Mail Vote — NASD Solicits Vote On Amendments To The NASD By-Laws On Selected Corporate Governance Issues (Note: Only NASD member Executive Representatives are allowed to vote)
Note: Only NASD member Executive Representatives are allowed to vote. Ballots with voting instructions were distributed with the print version of this Notice.
ACTION REQUESTED
NASD By-Law Amendments
Last Voting Date: January 22, 2001
SUGGESTED ROUTING |
KEY TOPICS |
Legal & Compliance |
Corporate Governance |
Executive Summary
The National Association of Securities Dealers, Inc. (NASD® or Association) invites members to vote to approve certain amendments to the NASD By-Laws. The amendments address several corporate governance issues: the treatment of staff Governors for purposes of Industry/Non-Industry balancing; the role of the National Nominating Committee (NNC) in contested elections; the petition process by which individuals and slates can be included in the election process; and the industry classifications that must be represented on the Board. Additionally, the amendments reflect the new NASD corporate structure, including the impending separation of The Nasdaq Stock Market, Inc. (Nasdaq®) and NASD and the creation of NASD Dispute Resolution, Inc., a wholly owned subsidiary. The amendments also incorporate certain technical changes. Attachment A is a summary of the proposed changes. Attachment B is the text of the amendments.
It is anticipated that these By-Laws, as amended, will be effective for elections preceding the 2001 annual NASD membership meeting.
The last voting date is January 22, 2001.
Questions/Further Information
Questions concerning this Notice may be directed to T. Grant Callery, Senior Vice President and General Counsel, Office of General Counsel, NASD, at (202) 728-8285.
Background
The proposed amendments have several purposes and are described in detail as follows:
Composition, Classification, And Qualifications Of The Board Of Governors
The NASD Board of Governors has both Industry and Non-Industry members and is required by the By-Laws to have a majority of Non-Industry Governors. In 1998, the NASD effected a substantial corporate restructuring which included the acquisition of the American Stock Exchange, LLC (Amex®). As part of this restructuring, the NASD moved to an overlapping Board structure whereby all members of the NASD Regulation, Inc. (NASDR) and Nasdaq Boards became members of the NASD Board. As a result of the 1998 restructuring, the number of Governors serving on the Board by virtue of their status as staff increased to five (the NASD Chief Executive Officer, the NASD Chief Operating Officer, the Presidents of NASDR and Nasdaq and the Chairman of Amex).
In accordance with current NASD By-Laws, these five Governors have counted as Industry Governors for balancing purposes. With this current composition and classification of staff Governors, the only realistic manner for NASD to satisfy its obligation to ensure fair representation of all relevant constituencies has been to increase the number of Industry seats on a given Board, and, in order to maintain the required absolute majority of Non-Industry/Public seats on the Board, increase in the number of Non-Industry seats as well. These increases have made it extremely difficult for the NASD Board to be small enough to function with optimum efficiency while still satisfying NASD's obligation to ensure fair representation of the relevant constituencies.
To improve the efficiency of the Board while maintaining fair representation of the relevant constituents, the Board has approved an amendment to reclassify the NASD CEO and President of NASD Regulation Governor positions as neutral Governors—that is, neither Industry nor Non-Industry Governors. The reclassification of these Governor positions as neutral is consistent with the neutrality classification other self-regulatory organizations assign to their Board staff members. Additionally, since these neutral Governors will no longer be treated as Industry Governors, the two Industry seats the staff occupied will now be available to Industry candidates elected by the NASD membership.
The approved amendments also reduce the number of staff Governors from the current five to a maximum of four (the NASD CEO, the Presidents of NASD Regulation and Amex, and up to one additional NASD officer appointed by the Board in its discretion should the Board deem it appropriate to name a second staff member). In recognition of the separation of Nasdaq from NASD, the President of Nasdaq will no longer be included on the Board.
The approved amendments also reduce the overall number of Governors to no fewer that 17 nor more than 27. This amendment will result in a smaller, more efficient Board of Governors.
National Nominating Committee - Participation In Contested Elections
The amendments will allow limited National Nominating Committee (NNC) participation in contested elections. Under the current By-Laws, the NASD, NASD staff, the NNC, and other corporate committees are prohibited from taking a position in contested elections. As a result of this prohibition, in contested elections, the NNC has been unable to explain the reasons an NNC-nominated candidate is worthy of support, and has been unable to respond to statements made by other candidates or parties about the NNC nominees. The NNC's current inability to support its candidates in contested elections is a deterrent to qualified individuals accepting nominations.
