the exercise of such powers, the Board of Governors, shall have the authority to:
(1) adopt for submission to the membership, as hereinafter provided, such By-Laws[, Rules of Fair Practice] and changes or additions thereto as it deems necessary or appropriate;
(2) adopt such Rules of Fair Practice and changes or additions thereto as it deems necessary or appropriate, provided, however, that the Board may at its option submit to the membership any such adoption, change, or addition to the Rules of Fair Practice;
[(9)] (3) (a) adopt [for submission to the membership] such rules as the Board of Governors deems appropriate to implement the provisions of the Act as amended [by the Government Securities Act of 1986] and the rules and regulations promulgated thereunder, and (b) make such regulations, issue such orders, resolutions, interpretations, including interpretations of the rules adopted pursuant to this Section, and directions, and make such decisions as it deems necessary or appropriate.
[(2)] (4) Unchanged.
[(3)] (5) prescribe a code of arbitration procedure providing for the required or voluntary arbitration of controversies between members and between members and customers or others as it shall deem necessary or appropriate[, and neither the adoption nor any amendments to the code need be submitted to the membership for approval and the code and any amendments thereto shall become effective as the Board of Governors may prescribe];
[(4)] (6) establish rules and procedures to be followed by members in connection with the distribution of securities issued by members and affiliates thereof[, and neither the adoption nor any amendments to such rules and procedures need be submitted to the membership for approval and such rules and procedures and any amendments thereto shall become effective as the Board of Governors may prescribe]; [(5)] (7) Unchanged.
[(6)] (8) organize and operate automated systems to provide qualified subscribers with securities information and automated services. 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 Corporation as the Board of Governors may deem necessary or appropriate. The Board of Governors may adopt rules for such automated systems, establish reasonable qualifications and classifications for members and other subscribers, provide qualification standards for securities included in such systems, require members to report promptly information in connection with securities included in such systems, and establish charges to be collected from subscribers and others. [The Board of Governors shall have power to adopt, amend, supplement or modify such rules, qualifications, classifications, standards and charges from time to time without recourse to the membership for approval, and such rules, qualifications, classifications, standards and charges shall become effective as the Board of Governors may prescribe; and];
[(7)] (9) require the prompt reporting by members of such original and supplementary trade data as the Board deems appropriate. Such reporting requirement may be administered by the Corporation, a division or subsidiary thereof, or a clearing agency registered under the Securities Exchange Act of 1934[.]; and
[(8)] (10) engage in any activities or conduct necessary or appropriate to carry out the Corporation's purposes under its Certificate of Incorporation and the federal securities laws.
(b) Unchanged.
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Article XII
Rules of Fair Practice
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 the Act, the Board of Governors is hereby authorized to adopt [for submission to the members of the Corporation] such Rules of Fair Practice 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 Rules of Fair Practice or amendments thereto, shall forthwith cause copies thereof to be sent to each member of the Corporation to be voted upon.] If any such Rules of Fair Practice or amendments thereto [are approved by a majority of the members voting, within thirty (30) days after the date of submission to the membership, and] are approved by the Commission as provided in the Act, they shall become effective Rules of Fair Practice of the Corporation as of such date as the Board of Governors may prescribe. [In any case, however, where a particular provision of a Rule of Fair Practice provides that membership approval is not required, the Board may amend that provision without submission to the membership for a vote as hereinbefore required. In addition, where the Board of Governors by resolution finds an emergency to exist, such Rules of Fair Practice of amendments thereto, if adopted by a two-thirds vote of the Board of Governors, 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 the Act, to administer, enforce, suspend, or cancel any Rules of Fair Practice adopted hereunder.
Proposed Amendments to Article III of the NASD Rules of Fair Practice
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Margin Accounts
Sec. 30.
[Prohibition]
March 1993
[(a) A member shall not effect a securities transaction in a margin account in a manner contrary to the requirements adopted by the Board of Governors pursuant to authority granted by this rule nor shall a member in connection with such a transaction otherwise act in a manner inconsistent with requirements adopted hereunder.]