To remedy this problem, the Board approved an amendment allowing the NNC to provide limited support to NNC nominated candidates. This proposal to limit NNC's support to "responsiveness" has a goal of allowing the NNC to support its candidates but not to unilaterally wage a significant electoral campaign on behalf of those candidates. Specifically, the amendment will allow the NNC to distribute two mailings to NASD voting members in support of its candidates. The amendment will also allow the NNC to respond in kind to vote solicitations and additional mailings by other candidates.
The absolute prohibition on participation in the electoral process by the NASD Board, the staff, and other committees remains in place.
National Nominating Committee - Nominees Proposed By Nasdaq And NASDR
With the departure of Nasdaq as a wholly owned NASD subsidiary, there is no longer a need for NASD Regulation and Nasdaq to propose two candidates each to the NASD Board for appointment to the NNC. The requirement was originally put in place to ensure limited and balanced influence by the regulatory and market subsidiaries. With the departure of a Nasdaq representative from the NASD Board, the Board approved an amendment to eliminate this provision.
Access To The Ballot By Petition
The amendments revise the NASD By-Laws with regard to inclusion on the ballot by petition. Under the current process, Industry candidates seeking nomination by petition can "coattail" other Industry and/or Non-Industry candidates in the same petition-gathering process. This process essentially allows the creation of a "slate" through the use of a single set of petitions signed by three percent of the membership. The Board approved an amendment to allow the nomination by petition of an individual, signed by 3 percent of NASD's voting members, and to permit each member to endorse only one such nominee. The amendments do specifically recognize the validity of slate petitions, but require that the slate be endorsed by 10 percent of NASD's voting members. The Board's adoption of separate thresholds for petition candidates and slate petitions is reasonable given the size and diversity of NASD's membership and is consistent with the practice of other industry organizations, namely the New York Stock Exchange.
Industry Segment Representation
To more accurately represent the full range of relevant industry constituents, the Board approved a proposal to amend the NASD By-Laws and require representation by three additional industry segments: a national retail firm, a regional retail or independent financial planning member firm, and a clearing firm. These segments are in addition to required representation by an investment company, an insurance affiliate, and a small firm. The proposed By-Law amendments require that the Board periodically adopt resolutions establishing the criteria for national retail and regional retail or independent financial planning member representatives. By allowing the Board to establish the criteria for these categories through Board Resolutions, the Board will be better able to respond to changes in the industry structure and demographics.
Changes To Board Or Committee Composition
In order to ensure balanced representation, the Board approved a proposal to clarify that, when the NASD Regulation Board consists of nine Directors, at least two must be Public Directors. The Board also approved a proposal to provide that any committee appointed by the Board, which may exercise all powers and authority of the Board in the management of the business affairs of the NASD, be balanced.
References To NASD Dispute Resolution And Nasdaq
To set forth the new NASD corporate structure and the change in the NASD-Nasdaq relationship, the Board approved amendments that make several technical changes reflecting the current corporate structure. The changes primarily consist of adding references to the newly formed NASD Dispute Resolution subsidiary, and deleting references to Nasdaq.
The Board asks that you vote in favor of these amendments.
ATTACHMENT A
Amendments To The NASD By-Laws
Substantive changes to the NASD By-Laws are set forth below. Key changes related to the corporate governance of NASD and the new corporate structure are found in Article I; Article IV, Section 1; Article V, Section 2; Article VI, Section 1; Article VII, Sections 1, 3-5, 7, 9-11, 13-14; Article VIII, Section 6; Article IX, Sections 1 and 4; Article X, Section 1; Article XIII, Section 1; and Article XV, Section 4. Stylistic changes and other minor, nonsubstantive changes are not described.
Article I. Definitions
New definitions have been added, and the terms Industry, Non-Industry and Public "Director" "Governor" and "committee member" have been amended, to reflect the new corporate structure, namely, the inclusion of NASD Dispute Resolution, Inc., within the family of companies and the changed NASD-Nasdaq relationship.
Article IV. Membership
Application for Membership
Section 1 has been amended to reflect the new corporate structure, namely, the inclusion of NASD Dispute Resolution within the family of companies and the changed NASD-Nasdaq relationship.
Article V. Registered Representatives and Associated Persons
Application for Registration
Section 2 has been amended to reflect the new corporate structure, namely, the inclusion of NASD Dispute Resolution within the family of companies and the changed NASD-Nasdaq relationship.
Article VI. Dues, Assessments, and Other Charges
Power of the NASD to Fix and Levy Assessments
Section 1 has been amended to reflect the new corporate structure, namely, the inclusion of NASD Dispute Resolution within the family of companies and the changed NASD-Nasdaq relationship.
Article VII. Board of Governors
Powers and Authority of Board
Section 1 has been amended to reflect the new corporate structure, namely, the inclusion of NASD Dispute Resolution within the family of companies and the changed NASD-Nasdaq relationship.
Authority to Take Action Under Emergency or Extraordinary Market Conditions
Section 3 has been amended to reflect the new corporate structure, namely, the changed NASD-Nasdaq relationship.
Composition and Qualifications of the Board
Section 4 has been amended to adjust the overall Board composition to no fewer than 17 nor more than 27 Governors, including no more than four staff Governors. This section has also been amended to require representation by three additional industry segments: a national retail firm, a regional retail or independent financial planning member firm and a clearing services firm. Finally, this section has been amended to allow the Board, by resolution, to specify the criteria for representatives of national retail and regional retail or independent financial planning firms.
Term of Office of Governors
Section 5 has been amended to reflect the changed NASD-Nasdaq relationship and to recognize the Board's discretion in limiting the term of a second NASD officer serving as a Governor.
Filling of Vacancies
Section 7 has been amended by clarifying that the provision applies to elected Governor positions.
The National Nominating Committee
Section 9 has been amended to specify that the NNC may support Governors in contested elections. This section has also been amended to reflect the new corporate structure and to eliminate the requirement that NASDR and Nasdaq propose two candidates each to the NASD Board for appointment to the NNC.
Procedure for Nomination of Governors
Section 10 has been amended to allow nomination by petition for individual ballots by three percent of NASD voting membership, to limit voting members from endorsing more than one individual nominee, and to allow nomination by petition for slates by ten percent of the NASD voting membership.
Communication of Views
Section 11 has been amended to detail the NNC's limited support of NNC nominees.
Election of Governors
Section 13 has been amended by clarifying that the provision applies to elected Governor positions.
Maintenance of Compositional Requirements of the Board
Section 14 has been amended by clarifying that the provision applies to elected Governor positions.
Article VIII. Officers, Agents, and Employees
Resignation and Removal of Officers
Section 6 has been amended to allow the Board to remove an officer of the NASD by a resolution adopted by a majority of Governors or a consent adopted by all Governors.
Article IX. Committees
Appointment
Section 1 has been amended to ensure that the Industry/Non-Industry balance of any committee given powers of the Board reflects the same balance of the Board.
Executive Committee
Section 4 has been amended to reflect the changed NASD-Nasdaq relationship.
Article X. Compensation of Board and Committee Members
Section 1 of this Article has been amended to allow member reimbursement of expenditures related to the limited NNC nominee support in contested elections.
Article XIII. Powers of Board to Impose Sanctions
Section 1 has been amended to reflect the new corporate structure, namely, the inclusion of NASD Dispute Resolution within the family of companies and the changed NASD-Nasdaq relationship.
Article XV. Limitation of Powers
Conflicts of Interest
Section 4 has been amended to reflect the new corporate structure, and to allow a decision by majority vote of disinterested Governors, regardless of whether or not the disinterested Governors constitute a quorum.
ATTACHMENT B
Deletions appear as Overstrike text surrounded by { }. Additions appear as Bold text surrounded by [ ]. Unmodified sections have not been included.
BY-LAWS OF THE NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC.
ARTICLE I
Definitions
ARTICLE IV
MEMBERSHIP
Application for Membership
Sec. 1.
ARTICLE V
REGISTERED REPRESENTATIVES AND ASSOCIATED PERSONS
Application for Registration
Sec. 2.
ARTICLE VI
DUES, ASSESSMENTS, AND OTHER CHARGES
Power of the NASD to Fix and Levy Assessments
Sec. 1. The NASD shall prepare an estimate of the funds necessary to defray reasonable expenses of administration in carrying on the work of the NASD 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 NASD and issuers and any other persons using any facility or system which the NASD, NASD Regulation {, or Nasdaq} [or NASD Dispute Resolution] operates or controls. Fees, dues, assessments, and other charges shall be called and payable as determined by the NASD from time to time; provided, however, that such admission fees, dues, assessments, and other charges shall be equitably allocated among members and issuers and any other persons using any facility or system which the NASD operates or controls. The NASD may from time to time make such changes or adjustments in such fees, dues, assessments, and other charges as it deems necessary or appropriate to assure equitable allocation of dues among members. 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 NASD 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.
ARTICLE VII
BOARD OF GOVERNORS
Powers and Authority of Board
Sec. 1.
Authority to Take Action Under Emergency or Extraordinary Market Conditions
Sec. 3. The Board, or such person or persons as may be designated by the Board, in the event of an emergency or extraordinary market conditions, shall have the authority to take any action regarding:
Sec. 4.
Term of Office of Governors
Sec. 5.