[Requirements]
[(b) The Board of Governors is authorized (1) to establish the minimum amounts of initial and maintenance margin required to be obtained by members from customers for or with whom such members effect transactions on a margin or cash basis, and (2) to establish other specific requirements or prohibitions, including record-keeping, reporting or other requirements necessary for the proper implementation of the initial and margin maintenance provisions.]
[Amount required]
[(c) The amounts of margin required, and other requirements authorized hereby, shall be set forth in Appendix A attached to and made part of this rule. The Board of Governors may from time to time alter, amend, supplement or modify the said Appendix A.]
[Special margin requirements]
[(d) Whenever the Board of Governors determines that unusual or extraordinary conditions warrant, it may prescribe special margin requirements for specific securities. The membership shall be promptly informed by notice to it of any such special margin requirements.]
[APPENDIX A]
The text of new Appendix A as approved by the SEC in February 24, 1993, (SEC Release No. 3431918) is to be included here.
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Securities "Failed to Receive" and "Failed to Deliver"
Sec. 31.
[The Board of Governors shall have the authority to establish rules, regulations and procedures to be followed by members in connection with domestic and foreign securities which are "failed to receive" and "failed to deliver." The rules, regulations and procedures authorized hereby shall be incorporated into Appendix B to be attached to and made part of this rule. The Board of Governors shall have the power to alter, amend, supplement or modify the provisions of Appendix B from time to time without recourse to the membership for approval, as would otherwise be required by Article IX of the By-Laws. Appendix B shall become effective as the Board of Governors may prescribe unless disapproved by the Securities and Exchange Commission.]
[APPENDIX B]
The text of former Appendix B is to become new Section 31.
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Fidelity Bonds
Sec. 32.
[Application]
[(a) Every member shall be required to carry a blanket fidelity bond meeting requirements as to form, amount and type of coverage as the Board of Governors may prescribe pursuant to the authorization granted by paragraph (b) hereof.]
[Authority of Board]
[(b) The Board of Governors is hereby authorized to adopt rules, regulations and procedures for blanket fidelity bonds concerning the form, amount and type of coverage thereof. The rules, regulations and procedures authorized hereby shall be incorporated into Appendix C to be attached to and made part of this rule. The Board of Governors shall have the power to alter, amend, supplement or modify the provisions of Appendix C from time to time without recourse to the membership for approval, as would otherwise be required by Article VII of the By-Laws. All contemplated changes shall, however, be submitted to the membership for comment prior to effectiveness. Appendix C shall become effective as the Board of Governors may prescribe unless disapproved by the Securities and Exchange Commission.]
[APPENDIX C]
The text of former Appendix C is to become new Section 32.
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Options
Sec. 33.
[(a) A member or a person associated with a member shall not effect any transaction in an option contract, including an option displayed on the NASDAQ System, except in accordance with the provisions of rules, regulations and procedures adopted by the Board of Governors pursuant to the authorization granted in subsection (b) hereof.]
[(b) The Board of Governors is authorized, for the purpose of preventing fraudulent and manipulative acts and practices, promoting just and equitable principles of trade, providing safeguards against unreasonable profits or unreasonable rates of commission or other charges, and for the protection of investors and the public interest, to adopt rules, regulations and procedures for transactions in options relating to:]
[(1) transactions in option contracts, including options displayed on the NASDAQ System, by members for their own account or the accounts of public customers;]
[(2) the comparison - clearance and settlement of transactions in options;]
[(3) the reporting of transactions in options;]
[(4) the qualifications and standards for registered market makers in options;]
[(5) the standards for authorization of underlying securities eligible to be subject to options displayed on the NASDAQ System;]
[(6) the endorsement and guarantee of performance options; and,]
[(7) such other areas of options activity and trading as may be required to achieve the above-stated purposes.]
[(c) The rules, regulations and procedures authorized by subsection (b) hereof shall be incorporated into Appendix E to be attached to and made a part of these Rules of Fair Practice. The Board of Governors shall have the power to adopt, alter, amend, supplement or modify the provisions of Appendix E from time to time without recourse to the membership for approval, as would otherwise be required by Article VII of the By-Laws, and Appendix E shall become effective as the Board of Governors may prescribe unless disapproved by the Securities and Exchange Commission.]