Filling of Vacancies
Sec. 7. If {a} [an elected] Governor position becomes vacant, whether because of death, disability, disqualification, removal, or resignation, the National Nominating Committee shall nominate, and the Board shall elect by majority vote of the remaining Governors then in office, a person satisfying the classification (Industry, Non-Industry, or Public Governor) for the governorship as provided in Section 4 to fill such vacancy, except that if the remaining term of office for the vacant Governor position is not more than six months, no replacement shall be required. If the remaining term of office for the vacant Governor position is more than one year, the Governor elected by the Board to fill such position shall stand for election in the next annual election pursuant to this Article.
The National Nominating Committee
Sec. 9.
Procedure for Nomination of Governors
Sec. 10. Prior to a meeting of members pursuant to Article XXI for the election of Governors, the NASD shall notify the members the names of each nominee selected by the National Nominating Committee for each governorship up for election, the classification of governorship (Industry, Non-Industry, or Public Governor) for which the nominee is nominated, the qualifications of each nominee, and such other information regarding each nominee as the National Nominating Committee deems pertinent. A person who has not been so nominated may be included on the ballot for the election of Governors if: (a) within {30} [45] days after the date of such notice {in 1997, or within 45 days after the date of such notice in 1998 and thereafter}, such person presents to the Secretary of the NASD [(i) in the case of petitions solely in support of such person,] petitions in support of his or her nomination duly executed by three percent of the members[, and no member shall endorse more than one such nominee, or (ii) in the case of petitions in support of one or more persons, petitions in support of the nominations of such persons duly executed by ten percent of the members]; and (b) the Secretary certifies that (i) the petitions are duly executed by the Executive Representatives of the requisite number of members{;}[,] and (ii) the person satisfies the classification (Industry, Non-Industry, or Public Governor) of the governorship to be filled, based on such information provided by the person as is reasonably necessary to make the certification. The Secretary shall not unreasonably withhold or delay the certification. Upon certification, the election shall be deemed a contested election. After the certification of a contested election or the expiration of time for contesting an election under this Section, the Secretary shall deliver notice of a meeting of members pursuant to Article XXI, Section 3(a).
Communication of Views
Sec. 11.
Election of Governors
Sec. 13. Governors [that are to be elected by the members] shall be elected by a plurality of the votes of the members of the NASD present in person or represented by proxy at the annual meeting of the NASD and entitled to vote thereat. The annual meeting of the NASD shall be on such date and at such place as the Board shall designate pursuant to Article XXI. Any Governor so elected must be nominated by the National Nominating Committee or certified by the Secretary pursuant to Section 10.
Maintenance of Compositional Requirements of the Board
Sec. 14. Each [elected] Governor shall update the information submitted under Section 9(e) regarding his or her classification as an Industry, Non-Industry, or Public Governor at least annually and upon request of the Secretary of the NASD, and shall report immediately to the Secretary any change in such classification.
ARTICLE VIII
OFFICERS, AGENTS, AND EMPLOYEES
Resignation and Removal of Officers
Sec. 6.
ARTICLE IX
COMMITTEES
Appointment
Sec. 1. Subject to Article VII, Section 1(c), the Board may appoint such committees or subcommittees as it deems necessary or desirable, and it shall fix their powers, duties, and terms of office. Any such committee or subcommittee consisting solely of one or more Governors, to the extent provided by these By-Laws or by resolution of the Board, shall have and may exercise all powers and authority of the Board in the management of the business and affairs of the NASD. [Any committee having the authority to exercise the powers and authority of the Board shall have a percentage of Non-Industry committee members at least as great as the percentage of Non-Industry Governors on the Board and a percentage of Public committee members at least as great as the percentage of Public Governors on the Board.]
Executive Committee
Sec. 4.
ARTICLE X
COMPENSATION OF BOARD AND COMMITTEE MEMBERS
Sec. 1. The Board may provide for reasonable compensation of the Chair of the Board, the Governors, and the members of any committee. The Board may also provide for reimbursement of reasonable expenses incurred by such persons in connection with the business of the NASD[, including those expenses incurred in connection with the support of a candidate or candidates by the National Nominating Committee in contested elections in accordance with the By-Laws].
ARTICLE XIII
POWERS OF BOARD TO IMPOSE SANCTIONS
Sec. 1. The Board is hereby authorized to impose appropriate sanctions applicable to members, including censure, fine, suspension, or expulsion from membership, suspension or bar from being associated with all members, limitation of activities, functions, and operations of a member, or any other fitting sanction, and to impose appropriate sanctions applicable to persons associated with members, including censure, fine, suspension or barring a person associated with a member from being associated with all members, limitation of activities, functions, and operations of a person associated with a member, or any other fitting sanction, for:
ARTICLE XV
LIMITATION OF POWERS
Conflicts of Interest
Sec. 4.