[(d)](a) For purposes of this section, the term "option" shall mean any put, call, straddle or other option or privilege, which is a "security" as defined in Section 2(1) of the Securities Act of 1933, as amended, but shall not include any tender offer, registered warrant, right, convertible security or any other option in respect to which the writer is the issuer of the security which may be purchased or sold upon the exercise of the option.
(b) [APPENDIX E]
The text of former Appendix E is to become new paragraph (b).
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Direct Participation Programs
Sec. 34.
[(a) A member or a person associated with a member shall not underwrite or participate in any way in the distribution to the public of units of a direct participation program, or sponsor a direct participation program, the provisions of which are inconsistent with rules, regulations and procedures prescribing standards of fairness and reasonableness in respect thereto adopted by the Board of Governors pursuant to the authorization granted in subsection (b) hereof.]
[(b) The Board of Governors is authorized, for the purpose of preventing fraudulent and manipulative acts and practices, promoting just and equitable principles of trade, providing safeguards against unreasonable profits or unreasonable rates of commissions or other charges, and for the protection of investors and the public interest, to adopt rules, regulations and procedures prescribing standards of fairness and reasonableness for direct participation programs relating to:]
[(1) the underwriting or other terms and conditions concerning, directly or indirectly, the distribution of units of such programs to the public, including, but not limited to, all elements of compensation in connection therewith, among other factors:]
[(2) the terms and conditions concerning the operations, structure and management of such programs in which a member or an affiliate of a member is a sponsor including, but not limited to:
a. the rights of participants in such programs;
b. conflicts or potential conflicts of interest of sponsors thereof, or others;
c. the financial condition of sponsors of such programs;
d. all elements of sponsor's compensation including but not limited to, working interests, net profit interests, promotional interests, program management fees, overriding royalty interests, sharing arrangements, interests in program revenues, and overriding interests of all other kinds, general and administrative expenses and organization and offering expenses;
e. the minimum unit value which may be offered and the minimum subscription amount per investor;
f. the retention and/or exchange of units of the program held by participants;
g. the assessments, mandatory, optional or otherwise, to be made on participants in a program in addition to the unit price;
h. the reinvestment of revenues derived from the operation of the program;
i. the duty of the program to render operational and financial reports to participants;
j. the liquidation of units in a pro-gram; and
k. any other terms, conditions or arrangements relating to the operation of the program which the Board of Governors determines are required for the protection of investors and the public interest;]
[(3) the standards of suitability for investment in such programs by investors;]
[(4) the content and filing with the Association of advertising and sales literature to be used in connection with the distribution of direct participation programs; and]
[(5) the definitions of words commonly used in connection with such programs including words used in this section unless they are otherwise defined herein.]
[(c) The rules, regulations and procedures authorized by subsection (b) hereof shall be incorporated into Appendix F to be attached to and made a part of these Rules of Fair Practice. The Board of Governors shall have the power to adopt, alter, amend, supplement or modify the provisions of Appendix F from time to time without recourse to the membership for approval, as would otherwise be required by Article VII of the By-Laws, and Appendix F shall become effective as the Board of Governors may prescribe unless disapproved by the Securities and Exchange Commission.]
[(d)] (a) Text unchanged.
(b) [APPENDIX F]
The text of former Appendix F is to become part of new paragraph (b).
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[Operating Rules for ITS/CAES and CAES]
[Sec. 37. The Board of Governors is authorized to adopt rules, regulations and procedures required for the operation of the Computer Assisted Execution System including rules, regulations and procedures required for implementation of the linkage of the Computer Assisted Execution System and the Intermarket Trading System and the Intermarket Trading System Plan pursuant to which that linkage was consummated. The rules, regulations and procedures adopted hereunder shall be entitled "CAES Operating Rules" or "ITS/CAES Operating Rules" as the case may be. The Board of Governors shall have the power to alter, amend, supplement or modify the provisions of these rules, regulations and procedures from time to time without recourse to the membership for approval as otherwise would be required by Article VII of the By-Laws.]
